Abnormally warm weather during the fourth quarter left 2001 year-end U.S. gas inventories at nearly 3 trillion cubic feet (Tcf), more than 1 Tcf higher than the year-before level and 19% above the average for the previous five years, according to the U.S. Energy Information Administration (EIA). "The last time such a high year-end storage total was seen was during the early 1990s, when a succession of very mild winters and a weak economy prevailed," an EIA report says. "...This reinforces the expectation that gas production may fall in 2002, since incremental domestic supply will not be needed as long as storage returns to more normal levels by the end of the year." Spot wellhead gas prices probably will average $2 per thousand cubic feet (Mcf) this year-less than half of the 2001 average, the EIA predicts. It expects the average wellhead price in 2003 to increase about 60 cents per Mcf year-to-year as the domestic economy recovers, world oil prices rise and reduced drilling affects production. The drop in drilling could pose significant market-price implications by 2003. "The quite robust amount of demand growth we currently project for 2002 (an increase of 1.2 Tcf, or 5%) probably will return gas inventories to normal," the EIA report says. "Thus, pressure on domestic wellhead prices to remain near $2 per Mcf will be strong through much of 2002. In 2003, the expected rebound in economic growth should result in further demand growth of about 2.0% and somewhat higher spot gas prices, averaging about $2.70 per Mcf." U.S. gas demand declined 5.3% year-to-year to an estimated 21.34 Tcf in 2001, the agency estimates. While relatively warm weather during the fourth quarter reduced residential consumption, most of the decline in demand came from a downturn in gas-intensive industrial production. "Natural gas use for power generation, on the other hand, increased an estimated 4.1% in 2001, entirely because of increased use by nonutility generators." Gas will be more price-competitive than heavy oil to generate electricity this year and next. Its advantage could disappear toward the end of 2003 if more-normal winter weather returns and if economic growth raises the price of gas above heavy oil. The agency expects domestic gas production to fall by about 400 billion cubic feet (Bcf), or 2.1%, in 2002 before recovering to a level near that of 2001 the following year. Net gas imports will rise slightly in 2002 and exhibit solid growth-about 10%-in 2003 as import capacity expands, it adds. As for domestic oil production, it expects an average of 5.78 million barrels per day this year, representing a 1.2% decline from 2001. Production will decrease an additional 2.3% in 2003 to average 5.64 million barrels per day. A bulk of the decline will be in the Lower 48: 49,000 barrels per day fewer this year and 158,000 fewer in 2003. Shell Oil Co.'s Brutus offshore platform's production is expected to peak at 100,000 barrels per day this year. Production from the Mars, Troika, Ursa, Dianna-Hoover and Brutus offshore fields could account for 9.7% of total Lower 48 oil production by fourth-quarter 2003. Alaska will produce 17.2% of total U.S. oil in 2003. Production will decline 2.4% this year but increase 2.0% in 2003 with the addition of output from the Colville River, Aurora, Polaris and Borealis satellite fields located on the North Slope. Initial production from Alpine averaged 74,000 barrels per day in March 2000 and exceeded 100,000 in August 2001. Another satellite field, North Star, is to come onstream this year and peak at 65,000 barrels per day by year-end. Production from Kuparuk River, plus from the West Sak, Tabasco, Tarn and Meltwater fields, is expected to continue to average 220,000 barrels per day this year and next. -Nick Snow

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