OIL AND GAS PRODUCTION

Louisiana ranks among the top four states in oil and gas production, and is second in per capita energy consumption. It has produced oil and gas for almost a century. The following section presents forecast data for oil (crude oil and condensate) and gas (casinghead gas and natural gas) production from state regulated land and water bottoms. Historical data is provided in Appendix F.

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OIL PRODUCTION FORECAST

The annual rate of decline over the past ten year period was 2.6%, and the DNR Technology Assessment Division long term model is projecting a 4.4% decline per year. Year to year decline rates over this period have varied between 0.7% and 6.9%, and in the last two years (FY1995/96 and FY1996/97) oil production has increased an average of 3.1% per year. Even though the long term model is accurate over long periods (10 to 30 years), these short term fluctuations illustrate why a separate short term model is required to forecast production over periods of 1 to 6 years.

Factors contributing to the year to year deviations in oil production are:

• Changes in wildcat drilling and development of marginal fields within the United States
• Early capping of stripper wells by major producers
• Unstable prices of crude oil
• Changes in environmental laws, especially those concerning salt water discharge
• World crude oil supply growing faster than demand, causing an oil glut similar to the gas bubble
• The number of active rigs in the region
• Military conflicts or political instability in some producing countries (OPEC members and the former Soviet Union)
• Application of advanced technology such as 3-D and 4-D seismic
• State and local tax incentives

The short term forecasted Louisiana crude oil and condensate production for FY1997/98 through FY2002/03 is as follows:

The base case assumed that: a) the price of crude oil will be as shown in the base case crude oil price forecast; and b) drilling activities will remain stable (average running rigs in Louisiana onshore and offshore should be around 105 rigs, and around 120 drilling permits issued per month).

The low case assumed that: a) the price and pricing assumptions for crude oil will be as shown in the low case crude oil price forecast; and b) drilling activities will drop substantially from present levels.

The high case assumed that: a) the price and pricing assumptions for crude oil will be as shown in the high case crude oil price forecast; and b) drilling activities will increase from present levels.

The short term forecast model is predicting a 3.9% per year decline in oil production for the next six years, FY1997/98 to FY2002/03. The forecasted production rates may be low depending on factors such as crude oil prices, number of active drilling rigs, consumer demand, exploration activities, OPEC production curtailment, non-OPEC producers' production capacity improvement, and Iraq returning to the crude oil market.

The average annual rate of decline over the last 10 years was 1.5% which is less than the DNR Technology Assessment Division long term model projection of 3.8% per year. Year to year production rate changes in this period were from a 4.3% decline to 2.9% increase in production. Four years out of the last ten have shown production increases. Even though the long term model is accurate over a 10 to 30 year period, these short term fluctuations illustrate why a separate short term model is required to forecast production over periods of one to six years.

Factors contributing to the year to year deviations are:

• Effects on industrial gas demand from chemical industry activity
• Growth in use of natural gas to meet clean air requirements in electric power generation and transportation
• Government production control at state level (prorationing)
• Mild or severe winter weather patterns
• Offshore drilling moratoriums in other states
• Changes in environmental laws, especially the Clean Air Act Amendments of 1990
• Production capacity higher than demand
• Price of gas relative to fuel oil and the amount of switching between these two fuels
• Peak day deliverability of the U.S. pipeline system
• Changes in federal taxation or incentives affecting oil and gas industry
• Foreign imports
• State and local tax incentives

Historical gas production data is provided in Appendix F. The short term forecasted Louisiana natural gas and casinghead gas production for FY1997/98 through FY2002/03 is as follows:

The base case assumed that: a) the price and pricing assumptions for natural gas will be as shown in the base case natural gas price forecast; and b) drilling activities will remain stable (average running rigs in Louisiana onshore and offshore should be around 105 rigs, and around 120 drilling permits issued per month).

The low case asssumed that: a) the price and pricing assumptions for natural gas will be as shown in the low case natural gas price forecast; and b) drilling activities will drop substantially from present levels.

The high case assumed that: a) the price and pricing assumptions for natural gas will be as shown in the high case natural gas price forecast; and b) drilling activities will increase from present levels.

The average annual rate of decline predicted by the long term forecast model is 3.8% per year. The short term forecast model predicts a 3.3% per year decline for FY1997/98 through FY2002/03. The natural gas production forecast may be low if gas demand in the U.S. is higher than the U.S. consumption predicted by the U.S. Department of Energy, Energy Information Administration, cheaper fuel substitutes are not available for users capable of fuel switching, and more new drilling targets gas. The demand for gas may increase as the manufacturing and utilities industries switch to gas for cleaner energy and if natural gas prices remain competitive.

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