The 30% increase in U.S. drilling activity since last year has failed to stop the steady decline of natural gas production, which should continue to fall “well into 2004,” Raymond James analysts said in their latest “Stat of the Week.”

Analysts Wayne Andrews and James. M. Rollyson said that they have maintained their bullish stance on high gas prices despite significantly higher storage injections because the market remained balanced through price rationing and more important, “the larger underlying problem of falling U.S. natural gas supply had not been addressed.”

With second quarter numbers now mostly complete, the analysts noted that production from 45 companies representing about 54% of total domestic production continues to fall. “Specifically, our survey results suggest that after adjusting the data for property acquisitions and divestitures, U.S. gas production decreased 0.8% sequentially and 2.4% year-over-year.”

First quarter gas production actually was up over the fourth quarter of 2002, but the analysts noted that the increase came from several one-time events, including tropical storm/hurricane activity during 3Q02; lack of liquids stripping; and the ramp-up of the Canyon Express pipeline system.

Despite strong drilling activity, the Raymond James analysts added that more important, “the majors (and gas utilities) continue to show the biggest decline in U.S. natural gas production, coming in this quarter at down 5.6% versus last year and 2.6% sequentially.”

The majors’ decline is important, they noted, because the majors and gas utilities represent the “single largest contributor of U.S. gas supply; and drilling activity among the majors and gas utilities has actually declined by 11% since the beginning of 2003. “This clearly suggests further significant production declines ahead for this group.”

There also is a “more astonishing reality,” they noted. “The independents and mom and pops are driving all of the drilling activity increases, with little production response to show for it. Specifically, the independents have been responsible for putting an additional 250 rigs to work (a 30% increase) since the start of the year, and their corresponding production results show only 1.4% year-over-year growth (and 1.3% sequential growth.”

Excluding a huge gain in the second quarter for independent Pioneer Natural Resources — which grew its gas production 108% since 2Q02 and 41% over the first quarter — the analysts said that the remainder of the independents’ production actually was down nearly 1% year-over-year and was flat sequentially.

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