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CERA: Demand, Not Supply, Challenging North American Gas Markets

Demand, rather than supply, will challenge North American natural gas markets over the coming decade, according to a Cambridge Energy Research Associates (CERA) multi-client study.

A "revolution in technology" pushed North American gas markets into an era in which supply is no longer constrained, CERA researchers said in "Rising to the Challenge: a Study of North American Gas Supply to 2018." The supply outlook is based on an analysis of gas fields using CERA's gas market modeling capabilities, which concluded that the North American gas market now will be "largely" supplied by North American gas production.

"North American gas production is no longer opportunity constrained," said CERA Senior Director Robert Ineson. "Resource-bearing shales and tight sands are extensive, and North America now has a sufficient inventory of drillable prospects to maintain or, if necessary, increase productive capacity for at least the next 10 years -- even after the current recession becomes a memory."

Benefiting disproportionately from technology, unconventional gas output "undoubtedly" will be the main driver of supply growth in the years ahead, CERA noted.

"Domestic gas producers explored a variety of technologies to exploit the known unconventional resource base," the report said. "The success of these efforts became evident in 2007-2008 when production in the Lower 48 United States grew rapidly -- from a 2007 low of 49.8 Bcf/d in February to 56.7 Bcf/d in July 2008, an increase of 6.9 Bcf/d and almost 14% in just 17 months."

Rising gas output has been achieved "even as painful recession has taken hold," noted CERA. Going forward, "North American gas production will be limited primarily by demand, which is falling sharply due to the global economic crisis. The market is struggling to absorb existing production -- as reflected in the current price trend -- rendering new drilling in higher-cost areas uneconomic."

Technology has led to higher-volume wells, and now, with the effects of the recession, the cost of new gas supplies may be lower for the immediate future. "However, as the economy rebounds, key commodity prices will rise again, driving new gas production unit costs up as well. Full-cycle unit costs are expected to increase from a weighted average of $4.63/Mcf in 2009 to $7.54/Mcf in 2018."

Given the increased productivity of unconventional wells, the analysis concluded that it would not be necessary to increase drilling activity to maintain or increase production. After years of developing unconventional gas with its long-lived production, in the aggregate, the average decline rate has fallen. This means, said CERA, that a smaller quantity of new production would be required to offset natural production declines.

According to CERA, the Lower 48 states' dry gas productive capacity will increase to 60.6 Bcf/d in 2018 from 53.5 Bcf/d in 2009. Canadian capacity is seen growing to 19.6 Bcf/d in 2018 from 15.8 Bcf/d.

The North American gas supply "renaissance" also is expected to have global consequences, especially for liquefied natural gas (LNG), said Ineson. "The development of unconventional gas is reshaping the outlook for natural gas supplies in North America, with far-reaching significance for the industry, consumers and the global gas business. Growing North American production will decrease North America's need for LNG, triggering changes in projected LNG flows and potentially affecting prices and the viability of projects worldwide."

LNG is expected to remain competitive in North American markets, but it "will compete more with higher-cost conventional supplies than unconventional gas," CERA said.

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