A survey of 47 gas producers indicates that second quarter domestic gas production fell 3.8% compared to second quarter 2003 levels and was down 0.6% from the first quarter 2004, according to analysts at Raymond James & Associates. Sharp declines among the majors and utility companies were only partially offset by production increases by the independents, the analysts said.

“Our bullish North American energy thesis has been, and continues to be, centered on the underlying problem of falling U.S. natural gas production,” said J. Marshall Adkins and Wayne Andrews of Raymond James. “Much like in the 1970s, when oil production continued to fall, regardless of how many rigs were drilling, we think we are nearing (if not at) a similar crossroads in the U.S. gas supply picture.”

Despite a 44% increase in drilling over the past two years, gas supply continues to fall, according to Raymond James’ statistics — statistics from the federal government paint a different picture, however.

The Raymond James survey shows a 9.9% decline in production from 2Q2003 to 2Q2004 from the majors and utilities (Amerada Hess, BP, ChevronTexaco, ConocoPhillips, Dominion, Equitable Resources, ExxonMobil, Marathon, Murphy, Occidental and Royal Dutch/Shell), and a 3.6% decline from 1Q2004 levels.

The data from 36 independent producers shows domestic gas production rose 2.2% in 2Q2004 from 2Q2003 and was up 2.3% from the first quarter of this year. In total, U.S. production from the entire group of 47 companies was 25,534 MMcf/d in 2Q2004 compared to 26,534 MMcf/d in 2Q2003 and 25,674 MMcf/d in 1Q2004.

Meanwhile, the Energy Information Administration (EIA) is estimating that total domestic gas production for the second quarter was flat at 4.75 Tcf and will end the year up 0.4%.

“Our survey results again bring into question data from the [EIA] showing U.S. natural gas production on the rise,” said Adkins and Andrews. “Though EIA data for 2003 (the latest available) has gone through several downward revisions, it still shows a year over year production increase of 0.6% for the entire industry last year. This conclusion from the EIA seems to defy common sense when one considers that our surveys cover 47 of the largest natural gas producers in the U.S., representing roughly 60% of total domestic production.

“Given that 60% of production was down 3.8% year over year in 2Q04, the other 40% would have to be up a whopping 5.7% in order for total production just to break even! Expecting such as massive level of growth from the small mostly privately held producers outside our survey is wishful thinking at best.”

According to Raymond James, the independents are driving nearly all of the drilling activity increase in the United States with “little production response to show for it.” However, because of high gas prices they are still making excellent returns on their investment, the analysts said.

Nevertheless, only four of the independents in the Raymond James survey (Chesapeake Energy, EnCana Corp., Pioneer Natural and XTO) kept the overall group from reporting production declines. Without the production increases from these four companies, domestic gas production from the entire group of independents would have dropped 0.8%.

“Given the inherent rate of decline in U.S. gas wells today, combined with what is still a muted response to drilling activity, we expect domestic gas production levels to continue trending south for the next several quarters.” Adkins and Andrews said they expect year over year production declines of 2-4% to continue “for the foreseeable future.” They also expect gas prices to continue rising, particularly if oil prices remain near $40/bbl.

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