U.S. natural gas production will fall more this year than it has in 16 years, roughly 5-6%, and it’s “going to get a bit uglier” in the years to come, warned Mark Papa, CEO of EOG Resources Inc. last Thursday. Even with a more ambitious drilling program next year, the decline will only be slightly contained, which will lead to “huge consequences” for the future, he told attendees at Lehman Brothers 2002 CEO Energy/Power Conference in New York City.

Comparing the downturn in drilling this year to the last one in 1999 is misleading, said Papa, because the “meat of it is shown in year-over-year change.” Using public information from U.S. exploration and production companies, EOG projects that on a quarter-by-quarter basis for the next six quarters through fourth quarter 2003, U.S. gas production will decline. “The bottom line is, in the first quarter of our numbers [2002], production was off 3.3%; in the second quarter, it was off 5.1%. We think it gets worse in the third quarter, and by the fourth quarter, we’ll be 6-7% down.”

Forecasts of an “immediate and aggressive ramp up in drilling” next year leading to success would only bring back 2% to 4% of the production already lost, he noted. EOG found that in the first quarter of 2000, U.S. production was 52 Bcf/d. The only quarter that has since been higher was the second quarter of 2001, when production reached 52.3 Bcf/d, and last year, there was only a gain of 0.2%.

But this year’s declines only foreshadow coming declines next year — in 2003, EOG forecasts a year-over-year loss of 5% in the first and second quarters, 2% in the third, and 1% in the fourth. Quarterly production also drops: 47.3 Bcf/d on average for all four quarters.

“Gas deliverability has been amazingly stable in the last 10 years,” said Papa, with 52 Bcf/d per quarter on average. However, “that is gone because of the aggressive decline rates. It’s a new world, with 47 Bcf/d of supply and that’s all.” The drop is “not going to stop in the next few years, and will not be turned around next year in an aggressive drilling program. That will only ameliorate the decline. It’s not coming from Canada next year; they’ll be down in Ladyfern and Eastern Canada and in Alberta, which is tired.”

Even though the declines will be slightly offset with incremental liquefied natural gas (LNG) imports, U.S. exports to Mexico are “heading toward 1 Bcf/d by 2005,” up from its current 0.5 Bcf/d. “This is a multi-year situation,” Papa said. “I don’t expect to see any significant supply relief until at least 2007, from either LNG or Alaska,” he said, referring to both Alaska’s gas potential, as well as Canada’s, which will require a pipeline commitment.

All of these long-range and somewhat bleak forecasts have led to some rethinking by the gas-rich producer. Since its inception, EOG has been all about North American natural gas — 74% of its total production currently is North American gas — one of the leaders in its peer group. “Clearly, we are the North American gas icon,” Papa told his audience, and said he could “easily claim to be the most profitable E&P in our space.”

However, based on forecasts in the past two or three years, EOG has been targeting a larger program, which Papa said was “still unfolding.” Believing that the company has been “exactly in the right place at the right time,” EOG plans to slowly expand internationally, including its assets in Trinidad.

“In four years or so, I’d like to capture another indigenous gas asset…we’ve got teams looking for projects. Ideally, I’d like to find another asset internationally, and there are signs we could do this in Trinidad and that path, and do that times two in Trinidad. The directions are going that way,” he said. And while he said that “four or five years from now, we’ll still be focused on North American gas,” EOG “may have a little more international blend to it.”

EOG has forecast an 11% compound growth rate on reserves through 2006. In Trinidad alone, Papa said, there is “guaranteed growth. Our volume will be up 6-7% next year.” Referring to the assets there as “static” until about three years ago, Papa said the growth in the region has been phenomenal for the company. “The bottom line on Trinidad is that even with the existing exploration, which is a modest exploration effort, we’ll add 200-300 Bcfe a year for the next few years. It has a very good growth profile.”

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