EOG's Papa: US gas supply constraint will linger

Elevation of natural gas prices in the US results from supply constraint likely to last several years, says the top executive of a large independent gas producer. Papa told an Independent Petroleum Association of America lunch meeting in Houston Aug. 9 that the inherent decline rate of US gas deliverability is increasing with time, reaching 24%/year in 1998 compared with 14%/year in 1990. That increase, he said, represents '100% of the reason' for gas prices in excess of $4/Mcf this year.


Bob Tippee
Oil & Gas Journal

Elevation of natural gas prices in the US results from supply constraint likely to last several years, says the top executive of a large independent gas producer.

In the US and Canada, notes Mark G. Papa, chairman and chief executive officer of EOG Resources Inc., producers must strain to sustain peak deliverability. And what he calls the �next big slug of supply� will be from Alaska and the Beaufort Sea, unavailable until a pipeline is in place.

Papa told an Independent Petroleum Association of America lunch meeting in Houston Aug. 9 that the inherent decline rate of US gas deliverability is increasing with time, reaching 24%/year in 1998 compared with 14%/year in 1990. That increase, he said, represents �100% of the reason� for gas prices in excess of $4/Mcf this year.

US production, which peaked in 1994, will be down 0.5% this year from its 1999 level, Papa said. Growth in production from Canada has been slower than expected.

In contrast, US demand growth has averaged 1.5%/year for the past decade and is accelerating.

For technical and economic reasons, average production decline rates for recent additions to reserves exceed those of past additions. To keep peak deliverability from falling, operators must bring on more new production each year.

In 1999, the US lost 2.2 bcfd of peak deliverability in response to low prices. And despite zooming activity in the Gulf of Mexico, peak deliverability there has been unchanged for a decade, Papa said.

His firm estimates that operators must keep 650 rigs busy drilling for gas in order to offset production declines. With prices high and more rigs than that now drilling for gas, production this year will hold steady.

But low inventories will make for a �stressed� heating season next winter. The only question, Papa said, is whether the season will be �extremely stressed or moderately stressed.�

Gas from Canada isn�t the whole answer to long-term US supply questions, he said. Net exports by Canada are up this year, mainly because of new production from the Sable Island area off the east coast. Although deliverability from Alberta is growing, production decline rates are increasing, and export pipelines aren�t full.

Papa warned producers that supply constraint won�t last forever as the main influence on price.

�Price elasticity works on the downside just as well,� he said. �There�s going to be another cycle.�

And he pointed to the risk of economic recession, which would slash industrial demand for gas.

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