?Given that both gas production and supply in storage are rising in the U.S., gas prices have been falling from their early-2008 highs. What do analysts project for the 2009 outlook? Based on the U.S. economic slowdown and the rise in gas supply, most are calling for a gas-price average of $7 to $7.50 per thousand cubic feet.


On October 23, gas futures hit a 13-month low of $6.41 per million Btu, as the weekly report by the Energy Information Administration showed a large increase in inventory. The surplus to the five-year average at that time was 93 billion cubic feet (Bcf), or 2.9%, having widened for four consecutive weeks. The five-year average is 3.3 trillion cubic feet (Tcf) for early November, when 52% of U.S. homes begin to use gas for heat.
Stockpiles reached 3.35 Tcf in the week ended October 17 and by November 7, they increased again, to 3.47 Tcf. Observers seemed alarmed by these storage numbers, but in fact, storage was below the level for the same week in 2007 of 3.54 Tcf.


Even so, the December delivery price on Nymex flirted with going below $6 for the first time in many months. At that price, several shale and tight-gas plays look less economic and some key E&P players were announcing their intent to keep their 2009 budgets flat or even below 2008 expenditures.

Supply
Onshore gas production is still growing in the Lower 48. The Department of Energy reported that July gas production was strong. Onshore, daily output grew by 5.8 Bcf or 12% year-on-year.


Daily production in August 2008 was up 5.4 Bcf, or 11%, versus the year-earlier levels, and up 0.4 Bcf sequentially. September and October production numbers were skewed due to the lingering aftereffects of hurricanes Gustav and Ike, especially as some midstream facilities were still off-line.


Onshore production growth correlates closely with the rising rig count and, especially, the increase in the horizontal rig count, which is now about 600, up from 133 in early 2005, according to Bernstein Research.
The firm thinks close to 4 Bcf a day of production growth can be attributed to horizontal drilling, but recent cuts in spending may alter the trend. In addition, it sees a flattening in the average estimated ultimate recovery (EUR) per well in many major plays, even in the Barnett.


Barclays Capital analyst George Hopley notes the EIA’s recent release of U.S. reserve data was positive. “Recent reserve estimates for 2007 show a sharp rise in proved U.S. gas reserves, the largest annual gain since EIA began estimating in 1977.”


Meanwhile, prominent gas producers reported their own gas-growth stories for the third quarter. EnCana Corp.’s daily gas output rose 8% or 287 million cubic feet in the third quarter, compared with third-quarter 2007, largely due to a 24% rise in production from the company’s U.S. resource plays. In these, growth was led by a rise of 135% in East Texas, where output averaged 340 million cubic feet per day in the third quarter, mainly due to new wells coming onstream, and thanks to the doubling of EnCana’s interest in the Deep Bossier play in late 2007 following its purchase of Leor Energy.


Devon Energy Corp.’s Barnett shale production rose to 1.1 Bcf equivalent per day. The first two wells in its new Haynesville play in East Texas produced between 22- and 26 million a day.


Chesapeake Energy Corp.’s gas output rose 15% over the prior year to 2.3 Bcf equivalent a day. Southwestern Energy Corp.’s Fayetteville shale output rose to 600 million a day, nearly triple third-quarter 2007 production.


Range Resources Corp. said in its closely watched Marcellus shale operation that production will reach 30 million cubic feet equivalent a day by year-end, but more important is the projection that it will rise to at least 80 million a day by year-end 2009.


Meanwhile, Petrohawk Energy Corp. said it expects to have 18 wells producing in the Haynesville shale by year-end and may drill at least 70 wells in the play in 2009.

Demand
Demand for gas is largely driven by the weather, yet it is also sensitive to changes in the economy that affect power-generation and industrial demand.


“Under a normal weather scenario, we believe gas demand will fall by 2 Bcf a day or 3% in 2009, assuming U.S. GDP falls 0.7% (the International Monetary Fund’s latest estimate), offset by a drop in gas prices,” report analysts Ben Dell and Scott Gruber of Bernstein Research.


“However, this would only require U.S. onshore production growth to drop 1% in 2009 to balance the market, as Canadian gas imports and Gulf of Mexico production should decline.”


The analysts expect that for a 1% decline in U.S. gas production, drilling activity will have to decline 25%, with marginal prospects facing the most obvious fall-off in drillbit activity. To mid-November, they had tracked company announcements of some $12.4 billion of cuts in E&P spending budgets through 2009 and 2010, with the average reduction being 20%, putting U.S. revenues for land drillers and oilfield-service companies for 2009 at risk.


Barclays Capital also foresees that the prospects for gas demand growth in 2009 are bleak, the analysts add, “as further evidence of an economic slowdown prompted yet another downward revision to the Barclays Capital 2009 estimates for U.S. GDP growth. Our economics research team now expects…a flat GDP year-on-year performance for the full 2009. We have revised our yearly 2009 price outlook to $7.65.”

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