Natural Gas Supply Up While Low Prices Stable

By BEN CASSELMAN

Energy companies started predicting a sharp cutback in the amount of natural gas pumped in the U.S. more than a year ago.

But even though gas prices now hover 30% below a year earlier, the promised reduction never came. And this week, two major natural-gas companies reported big increases in production, while a third, Devon Energy Corp., announced that its new East Texas well was yielding 31 million cubic feet of gas a day, one of the most prolific U.S. wells this year.

As a result, storage facilities are brimming with record gas supplies, and prices are likely to remain soft. The closing price Tuesday was $4.922 per million British thermal units, down 32% from $6.838 a year ago. In July 2008, the price was over $13.

The burgeoning supply is good news for consumers, who can expect their electricity rates and home-heating bills to be lower this winter. But it's bad news for gas producers, which could face low prices for longer than they expected.

On Tuesday, El Paso Corp., a Houston-based gas producer and pipeline company, said it would cut its quarterly payout from five cents to one cent and sell up to $500 million in assets to fund future projects and shore up credit. El Paso said its third-quarter earnings fell 85% to $67 million.

The continued production growth has caught energy experts and others off-guard. "Nobody seemed to anticipate this," said Rocco Canonica, director of energy analysis for the research firm Bentek Energy in Evergreen, Colo.

The challenge the industry faces was also evident in the results of Chesapeake Energy Corp. and Anadarko Petroleum Corp., two of the biggest U.S. gas producers. Late Monday the companies reported big increases in gas production despite a reduction in spending, and lower profits because of low prices.

Hampered by dwindling profits, big gas companies are drilling fewer new wells. Indeed, the number of rigs drilling for natural gas in the U.S. has fallen 53% in the past year, according to Baker Hughes Inc. But technological improvements let companies drill faster and more cheaply than before, and their new wells are very productive.

Gas production in the lower 48 states was up slightly in August, the most recent month available, compared with a year earlier, according to federal data released last week.

Some experts, including Jon Wolff, an energy analyst with Credit Suisse in New York, argue that production has remained so high because companies are choosing to drill only in the best areas and can demand the best gear and workers from contractors desperate for business.

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