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Wood Mackenzie: Mild Winter Would Be Hard on Prices

U.S. natural gas is in for "a prolonged period of significant weakness" and will trade in a range of $5-6/MMBtu for the next five years, and prices could go lower in the near term if winter is mild, Wood Mackenzie's head of North American gas research told a Houston audience recently.

"We are now in a position of significant potential oversupply brought about by the huge success experienced in the development of shale gas plays," Jen Snyder said at the firm's Houston Energy Forum. "Whilst most commentators are pointing towards prices settling at the marginal cost of the most expensive shale plays, we think this is a mistaken reading of the current and future environment. Simply stated, there is no requirement for the rapid near- to mid-term development of some of the more expensive or challenging shales such as the Marcellus or Horn River; the market can be adequately supplied without these volumes. We believe that there are sufficient volumes available at a development break-even price of US$5.50/MMBtu or below for the market to balance."

The price forecast is predicated on normal weather. "[A] mild winter could exacerbate the current position of oversupply and lead to prices in the $4/MMBtu range in the near term," Snyder said. "We have also assumed that gas demand benefits from a 1.5 Bcf/d switch from coal to gas-fired power generation. If this fails to materialize, due to collapsing coal prices, this would further add to short-term price weakness."

The downturn in commodity prices, the global credit strife and tightening of credit have moved a number of producers to lay down rigs and pull back on capital spending plans (see related story).

Wood Mackenzie factored into its analysis demand declines due to a prolonged recession lasting until the fourth quarter of 2010; new wind and coal-fired generating capacity coming on-line; and a significant drop in drilling activity due to lower commodity prices. "We have also factored in the positive impact on break-even costs due to cost reductions associated with this drilling slowdown and continued optimization of drilling solutions at those plays that will continue to be aggressively developed," Snyder said.

The firm's modeling points to significant liquefied natural gas (LNG) imports over the next few years despite the growing output of unconventional gas plays. "There are a number of reasons for this," Snyder said. "Existing offtake agreements for some suppliers make diversions from North America unlikely. In addition, other suppliers with flexible LNG will want to avoid jeopardizing long-term contract prices in Europe and Asia, through a further weakening of spot prices in these areas, and the Qataris in particular are likely to direct some of their new volumes to the U.S. market, where there are no long-term contract implications and a large and liquid market to absorb the volumes."

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