US Gas Production Drop May Spell Trouble For Future Supply

(1/30/01 3:17:13 PM PT)

NEW YORK -- A decline in U.S. natural gas production during the fourth quarter may spell trouble ahead for 2001 production growth.

While the tally isn't complete, the fourth-quarter numbers from the major oil and gas producers that have already posted results show an overall decline in natural gas production from the third quarter.

The production slump is startling because it is counterintuitive, coming at a time when gas demand is growing, prices are strong, and the number of rigs drilling for natural gas is at a record level.

'I think given the robust commodity price picture that we have been seeing, the sequential decline in natural gas production so far is a little bit troublesome,' said Lehman Brothers Inc. analyst Paul Cheng.

Most would expect oil and gas companies to produce more gas when prices are strong, but some believe the last industry downturn had such a negative effect on the industry that many companies remain averse to risk.

While there is plenty of drilling activity, the gas reserves being targeted are smaller in size and the decline rates are greater, said David Pursell, an analyst at Simmons & Co. International in Houston.

Judging by the reduction in dry hole expenses, it appears that companies are drilling wells in the same geographic areas that have been reliable producers in the past. The problem with that strategy is the remaining reserves in a region tend to dwindle over time.

A decline in dry hole expenses, which are write-offs for costs related to an unsuccessful well, usually indicates fewer exploratory wells are being drilled, Pursell said.

'You have to ask, when are you going to put the 'E' back in 'E&P' projects,' Pursell said, referring to the need for new exploration to create production growth.

At Texaco Inc. (TX), two-thirds of the drop in fourth-quarter U.S. gas production from the third quarter was attributed to the natural decline rate of its wells, said Paul Weeditz, a spokesman for the White Plains, N.Y., energy company.

Sales of gas-producing properties accounted for the remainder of the decline, he said.

Looking ahead, Texaco expects to maintain U.S. gas production at its current levels, Weeditz said.

At Chevron Corp. (CHV) asset sales were the reason for the quarter-to-quarter decline in U.S. natural gas production, said company spokeswoman Bonnie Chaikind.

Excluding asset sales, gas production was flat sequentially, she said. Lower Spending May Have Sped Up Decline Rates

Also, lower spending on well infrastructure during the last oil industry downturn in late 1997 to 1999 may have accelerated the decline rate of some reserves, said Tyler Dann, an analyst at Banc of America Securities LLC.

He likened the industry's situation to the difficulty one encounters trying to get back on a moving treadmill after stepping off the machine.

Furthermore, the large oil and gas companies have shown an unwillingness to increase price expectations in the budget process, Dann said. As a result, some exploration projects that would be economically feasible under current prices won't be pursued because of the tough financial criteria.

This is especially important because there is a growing opinion that natural gas prices will settle at a higher average level in the future.

'If the new 'plateau' for natural gas prices is higher than what consensus projects it to be, then energy companies need to increase their leverage to natural gas production around the world,' said Gene Pisasale, senior energy analyst at Wilmington Trust.

But this isn't likely to occur overnight.

Late in the fourth quarter, Exxon Mobil Corp. (XOM) took steps to increase its gas production by maximizing production of natural gas rather than liquids at its U.S. gas plants, said company spokeswoman Suzanne McCarron.

The Irving, Texas, oil and gas giant also expects to increase its spending 15% to 20% from 2001, McCarron said.

How much of the increased spending will translate into higher production, is the big question, said industry observers, who have watched oil companies get less for their money in 2000.

In an estimate Pursell describes as aggressive, the analyst predicted the industry's U.S. gas production in 2001 will rise only 2%.

Looking further ahead, the situation may improve.

'According to both private sector and government estimates, it appears that considerable new supplies of natural gas will come on line in 12 to 24 months,' said Rhone Resch, a spokesman for the Natural Gas Supply Association, a Washington, D.C., trade group for gas producers.

The caveat there is that many of the estimates Resch is quoting depend on the Bush administration's willingness to open lands controlled by the federal government, mostly in the Rocky Mountains and the eastern Gulf of Mexico, to drilling.

(This story was originally published by Dow Jones Newswires)

Copyright (c) 2001 Dow Jones & Company, Inc.

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-- Martin Thompson (mthom1927@aol.com), January 30, 2001