Natural-Gas Producers Report
A Continuing Decline in Output

production continues to decline, suggesting that today's high prices won't be falling significantly anytime soon

CHIP CUMMINS
Staff Reporter of THE WALL STREET JOURNAL
January 31, 2001

As high natural-gas prices drive up home-heating and other bills, producers
of the fuel are reporting that production continues to decline, suggesting
that today's high prices won't be falling significantly anytime soon.

About 20 large natural-gas producers, accounting for close to 40% of
domestic production, have so far reported fourth-quarter results. The
result: Natural-gas production in the quarter was down 0.8% from the third
quarter and off 3.7% from the fourth quarter of 1999, according to figures
compiled by Lehman Brothers. Analysts, surprised by the trend, say gas
production will need to start growing for prices to return to more traditional
levels.

Analysts had been expecting higher natural-gas production in the fourth
quarter after record selling prices prompted increased drilling. For
instance, Baker Hughes Inc., an oil-services company, says 879 rigs were
actively drilling for natural gas last week, up 41% from the year-earlier
week.

"It is surprising because we had assumed that we would get some
increases" in production, says Tom Driscoll, a Lehman analyst.

Total numbers for fourth-quarter production won't be available for some
time. BP Amoco PLC, the country's largest gas producer, doesn't report
until next month. But a host of companies have so far reported flat or
declining production growth, including Burlington Resources Inc., one of
the largest independent gas producers, and Kerr-McGee Corp., another
independent.

All of them benefited as colder-than-normal temperatures in November
and December helped drive up demand, sending natural-gas prices soaring
above $9 per million British thermal units, sharply boosting fourth-quarter
profits for many natural-gas producers. Tuesday, the New York
Mercantile Exchange contract for delivery of natural gas in March was
trading at $6.097 per million BTUs, almost three times the price of the
comparable contract early last year.

In most cases, high gas prices have been passed on to residential and
industrial users. Households across the nation have seen natural-gas bills
more than double. Unable to operate profitably, aluminum and chemical
makers have shuttered plants. In California, utilities and other generators
say high natural-gas prices -- used increasingly to power electricity plants
have contributed significantly to the state's energy crisis.

A number of factors have conspired to keep production from growing,
industry executives and analysts say. Because natural gas is difficult to ship,
most gas used in the country is produced here or piped from Canada.
During the past few years, producers have used technological advances to
squeeze more gas out of older fields in the U.S., Canada and offshore in
the Gulf of Mexico.

But such new technologies have reached their limits in many cases, and
those older fields are being emptied of reserves more rapidly than
companies can find new deposits of natural gas. "Technology was winning
for a while, but now Mother Earth is winning," Lehman's Mr. Driscoll says.

At the same time, oil and gas companies complain that federal restrictions
have kept them from exploring promising new acreage, and they are now
clamoring for more access from the Bush administration. "We're fighting
depletion of wells, and we're fighting lack of access," says John Sharp, vice
president for federal and state affairs at the Natural Gas Supply
Association, an industry lobby group.

Some companies have bucked the trend. Devon Energy Corp., Oklahoma
City, said Tuesday that its domestic gas production grew 9% in the fourth
quarter from a year earlier. Net income was $306.9 million, or $2.27 a
diluted share, up sharply from $74.9 million, or 57 cents a share. Revenue
was $850.1 million, up 68% from $505.2 million.

Write to Chip Cummins at chip.cummins@wsj.com

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