Despite the record rig count, gas production isn’t picking upspeed the way many expected, according to Robert Morris of SalomonSmith Barney. Gas production decline rates are extremely high, andthe United States will be lucky to see production growth of 3% thisyear, Morris said during a conference call Friday.

“Overall we expect that the supply and demand balance willremain tight throughout this year at least as tight as last yearkeeping natural gas prices on a relatively firm course and ourforecast for the full year is $5/MMBtu,” said Morris.

“The overall decline rate for production in the U.S. hascontinued to climb. In fact since the beginning of the 1990s it hasmore than doubled. What that means is that overall we have to runharder every year just to stay in place,” said Morris. He saidoverall production decline rates per well are averaging about 27%today, according to data from Dwights.

And at this stage the level of drilling activity is starting toplateau off with the gas rig count in the U.S. having reached 900.Last week the U.S. gas rig count dropped to 885 from 905. Prior tolast year the highest ever seen was 650.

But the 40 largest production companies, which account fortwo-thirds of domestic gas production, reported only a 1% increasein fourth quarter 2000 gas production from the third quarter. Theypredict 5% growth this year but Morris said he isn’t buying it.

A new field-by-field study of natural gas production from theGulf of Mexico by McLean, VA-based Beacon Energy shows a 10.2%decline over 18 months in 1999 and 2000. The Beacon Energy studylooked at data collected by the federal Minerals ManagementService.

Production from the federal waters of the Gulf declined to 12.7Bcf/d from 14.1 Bcf/d between January 1999 and June 2000, thelatest month for which reliable data were available. The Gulf ofMexico provides 20-24% of the natural gas consumed in the UnitedStates.

The decline “explains, in part, the run-up in gas prices duringthe last half of 2000,” said Jeff Brown, vice president of BeaconEnergy. “Combined with high gas-fired generation demand during theunseasonably warm summer weather in California and the heatingdemand in November and December 2000 throughout the country, thecoldest two-month period in more than a century, one can see why wehave experienced extremely high price levels in the gas market.”

The big question, said Brown, is whether the increase indrilling will provide the supply needed to meet rapidly increasinggas demand.

“This summer we expect to see the highest gain in demand fornatural gas to fuel power plants seen to date,” he said. “Thecombination of 20 GW of capacity placed in service in 2000 and anadditional 30 GW in 2001 could test natural gas productioncapacity.” Brown said the new generation “could add 5-7% to naturalgas demand if we have hot weather and those new units see extendedrun times.”

Morris doesn’t see much help coming from Canada. Imports areexpected to remain relatively flat in 2001. “Any significant uptick[in imports] will occur in 2002. We don’t expect any help fromCanada in augmenting our supply in 2001.”

Fuel switching has provided some relief, bringing supply anddemand more in balance. Switching reached 8 Bcf/d in January, butit has dropped recently to around 3 Bcf/d, Morris said. Someammonia production plants are still off line because of high gasprices, but with the recent drop in prices some also are startingto return, he added.

Meanwhile, gas storage levels probably will exit March atroughly 700-800 Bcf, compared with just over 1,000 Bcf last year atthe end of the traditional withdrawal season.

“Nonetheless, under most scenarios, incorporating numerous othervariables such as the pace of economic expansion, fuel switchingand industrial plant closures, it appears that storage levels atthe beginning of winter will be near or below last year’s 2,800 Bcflevel,” Morris concluded. “Thus, it appears likely that the ‘heat’will remain on natural gas prices throughout 2001.

Rocco Canonica

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