A room full of producers was asked last week in Houston whetherthey would contract to sell gas for $3 for 10 years, adjusted forinflation. Only a smattering of hands went up. Clearly, optimismhas returned to the industry.

David Trice, the president of Newfield Exploration Co. whoquizzed the producers before his talk Monday at an IndependentPetroleum Association of America (IPAA) luncheon, said he wasn’tsurprised by the audience’s response. “That’s the same response Igot from my management group. I think there was one out of seven ofus who thought that that would be a good deal.” Trice noted therehaven’t been any gas buyers knocking on his door to lock in dealsat $3/Mcf either.

A good bit of producers’ optimism could be attributed largely tothe industry’s inability of late to grow gas reserves. “In 1999 onthe supply side we’ve clearly gone the wrong direction,” Tricesaid. “Investment is down. The average rig count is down, anddeliverability is off – pick your consultant – somewhere between 2and 3 Bcf/d. And even with higher rig rates and investment in 1997,all we did was tread water in 1998. Production was essentiallyflat. So we wake up every day on a treadmill, and it becomes harderand harder to beat natural decline.

“And increases in the gas supply over the last decade have notreally come from the drillbit. We had allowable rules changed inthe Midcontinent. We’ve got a lot of infill drilling. We’ve had alot of Canadian imports over those years. So as an industry ourtrack record in exploration has been lackluster.”

Decline rates continue to increase as gas field sizes shrink andtechnology improves the industry’s ability to take gas out of theground faster. Trice pointed out that 70% of current productioncomes from wells drilled after 1990. “And first-year depletionrates on those wells range anywhere from 30 to 40%.”

Newfield is active on the Gulf of Mexico’s Continental Shelf butnot in the deep water. Trice said it’s up to the Gulf, includingthe Shelf where decline rates are high, to brighten the country’sgas supply picture. “For the past several years, the Gulf of Mexicohas produced in excess of 25% of U.S. gas supply and holds about18% of U.S. gas reserves. The remaining proved reserves in the Gulfpeaked at about 46 Tcf in 1986.

But by the beginning of 1998, they had declined to about 28.5Tcf, a pretty steep decline. And also remember in 1986 thatvirtually all those proved reserves were located on the Shelf. Butby the beginning of 1998, 7.5 Tcf, or about 26% of the reserves,were located in water depths greater than 200 meters.”

Reserve growth in the Gulf has come from the deep water over thelast several years with the Shelf unable to sustain its provedreserve base due to annual production growth. “Those increases havecontinued basically every year up until last year. This is in spiteof high rates of investment and 10-year high rig counts in 1997 andthe first half of 1998.”

The high rig counts and heavy investment didn’t last, aseveryone in the industry knows. “And the lack of drilling andinvestment over the past 12 months has led to further supplyreductions from the Gulf, which are estimated at anywhere from 1 to1.5 Bcf/d.”

Trice said by the fourth quarter Shelf production, includingthat from state waters, is expected to fall off to about 11.8Bcf/d, a decline of 9% from the fourth quarter of 1998. “So there’sno doubt in my mind and I’m sure in your minds that the Gulf ofMexico Shelf, in particular, really is a treadmill and both thespeed and the incline were increased in 1998 and 1999.”

However, in the deep water, production is expected to grow by600 to 700 MMcf/d this year to end the year at between 2.3 and 2.5Bcf/d. “But that only offsets about 50% of the decline that we’veseen from the Shelf this year.

“Deep-water gas production is expected to continue to increaseto around 3 Bcf/d in 2000… But note that the reserves in thedeep-water at the beginning of 1998 were like 7.5 Tcf. And theseprojection rates to me imply a treadmill not unlike the one we’vefound ourselves on in the Shelf.”

To ensure the viability of Shelf production into the future, anumber of steps can be taken and some already are in place, Tricesaid. For instance, deep-water royalty relief is good, although thepaperwork involved is too complicated. The government needs to openup prospective areas to E&P, such as the eastern Gulf and theAtlantic.

The Minerals Management Service also should reevaluate itsprocedures for rejecting lease bids in competitive sales. “Betteryet, eliminate that practice.” Finally, technology will drivereserve growth in the deep-water just like 3D seismic and improvedcompletion technologies rejuvenated the Shelf during the 1980s and1990s, Trice said.

Joe Fisher, Houston

©Copyright 1999 Intelligence Press, Inc. All rightsreserved. The preceding news report may not be republished orredistributed in whole or in part without prior written consent ofIntelligence Press, Inc.