Total US natural gas production is likely to drop by 3.5-4% this year instead of the 2% decline previously predicted, because exploration and production companies have depleted their North American drilling inventories faster than expected, a veteran industry analyst contends.
Robert Morris, oil and gas exploration and production analyst for Salomon Smith Barney Inc., New York, said, "Producers have run through a lot of their best prospects in trying to drill up all they could" during a flurry of activity that started about mid-2000 and peaked at 1,293 active units in late July 2001. US drilling subsequently declined fairly steadily through early April.
But with the pick-up in drilling activity in recent weeks, Morris said, "It appears the rig count bottomed out earlier than expected."
However, he said E&P companies are getting less new production for each rig employed over a base of 500 rigs because of the smaller fields being found and quickly depleted.
With rig efficiency currently below the average levels for the last 2 years, Morris said, "We would need 1,200 rigs in the field next year to keep US production level."
Canadian gas exports to the US will likely decline by 1-2% this year, largely as a result of lower production from Ladyfern field in Northeast British Columbia than initially projected by the operators. "Other Canadian production also is depleting," Morris said.
Demand, storage outlook
Meanwhile, he said, US gas demand is expected to rise by 5% this year with a rebound in the economy and the recapture of that portion of the gas market lost when previous high prices led power plants and industrial users to switch to distillates and fuel oil.
"Our base case is still that, with a normal winter, spot natural gas prices will average $3.50/MMbtu in 2003," said Morris. A winter that's 10% colder than normal could pump prices up to $4/MMbtu, while one that's 10% warmer than normal could drop prices to $3/MMbtu.
"At this juncture, all eyes will be on the pace of storage injections now that summer is almost upon us. The important factor will be to determine if there has been any significant loss of demand based on the persistent strength in natural gas prices," Morris said.
"We continue to project the current 540 bcf year-over-year surplus will be eliminated by the start of the upcoming winter, with storage reaching 3-3.1 tcf at the beginning of November, compared with roughly 3.1 tcf last year," he said.
