RJA examines factors behind differing US natural gas production estimates

OGJ editors
HOUSTON, Dec. 23 -- Regarding conflicting reports about the direction of US natural gas production, Raymond James & Associates Inc. said, "the preponderance of the evidence supports the view that US gas production is falling by more than 4% on a year-over-year basis."

"Furthermore, it does not appear that this trend is likely to reverse itself anytime soon," analysts said in a Dec. 1 research note.

The Energy Information Administration estimates that US production is growing by roughly 2% year-over-year. But RJA believes production is declining based upon its findings from quarterly surveys of 46 publicly traded US gas producers.

"If we smooth the data out by incorporating a 12-month moving average, one can see a substantial divergence between publicly traded company data and EIA data beginning in early 2002," RJA said.

The EIA estimates dry gas production from state-reported data, which is an estimate that will be revised for a trailing 18 month period, RJA said. Then, the EIA adds supplemental gaseous fuels and imports, subtracts exports, accounts for changes in gas storage, and incorporates a "balancing item" to arrive at a monthly consumption number, RJA added.

"Not only are US natural gas production revisions for the last 18 months enough to raise an eyebrow at, but the mysterious balancing item estimates and revisions have brought the accuracy of the EIA data under scrutiny for some time," RJA said.

Private producers
RJA contemplated whether production from small private companies could account for the differences between its survey figures and EIA data.

"Specifically, private company production would have to be growing by nearly 8.5% year-over-year to get close to the EIA data . . .While these smaller companies have been helping to drive the rising US rig count, one must question the quality of prospects available to them. In fact, our analysis shows that it is highly unlikely that the smaller,
private E&P companies are driving any increase in US gas production," RJA said.

RJA said the larger publicly traded independents represent 29% of US gas production and have been responsible for putting an additional 97 rigs to work, accouting for a 49% increase, since Jan. 1, 2003.

But despite the increased drilling, corresponding production results shows only 2.4% year-over-year growth in gas production.

Meanwhile, the private companies represent 44% of US production and have been responsible for putting an additional 106 rigs to work (a 30% increase).

"Even if we generously assume similar rig and finding efficiencies, private company production would be up only about 1.5%, and therefore total US production would still be down over 1%," RJA said.

"In summary, without large organic increases in production from only a few of the independents with quality prospects and improved efficiency, it is likely that the private gas producers may not experience production increases at all," RJA said.

State agency data
The analysts noted that some of the states' reporting agencies also project monthly
production data.

For instance, the Texas Railroad Commission releases its monthly production data, complete with projections of recent months based on an inflation factor.

"Over time, these projections have been fairly accurate," RJA said. "However, in periods of severe changes in activity and production (particularly upswings), we have noticed that these estimates can be a bit too optimistic," RJA said.

For instance, this was the case during the 1997-98 acceleration in gas production following a drilling boom, analysts noted.

"While we can't definitively say that this issue is reoccurring today, we are not willing to just take the most recent production estimates at face value, as some others have done. Only time will tell if these figures are, in fact, accurate," RJA added.

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