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Henry Hub to Average Low $7 Area in 2009, Says Analyst

Abundant supplies and weakening demand fundamentals have November gas futures trading around $6.70, but U.S. gas would have to get cheaper in order to compete in a liquefied form on the world market, according to Wood Mackenzie's Ed Kelly.

Kelly, Wood Mackenzie vice president for North American Gas & Power, told NGI that his firm doesn't see development of liquefied natural gas (LNG) liquefaction capacity coming to the Gulf of Mexico region anytime soon, if ever. To make it work, U.S. gas would have to be $4-6 less expensive than gas in competing world markets. "Liquefaction [capacity] is so expensive, and approximate shipping distances may be longer, especially in the Pacific Basin, that sort of thing," Kelly said in dismissing the idea of the Lower 48 U.S. as an LNG exporter, as some have said is possible (see NGI, Aug. 4).

While the Lower 48 is unlikely to become a purveyor of LNG to the rest of the world, it's also unlikely to become a big importer anytime soon as burgeoning production from gas shale plays could put off the need to import substantial amounts of LNG until the middle part of the next decade or later, Kelly said.

In the near term the supply-demand outlook is set to shape the future of the shale plays. A weak economy next year is expected to soften demand growth among power generators and industrial end-users, although by how much remains to be seen (see related story). Producers have been announcing cutbacks in their drilling plans of late (see NGI, Oct. 13). And Kelly is predicting an average Henry Hub price next year in the low $7 area.

"It will be interesting to see whether the supply growth that is doable at $8 or $9 is doable at $6-7," Kelly said.

One shale play whose potential is yet to be fully understood is the Haynesville in northwestern Louisiana. Kelly said it should take one to two years for the industry to learn what the pace of Haynesville development will be and what kind of production it will ultimately offer. This is one of several factors that will influence whether more long-haul pipeline capacity will be needed out of the Gulf Coast region.

"The jury is still out, from our point of view, as to whether new long-haul capacity is needed out or is justified out from the Gulf Coast to the Northeast," Kelly said. "That would be such an expensive build. It would be a daunting build for anyone to attempt."

As for producers, upheaval in the capital markets will be leading to consolidation among independents, Kelly said. Look for that cycle to begin in earnest in about six months with some deals announced sooner.

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