Reality suggests that even with a “modest” decline in the U.S. natural gas rig count in 2012, structural drivers should “more than offset” the drop and gas supply growth even may accelerate over the coming year, the energy team with Raymond James & Associates Inc. said last week.

“To be conservative, we are modeling U.S. gas supply growth in 2012 of only 4 Bcf/d. Unfortunately, this is roughly twice as high as consensus expectations and is likely to keep a lid on U.S. natural gas prices in the sub-$4.50 range for the next year,” wrote J. Marshall Adkins and colleagues John Freeman, Cory J. Garcia and Kevin Cabla.

For more than 10 years the Raymond James crew has tracked reported gas output from publicly traded U.S. producers, which comprise about half of total domestic production as a “fact check” on the Energy Information Administration (EIA) 914 data. Raymond James’ most recent quarterly survey, for 2Q2011, “confirmed the upward growth trend,” which indicated another sequential gas supply increase of 2.6%, or 0.8 Bcf/d. Monthly onshore supply has increased on average about 0.5 Bcf/d since the beginning of 2010, according to the data.

“On a year/year (y/y) basis, our survey of publicly traded producers demonstrated growth of 6.5% for 2Q2011. This compares to y/y growth of 5.5% in 1Q2011, 7.6% in 4Q2010 and 6% in 3Q2010 — a fairly consistent track record.” Independents posted “incredible growth of 11.7% y/y (2.3 Bcf/d),” while sequential volumes rose by 3.8%, or 0.8 Bcf/d. The majors posted a y/y decline of 2.8% with “flattish” sequential volumes. Raymond James doesn’t track private producers and the international joint ventures (JV) but “it has been our experience over the years that the production trends from privates tend to track public independents fairly closely.”

There were about 630 active horizontal gas rigs operating at the beginning of last week, said the analysts. “The obvious question is: why would U.S. gas production growth slow if horizontal gas drilling activity holds above 600 rigs? Are drilling efficiencies going to get worse? Are we going to get less ‘associated’ gas from liquids-rich oil wells? Are more completions of uncompleted wells going to drive gas supply lower? No, no, and no.”

The reason, said the team, is that fewer gas rigs are producing more gas at a faster pace while drilling and completion efficiencies continue to increase, associated gas from liquids plays continues to grow and a lengthening backlog of uncompleted wells await a tie-in to pipe.

“Even with the slow bleed in overall active gas rigs and a slow bleed in offshore gas supply, we continue to believe U.S. domestic gas production will be up 4 Bcf/d (or more) in 2012,” the analysts wrote. “Unfortunately, this should leave gas prices relatively depressed through 2012.”

The team also played “myth busters” to refute misconceptions about gas supplies. Myth No. 1, that the gas rig count “is setting up to fall of a cliff after leases expire,” isn’t accurate because leasehold obligations are only held on about 10% of the current rig count and most new well permits are on acreage already held by production, the analysts said.

Another “myth” is that the decline curve treadmill eventually will catch up, they wrote. First-year gas well production declines are “anywhere from 65-80%,” but this effect “fades rapidly as wells enter year two or three of production,” which more than offsets the initial declines.

“In fact, we believe that base decline rates are actually declining as the Barnett and Haynesville mature,” they wrote. “Once you get past the first couple of years, the production tails from these long-lived shale plays flatten out dramatically…The poster child for this phenomenon is the Barnett Shale. Even recently, Devon Energy said it now has the ability to grow production in the Barnett Shale off a flat rig count.”

The third “myth,” they said, is that rigs migrating to liquids plays will reduce gas output. However, in “many cases these liquids-rich plays, which are often classified as oil wells, have more associated dry gas than the older gas shale plays that the rigs recently left behind. The average Eagle Ford and Granite Wash wells, for example, produce almost twice as much gas in the first year than the average Barnett or Fayetteville wells.”

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