Despite a more than 30% increase in the gas-rig count during the past 24 months, U.S. gas supply continues to drift downward. J. Marshall Adkins and Wayne Andrews, Houston-based analysts for Raymond James & Associates, report that in second-quarter 2005, their survey universe of publicly traded domestic producers-which account for about 50% of total U.S. gas output-showed a year-over-year gas-production decline of 1.2%. For first-quarter 2005, the year-over-year production drop for the group was 1.3%. "While the rate of decline in U.S. gas production appears to have slowed, we emphasize that just getting to this point took immense effort for industry," says Adkins. He notes that the industry is now at virtually 100% utilization of onshore gas rigs while gains in drilling efficiencies have also been significant during the past two years. "Going forward, constraints on rig availability are likely to become more noticeable and gains in [drilling] efficiencies should slow," says Andrews. "Meanwhile, the quality of prospects that are being drilled is diminishing and organic decline rates for the industry are continuing to rise. This means that the U.S. gas-supply picture remains quite constrained." The researchers' bullish North American energy thesis has been, and continues to be, centered on the underlying problem of flagging U.S. gas output. "Much like the 1970s, when oil production continued to fall regardless of how many rigs were drilling, we think we are nearing-if not already at-a similar crossroads in U.S. gas supply," stresses Adkins. While the analysts concede that gas-supply declines in the second half of 2005 and in 2006 should be less severe than those observed in 2004, they nonetheless expect domestic gas-production levels to continue trending down. For more on this, see the September issue of Oil and Gas Investor. For a subscription, call 713-993-9325 Ext. 126.

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