Raymond James & Associates’ gas analysts warned investors last week the latest production statistics indicate gas production is down 4-6% compared to last year and a tally of producers’ statistics for the second quarter by NGI found that conclusion to be accurate (See Table).

The St. Petersburg, FL-based firm highlighted several indicators, including sharply lower year-to-year storage injections, reduced E&P company production figures, a growing “balancing item” reported by the Department of Energy in its gas market statistics and a survey of three of the largest gas producing states.

The driving factor behind the production decline, Raymond James said, is the fact that drilling activity has fallen off at the same time that gas well depletion rates are accelerating. From the peak in December 1997 to the bottom in April 1999, U.S. gas-directed drilling declined 45% (from 654 rigs to 362 rigs). Additionally, gas production decline rates increased by more than a third over the past decade, making it harder for producers to maintain existing production levels.

Lower storage injections this year suggest that production is down 4% to 5% through June, Raymond James noted. And that conclusion was supported by the latest American Gas Association storage report. The AGA showed only 41 Bcf of gas was injected during the week ending July 23, which was about 27 Bcf less than average for that week. Working gas levels in U.S. storage stand about 43 Bcf less than the same time last year but still 205 Bcf more than the five-year average, according to AGA data.

Another factor that suggests production is down is the “ballooning balancing item” in the Department of Energy’s monthly natural gas statistics, the investment firm said.

In addition, Raymond James surveyed production statistics from Texas, Louisiana and Oklahoma (excluding federal offshore production) and discovered gas production in these three states combined was down 7.4% year-to-date through April and the downward trend seems to be accelerating each month. Gas production in Louisiana was down 1.8% to 4.3 Bcf/d through April compared to the same period last year. In Texas, production was down 5.9% to 15.1 Bcf/d and in Oklahoma production was down 17.6% to 3.8 Bcf/d. Raymond James also examined offshore Gulf of Mexico statistics and estimated production to be down 5.7%.

“The bottom line is that the effects from massive declines in U.S. natural gas-directed drilling activity over the past 18 months have only recently begun to show up in the figures posted by many government agencies. Digging through our state agency data, however, suggests that production is down much more than the DOE numbers suggest…

“[T]his decreasing supply picture combined with the outlook for increasing demand lead us to conclude that there is a very high probability of a gas shortage this winter. If we have a shortage, U.S. natural gas prices will likely be headed for record highs this winter.”

In a previous report, Raymond James predicted gas prices at the Henry Hub could peak at $10/MMBtu during high demand periods this winter and would average $3/MMbtu next year. Rocco Canonica

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