EIA says gas drilling slump won't prevent low prices in 2002

By the OGJ Online Staff

HOUSTON, Jan. 8 -- The US Energy Information Administration said the sharp downturn in US gas-directed drilling rates since July will probably not reduce production enough to prevent low prices this winter and through most of 2002.

Natural gas production increased 1.7% in 2001, while demand declined an estimated 5.3%, said the EIA in its January forecast.

"We now expect domestic natural gas production to fall 400 bcf in 2002 or 2.1% and to recover to about 2001 levels in 2003," the EIA analysts said. But lower drilling rates could have important implications for market prices by 2003, according to the agency.

With gas demand projected to rise 1.2 tcf, or 5.5% this year, EIA is expecting inventories to return to normal. US wellhead prices will remain near $2/Mcf through much of 2002, but in 2003, EIA said the expected rebound in economic growth will boost demand growth by 2%. Forecasters predicted somewhat higher spot gas prices, averaging about $2.70/Mcf.

EIA attributed 2001's decline in residential gas demand to weak heating-related demand in the fourth quarter. Heating season temperatures for most of fourth quarter were above normal, causing withdrawals from storage to be delayed. If temperatures are normal for the rest of this winter, the agency said heating degree-days for the entire 2001-2002 winter season would be 14% lower than last winter.

EIA blamed a weaker industrial economy compared with last winter and the relatively warm fourth quarter of 2000 for lower gas and power consumption.

After no growth last year, the US government is projecting electricity demand will revive slightly this year as the economy improves.

The US Energy Information Administration in its January forecast predicted electricity demand will be up 0.8% in 2002 and 2.4% in 2003. This is compared with estimated demand growth in 2000 of 2.8% over 1999's level. The agency noted 2001 electricity demand in the industrial sector was adversely affected by the overall economic slowdown.

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