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Report Suggests Weak Winter Demand, More LNG May Drop Gas to $6.50/MMBtu by Mid-2006

A supply-constrained natural gas market, which intensified competition between industrial and power generation consumers, has underpinned the current high gas price environment, but weaker winter demand, repairs to Gulf of Mexico infrastructure and growth in liquefied natural gas (LNG) imports may drop gas prices to $6.50/MMBtu prices by the middle of 2006, according to a report by the Gerdes Group, an energy consulting firm based in Houston.

Built into the pricing forecast are the assumptions there will be a 2% decline in gas use through conservation over the 2005/2006 heating season, about 90% of Gulf of Mexico gas production lost during the recent hurricanes will ramp up by late February, and almost 10% of Gulf output will be permanently lost, said analyst John Gerdes, who authored the report.

Current high prices are related to a combination of things: no aggregate gas supply growth since late 2003 and resurgent gas demand on stronger economic growth. "Regrettably, Hurricane Ivan last year and Hurricanes Katrina/Rita this year only exacerbated an already fragile supply condition," Gerdes noted in the 97-page report.

"In 2006, above normal gas in storage exiting the heating season and a significant increase in LNG imports (Trinidad, Nigeria, Egypt) suggest natural gas prices should decline to an average of $7/MMBtu next year. In accordance with the growth in natural gas supply and lower natural gas prices, industrial gas demand should largely rebound and gas-fired power generation should exhibit solid growth in 2006," Gerdes wrote. Overall, gas prices next year should average around $7/MMBtu.

The expansion of the Elba Island and Lake Charles LNG import terminals, which coincide with the late 2005 start-up of U.S.-contracted liquefaction supply from terminals in Trinidad, Nigeria and Egypt "should increase U.S. LNG imports about 1.5 Bcf/d next year," said Gerdes.

Slower LNG growth in 2007 could send gas prices up again, to around $8/MMBtu, he continued. "A hiatus in LNG import growth in 2007 should again place the U.S. in a supply constrained gas market; thus a consequence is requiring a modest reduction in industrial gas demand through higher gas prices." Gas-fired power generation "should continue to display greater resiliency to higher gas prices than industrial gas demand."

After 2007, Gerdes expects there will be about 1 Bcf/d a year of additional gas supply available for consumers, with growth of 0.8-1.4 Bcf/d between 2008 and 2010, "largely attributable to LNG..." Said Gerdes, "LNG appears likely to constitute almost all the growth in U.S. natural gas supply for the foreseeable future."

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