Devon, Gas Producers Reaping High Prices, Say Enough (Update1)

June 16 (<a href=quote.bloomberg.com>Bloomberg) -- Devon Energy Corp., the largest U.S. independent natural gas producer, last month posted a seven-fold surge in earnings, partly because U.S. gas prices more than doubled. Now it's seeking divine intervention to lower them.

We should all pray for warm winters and cold summers in North America,'' James Hackett, Devon president and chief operating officer, told investors at a Credit Lyonnais energy conference in Paris. Rising prices become a question of competitiveness for America. It's not good for consumers or business.''

It also may not be good for producers. Prices for U.S. natural gas, as measured at the Henry Hub in Louisiana, have averaged $5.83 so far this year, about double the price last year. That may mark a boom, and veterans fear a bust.

Every project works at $6 gas -- it will sow the seeds of its own destruction,'' said Thomas Edelman, chairman of Patina Oil & Gas Corp., a Denver company that operates natural gas fields in Colorado's Wattenberg Field. It's very unhealthy for the economy, and in the long run, for the industry.''

So-called independents such as Patina simply drill for new deposits and pump out oil and gas, unlike bigger oil companies such as BP Plc of London or ConocoPhillips of Houston who own oil refineries and chemicals plants. Yet such independents produce 70 percent of all U.S. natural gas.

While the number of working rigs is 30 percent more than a year ago, the current count is one-fourth lower than the peak of 1,058 on July 2001, months after Henry Hub prices rallied to $10.50 in December 2000. Nine months later, gas was at $1.82.

The question is what will kill the rally this time?'' asked Brad Beago, an analyst at Credit Lyonnais. We're not seeing a huge rush to put every rig back to work.''

Gas Deficit

The U.S., the biggest energy market and consumer of about 18 percent of the world's gas, will use about 8 billion to 10 billion cubic feet of gas more than it produces by 2010, according to Cambridge Energy Research Associates. That's even with prices curbing use at steel, aluminum and ammonia makers.

``We don't expect that decline to stop, no matter how much drilling you do,'' Robert Esser, senior consultant director at Cambridge Energy, told the Paris conference.

One of the biggest sources of new demand is for electricity generation, because natural gas is a cleaner-burning fuel source. About 16 percent of U.S. electricity was generated by natural gas in 2000, up from 13 percent four years earlier, according to the U.S. Department of Energy. Utilities used 5.5 trillion cubic feet of natural gas in 2002, 36 percent more than five years earlier, the government estimated.

Esser and others expect the U.S. will have to make up the difference through new facilities to handle imports of liquefied natural gas. Gas can be converted to liquid at minus 260 degrees Fahrenheit (minus 162 degrees Celsius), allowing exports in tankers instead of pipelines.

LNG in U.S.

Liquefied natural gas, or LNG, will account for as much as 15 percent of U.S. gas in a decade, up from about 3 percent now, according to Guy Outen, chief financial officer for Shell International Gas.

Royal Dutch/Shell Group, producer of 40 percent of the world's LNG, plans to ship LNG from Venezuela, Nigeria and eventually from a project off Russia's Sakhalin Island, through plants in Mexico's Baja California, Altamira and Cove Point, Maryland, and Elba Island, Georgia.

The current plans were in place before the increase in prices in the U.S.,'' said Outen, who said plans were made on an assumption of $3 per million British thermal units. We don't forecast today's gas price for our long-term projects.''

High heating bills or surging costs for electricity to run air conditioners this summer will help overcome local opposition to new plants that can convert LNG back into gas, proponents argue.

Opposition ``is less when the price is higher for things like air conditioning and heating,'' said Outen.

`Not Appropriate'

Hackett of Devon said he's not planning on prices staying high. ``It's just not appropriate'' to anticipate $5 gas, he said. Devon is based in Oklahoma City, Oklahoma.

Almost 98.5 percent of the 23 trillion cubic feet of gas consumed in the U.S. last year came from North America, including 15 percent from Canada. Four liquefied natural gas terminals in the U.S. East Coast supplied the remaining 1.5 percent of the nation's gas, according to the American Gas Association.

For all their concern of potential damage to the industry in the years ahead, producers aren't grousing about today's profits.

When the gas price spiked, we were absolutely delighted,'' said Patina's Edelman. At $4 we make a fortune. At $6 it's a gift from God.''