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Imminent Natural Gas Supply Glut Not Likely, Analyst Says

A steady increase in production from the burgeoning Haynesville Shale of northwestern Louisiana will be offset by moderating activity in other producing regions, significant midstream bottlenecks and a lower futures curve, making an imminent natural gas supply glut unlikely, according to MorningStar analyst Eric Chenoweth.

"It would be foolish to ignore the potential impact of the multitude of shale plays that have been discovered and that are proving to be economic with gas prices above $9," wrote Chenoweth. "In our opinion, we think it would be equally foolish to simply point at all of the announced shale plays and conclude a gas supply glut is inevitable."

According to the MorningStar report, there has been some theorizing in the industry that the companies developing the big natural gas shale plays "could become victims of their own exploration success by creating a glut of new natural gas supply." A rush of activity at the Haynesville Shale, which accelerated when Chesapeake CEO Aubrey McClendon said an estimated 245 Tcf in recoverable gas resided on a three million acre position there (see NGI, July 7), added weight to the theory, Chenoweth said.

The Haynesville Shale has been trumpeted recently as the new power play for domestic gas production. Research and analysis firm Wood Mackenzie this summer called the Haynesville a "booming new resource play" that could become the fastest growing shale play to date in the Lower 48 (see NGI, July 21). But while the industry has aggressive drilling plans for the Haynesville -- 100 rigs could be running by the end of 2009 and 200 rigs could be producing as much as 2 Tcf annually by the end of 2010 -- a supply glut is still avoidable, the MorningStar analyst said. The migration of industry resources to the Haynesville could force a moderating of production in other regions and there could be "significant" midstream bottlenecks next year, he said.

"A lack of pipeline takeaway capacity has plagued Barnett Shale producers from time to time recently, and it's likely to haunt the dreams of producers envisioning a rapid escalation of production out of the Haynesville and other shale plays...we see the potential for Haynesville producers relying on interruptible pipeline access to get disrupted by Barnett and Fayetteville producers with longer-standing firm pipeline capacity agreements."

In addition, exploration and production companies are not likely to be drilling as aggressively when faced with a futures curve in the $7-8/Mcf range as they were at a futures curve in the $10-12 range, "so we'd expect drilling activity to taper off over the next few months," Chenoweth said.

"We don't think an imminent natural gas supply bubble is obvious, but we will take the threat of much greater supply levels very seriously when thinking about our forecasts," he concluded.

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