Analysts: US to scramble for 2001 gas supplies after colder winter

Producers will still be scrambling for more natural gas supplies in 2001, with even lower storage levels after a colder winter this year, analysts at Salomon Smith Barney Inc. reported this week. Following three exceptionally warm winters in a row, this winter is likely to return to 'more normal' cold levels that will use up more supplies of gas and home heating oil, said Jon Davis, a meteorologist with the company's Chicago office.

Oct 16th, 2000


Producers will still be scrambling for more natural gas supplies in 2001, with even lower storage levels after a colder winter this year, analysts at Salomon Smith Barney Inc. reported this week.

Following three exceptionally warm winters in a row, this winter is likely to return to "more normal" cold levels that will use up more supplies of gas and home heating oil, said Jon Davis, a meteorologist with the company's Chicago office.

"Nationwide, we see a high likelihood of early (November) cold weather this winter, which is much different than in the past few years," he reported Friday. "There is also a good chance of a great deal of variability in temperatures during the heart of the winter. Regionally, we foresee periodic surges of cold weather in the northeast quadrant of the US, which will be influenced by the sea surface temperature situation in the Atlantic Ocean."

With only 4 weeks remaining in the traditional refill season, gas storage levels are expected to be in the range of 2.6-2.7 tcf by November, down from roughly 3 tcf last year, said Robert Morris, chief energy analyst for Salomon Smith Barney.

A return to normally cold temperatures this winter would reduce US gas storage to roughly 500 bcf by the end of March, about half the amount that was left in storage in spring of this year, he said.

"Even if we experience another record-warm winter, storage levels would likely exit at about 1 tcf, or roughly equal to this year," Morris said in a telephone briefing Thursday. "Subsequently, operators would still have to run hard without any missteps to refill storage by the start of the following winter."

Tight fundamentals of supply and demand are likely "to keep the heat on" gas prices through 2001 at least, he said. Consequently, Salomon Smith Barney has raised its projected average US price for gas to $5/MMbtu during the fourth quarter of 2000, up from $4.25/MMbtu previously. Average gas price predictions for 2001 were raised to $4.25/MMbtu, up from $3.50/MMbtu previously.

Strong growth in demand for electricity, largely as a result of the internet explosion, is the primary driver of the growing demand for gas. Greater gas-fired electric generation capacity is conservatively projected to consume at least another 470 bcf of gas during next year's refill season, said Morris.

Domestic gas deliverability now seems to be on the upswing with a surge in drilling activity over the past 18 months. The number of rigs drilling for gas is at an all-time high, in excess of 830, up from the previous high of 650 at the end of 1997, Morris said.

Production decline rate increasing
Yet domestic gas production increased only 1% in the third quarter from the second quarter of this year, which was down more than 1% from the first quarter because of delays in hook-ups and permitting. First quarter 2000 deliverability was down roughly 3 bcfd, or nearly 6%, from the same period in 1999, he said.

That's largely because of the escalating decline rate among new US gas production, now exceeding 27% overall compared with 14% only 10 years ago, said Morris. In the Gulf of Mexico, which represents slightly more than 25% of total US gas production, new production is declining at close to 50% during the first year.

Morris cited two primary reasons for that decline:

� Smaller structures are being discovered and developed on average, since most of the bigger and more easily delineated structures on the outer continental shelf have already been developed. Apart from the deepwater frontier, the average field discovery in the gulf during the 1990s was less than 30 bcf of gas equivalent, Morris said. That compares with averages of 65 bcfe in the 1980s; 230 bcfe in the 1970s; and 430 bcfe in the 1960s.

� New technology, including horizontal drilling, better completions and fracture stimulation techniques, allow wells to be produced at higher rates during their first year of production.

Peak domestic gas production per active rig "has clearly trended down during the past 7 years" with the exception of 1996, which Morris described as "an aberration, with the start-up of production from Mobile Bay offshore Alabama."

Moreover, he said, increased drilling activity in Canada has focused on shallow gas reserves with lower productivity and faster depletion.

"Canada is not in much better shape than the United States with regard to the supply/demand fundamentals, and Canada clearly does not possess enough excess production to entirely fill existing or proposed export pipeline capacity into the US Midwest," said Morris.

The deep waters of the Gulf of Mexico currently produce nearly 3 bcfd of gas, or almost 6% of total US production. Projects scheduled for production startup this year could add another 500-600 MMcfd, although some of that would be offset by production declines, Morris said.

Because most of the drilling for coalbed methane in the prolific Powder River Basin is done by small truck-mounted rigs, those are not included in the Baker Hughes Inc. gas rig count. That production is currently 425 MMcfd, or less than 1% of total domestic gas production, Morris said.

But he expects that production to grow by 25 MMcfd until the first quarter of 2001. Then, Morris said, that production growth will "slow considerably," constrained by the lack of pipeline capacity until the fourth quarter of 2001.

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