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Monday March 26, 7:55 pm Eastern Time

N. Amer gas production flat, despite drilling boom-El Paso CEO

By C. Bryson Hull

NEW ORLEANS, March 26 (Reuters) - North American natural gas production is flat despite a 10-year-high drilling boom, the top executive of the world's biggest natural gas company said on Monday.

El Paso Corp. (NYSE:EPG - news) Chairman and Chief Executive William Wise said receipts from his company's expansive gas gathering pipeline systems have stayed at roughly 4.3 billion cubic feet per day (bcf/d) since January 1998.

``Our field services are in all of the basins where all of the drilling in the United States is taking place and we are not seeing a production response. We're just kind of treading water, holding our own,'' Wise told an audience at boutique energy investment firm Howard Weil's annual conference.

But the long demand and short supply opens up opportunities for the Houston-based company to offer other gas supplies, like liquefied natural gas (LNG), or gas transported from frontier areas like Alaska or the Canadian Maritime Provinces, he said.

The production plateau comes despite the highest rig count in 10 years, 1163, reported for the week ending March 23, according to Baker-Hughes Inc. (NYSE:BHI - news). Of the total, 904 of the rigs were drilling for gas.

The culprit is shrinking decline rates which have offset the drilling surge. Better well completion techniques and technology plus robust commodity pricing have driven steeper decline rates in the Gulf of Mexico, Wise said. Decline rates are now nearly 50 percent per year, as opposed to 17 percent in 1970, he said.

``What not everybody realizes is the same thing is happening in Canada,'' Wise said.

Decline rates there moved from 20 percent per year to 40 percent per year from 1990 to 1998, he said.


Wise expounded on El Paso's previously announced plans to beef up its LNG operations.

Earlier this month, El Paso announced a tentative deal to begin buying LNG from Phillips Petroleum's (NYSE:P - news) Darwin, Australia plant for shipment to Baja, Calif. El Paso, which has the most capacity at the U.S.'s four LNG terminals, also plans to build as many as six more receiving terminals on both coasts.

All of the expansion is aimed toward increasing liquidity in the LNG market and making it more moveable commodity, he said.

``We think we can generate a brand-new business in global, long-term LNG. Not just long-term, point to point, buy LNG here and deliver it there for 20 years,'' Wise said.

With enough liquidity and natural gas prices above $4.50 per thousand cubic feet (mcf), the segment is worth an estimated $200 million of pretax earnings per year, Wise said. Analysts estimate gas will remain in the $5/mcf range well into 2002.

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