Despite predictions from the Energy Information Administration (EIA) and energy industry analysts that gas production probably will be flat to slightly higher in the fourth quarter compared to the third quarter, analysts from Raymond James & Associates said a recent survey shows domestic natural gas production actually may be down 1.5-2% from the third quarter.

“Our mid-quarter survey indicates that U.S. natural gas production will probably decline meaningfully for the second quarter in a row,” Raymond James analysts said in an equity research note. “Our survey of 29 of the largest natural gas producers in the U.S. (representing nearly 45% of U.S. production) shows that fourth quarter production will likely be flat to down 1.5% sequentially and year to year. While these number are in line with the market’s current expectations, underlying dynamics in the industry lead us to believe that actual results (reported in late January) could show an even larger Q4 2001 sequential decline in U.S. supply closer to 2%.”

The industry dynamics that support a lower supply forecast, according to the analysts, include the rapidly falling rig count, voluntary production curtailments because of low October gas prices, pipeline-mandated production curtailments because of low demand and full storage and year-end tie-in delays associated with year-end ad valorem taxes.

Since July, the rig count has fallen 30% from 1,293 rigs to 907 as of Dec. 14. Production already was down in the third quarter, and “it’s highly unlikely that producers would be able to increase volumes in the face of such a steep decline in activity,” the analysts noted.

They added that many of the integrated producers also made their fourth quarter production forecasts without the knowledge of the mild heating season, high storage levels and supply restrictions by pipelines. In the third quarter, the integrated producers overestimated their production by 1.8%; it’s more likely they overestimated production again in the fourth quarter.

In addition, results from the independents show production down 1-3%. “In general, activity levels for the independent producers are more gas price-sensitive than for the integrated group because the independents typically target smaller prospects with shorter production lives and investment horizons,” the analysts noted. “As a project’s investment horizon shortens, the returns become more sensitive to short-term commodity price cycles. Therefore, when commodity prices decline, the independent group is the first to scale back activity levels. In contrast, larger integrated producer target larger projects that have longer production lives and are not as sensitive to short-term swings in commodity prices.”

Raymond James’ analysts said their survey represents 45% of domestic production from 29 of the largest producers. The smaller producers which are more likely to show production declines were not included in the survey, and they actually represent more domestic production (55%). “Therefore, if smaller producers are facing steeper production declines than larger producers, then we can infer that production from the remaining smaller E&P universe is declining faster than our survey suggests.”

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