US gas production to fall below capacity, analysts say

Ann de Rouffignac
OGJ Online

HOUSTON, Feb. 13, 2002 — Natural gas producers are expected to shut-in production soon. And for the first time, US production will be lower than capacity, experts with Cambridge Energy Research Associates said Wednesday in Houston.

Gas prices are expected to dip even lower than $2/Mcf before the summer. But there is no supply bubble, panelists said at the conference. Instead, they said it’s a question of demand recovering from the recession and a return to “normal” weather patterns. In fact, supply could not be portrayed as robust.

“It is difficult to see a lot of new production in the US,” said Edward Kelly, director of CERA.

Although there is no shortage of supply, there will be a decline in US production by summer, he said. Decline in production in producing areas and a severe decline in drilling is impacting supply, said Bob Esser, CERA director.

“Production went up in September after a peak in drilling in mid-July and then started to flatten out in October,” he said. “We estimate that production is off by 1.2/bcfd and possibly up to 2/bcfd by next year.”

All areas of production, especially the San Juan basin, Midcontinent, and Permian basin are experiencing decline. Only the Gulf Coast region and the Gulf of Mexico areas are not, he said.

With prices lower than $2/Mcf and capital budget cut backs, Esser said he expects the rig count to decline as low as 600 rigs. He noted it takes 800-850 rigs drilling just to keep production flat, he said.

“We are only one hot summer or cold winter from being in the same situation as 2000,” said Patrick Strange, senior vice-president with Reliant Energy Wholesale Group, a unit of Reliant Energy Inc. “Weather has been a big factor for why we are now flush with gas.”

Making the problem even worse are ‘cycling’ requirements for storage fields. Because gas is not being withdrawn and replaced at a rate that meets technical specifications, a certain amount of gas must be withdrawn (cycled) and sold on the market no matter what the price.

“There will be 100-150 bcf to come on the market that absent cold weather would not have come on the market,” said Kelly. However, for the second half of the year, Kelly predicted demand will rebound and prices for the full year will average $2.50/Mcf.

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