Based on a third quarter production survey, which showed a 3.1% year-over-year decrease and a 1.5% sequential production drop, analysts at Raymond James & Associates believe domestic gas production decline rates actually accelerated during the quarter rather than slowed. And this may have happened despite a nearly 30% increase in drilling since late last year.

However, the analysts admit that the results of their survey, which included producers that represent only 56% of total domestic production, may not be reflective of the other 44% of domestic production.

Other industry soothsayers, including the Energy Information Administration (EIA), are expecting domestic dry gas production to increase during the quarter and the year. EIA projects a 1.7% rise for the quarter compared to the second quarter and 2.9% compared to 3Q2002. The government agency also is forecasting a 3% increase in domestic dry natural gas production this year. Some prominent industry consulting firms, such as Arlington, VA-based Energy and Environmental Analysis Inc., also are forecasting production increases for the quarter and the year.

But the market bulls at Raymond James say that their survey of 46 of the largest gas producers in the United States shows that nearly all of the companies in the group failed to maintain production levels.

“Perhaps more importantly, the majors (and gas utilities) continue to show the biggest decline in U.S. natural gas production, coming in this quarter at down 8.3% versus last year and down 4% sequentially,” said Raymond James analyst Wayne Andrews, adding that further production declines probably lie ahead from the majors and gas utilities.

“This also brings to light an even more astonishing reality: the independents are driving nearly all of the drilling activity increases, with little production response to show for it,” Andrews added. “Specifically, the independents have been responsible for putting an additional 240 rigs to work (a 33% increase) since the start of the year and their corresponding production results show only 2.4% year-to-year growth and 1.1% sequential growth.”

Andrews said only three companies are responsible for all of the growth among the independents: EnCana, Pioneer Natural, and XTO Energy — each with double digit increases, excluding acquisitions and divestitures.

The question is whether the remaining companies, mainly small “mom and pop” producers, outside the Raymond James survey performed more like EnCana, Pioneer and XTO, or more like the majors and utility affiliates. “It is probably that the production growth rate of [the remaining] companies is closer to that of the large independents than the majors,” Andrews admitted, “but given the vast number of these small players, it is difficult to get an accurate assessment of what their production is doing.”

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