Lehman Brothers analyst Thomas Driscoll said that U.S. gas production was down about 0.2% in the second quarter from first quarter levels based on results from 44 large production companies. The decline was much smaller than the 2.9% sequential drop in the first quarter from 4Q2001. Driscoll said the results have led him to maintain his projection that full-year gas production will be down 4.5 to 5.25% compared to 2001 (production rose 0.7% in 2001, but fell 2% and 1.3% in 1999 and 2000, respectively).

The 44 major production companies, which represent about 70% of U.S. gas production, reported gas volumes of 26.8 Bcf/d, down 0.2% from the first quarter and down 5.3% from 2Q2001. The companies with the largest percentage declines were Swift Energy with an 18% drop from the first quarter and Nuevo Energy with a 12% drop. Other large sequential declines were reported by ExxonMobil (-5%), Burlington Resources (-8%), Philips (-6%), Apache (-5%) and Occidental (-4%).

The biggest percentage gains in the second quarter compared to the first quarter were made by ATP Oil & Gas (+25%); XTO Energy, Forest Oil, Pogo Producing and Vintage Petroleum (all up 8%); Shell (+6%); Amerada Hess (+7%); and Unocal, Newfield and Stone Energy (all up 5%).

Meanwhile, Canadian production was down 2.1% sequentially and 0.3% compared to the second quarter of 2001. “Canadian natural gas production growth could be flattening out,” said Driscoll. “Based on historical trends and assuming Ladyfern production remains flat, we estimate that [Canadian] production this year can be 1% up or 1% down from last year’s levels. However, if Ladyfern declines 70% by year-end, the worst case scenario, then total Canadian production can be down an estimated 1-3% from the previous year. This compares to a 6% annual increase experienced in 2001.”

The Ladyfern project is located in northeastern British Columbia about 65 miles northeast of Fort St. John and is producing about 650 MMcf/d currently. Canadian Natural Resources is the only company producing its allowable production at Ladyfern, about 200 MMcf/d. And Canadian Natural also appears to be the only producer expecting to maintain its production there through the end of the year. Murphy/Apache and EnCana expect production declines over the remainder of the year.

Driscoll said the latest drilling statistics show Canadian rig utilization down 13% as of July 30 compared to the same week last year. Gas well completions in Canada dropped sharply in June. Western Canadian gas well completions declined 44% in June from a historical high last year. Net gas exports also are down about 6% from last year and Driscoll estimates they will be down 1-6% for the full year.

However, the Petroleum Services Association of Canada (PSAC) recently increased its projection of wells to be drilled across Canada during 2002 to 14,700 from spring expectations of 14,000. Gas drilling is forecast to account for 61% of the activity.

PSAC President Roger Soucy observed that although the count will still be down from a 2001 record of 18,181 wells, the new outlook for 2002 still represents 16% more drilling activity than the 10-year average for Canada. The strength reflects growing confidence in the North American gas market.

From a Canadian perspective, the price outlook is strong by the standards of its recent, painful history. The Canadian industry is still only in its second year of receiving prices which are reasonably comparable to U.S. benchmarks.

Meanwhile, Canadian gas demand was up 3% in May. According to Statistics Canada, gas consumption in Canada was up 237 MMcf/d or about 3% year to date over the same period in 2001. “This could partially explain why net exports to the United States are down,” Driscoll noted. “We forecast that natural gas consumption this year will be up 1-3% from last year’s levels.”

Driscoll said he expects total North American natural gas production volumes to fall 3.2-4.3% this year. LNG imports are expected to rise 50-150 MMcf/d from about 650 MMcf/d last year, but total gas supply is expected to be down 3.0-4.1% this year.

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