I first came across the discrepancy I'm about to describe here through an article by Arthur Berman in "The Oil Drum". Since I found the discrepancy puzzling, I took the chance to expand Arthur Berman's work, both going back further and updating it with the presently available data.
For some background, what you're about to see are natural gas (NYSEARCA:UNG) production statistics, as compiled by the Railroad Commission of Texas, and by EIA (U.S. Energy Information Administration). These statistics are relevant because Texas accounts for almost 30% of the U.S. natural gas production. It's also home to several of the better known shale formations (Barnett, Haynesville, Eagle Ford, etc).
These statistics do not represent exactly the same reality. Those emanating from RCT represent production, whereas those from EIA represent marketed production, which excludes losses, usage by the pipelines to compress and move gas, etc. Still, since the factors creating a difference between the two series are rather stable, the relationship between these two data series is also stable. This much can be quickly gleaned from the chart below, going from January 2006 up to December 2010.
All fine and dandy, then. But the main gist of this article is that something mysterious is happening. So let us look at that same chart, but now including all the available data right up to March 2012 …
Something weird just happened! As it stands, the Texas Railroad Commission is saying that natural gas production is falling, and falling fast. Indeed, per its numbers natural gas production in Texas is falling 17.7% year-on-year when comparing March 2012 to March 2011. This is wildly strange, since the data has been consistent between these two sources for so very long. One answer could be in EIA's collection of the data, apparently gotten by surveying a sample of large gas producers and then modeling the overall production.
This gains further relevance because this aggregated data from the states is then used in all other EIA production data statistics. So one has to ask if this production existed or not. And if it didn't exist, then why was it reported? Was it the model that broke down? Were some of the large producers over-reporting their own production? If there was some company over-reporting, was the over-reporting limited to statistics handed to the EIA? Many questions come to our mind when confronted with such a discrepancy.
I must admit I was starting to get scared. This is a controversial sector and this kind of find makes our mind think the worst, things like shady people adjusting numbers and such. Yet, this time there's a simpler explanation. Basically, the Texas Railroad Commission production statistics are flawed. Fortunately, I was able to find an EIA document illustrating the problems in estimating natural gas production for Texas. In this document, EIA shows that the revisions by the Texas Railroad Commission follow a biased pattern, illustrated below:
What this means is that the reported production tends to be a lot lower than the final, revised, number. So as we walk towards the most recent production, the numbers are more and more skewed to the downside, making for that huge drop in the second chart I posted. Over time that drop is then revised until it disappears.
Reading this, I quickly went to check Arthur Berman's article to see what values he had in his chart. October 2011 showed 18.18 Bcf/d. And my data for the same month? 20.02 Bcf/d. Why the difference? Because Arthur Berman's data was now older and was slowly being revised higher and higher.
At first, I thought that there could be a story here. That Arthur Berman could be onto something really big. This could mean that the largest producing State is seeing plunging natural gas production already, and such could have deep implications to the natural gas market. It could also mean that some large producer with a Texas presence, such as Chesapeake (NYSE:CHK), Cabot Oil & Gas (NYSE:COG), Encana (NYSE:ECA) or some other could be fudging the numbers.
But it turns out that no, there's no wrongdoing other than a poor reporting process by the Texas Railroad Commission. So this time Arthur Berman called the attention to something that ended up being somewhat misleading. And for once, we can sleep easily knowing the cause.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.