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U.S. Shale Gas Causing 'Ripple Effects' Abroad, Says Analyst

The United States has become a "surplus natural gas producing country essentially forever" because of shale gas, Credit Suisse analyst Edward Morse said recently.

The relatively quick build-up in U.S. gas supplies is causing "ripple effects" abroad, Morse told an audience in early October at the PennWell's Unconventional Gas International Conference and Exhibition in Fort Worth, TX. The shale gas "revolution has challenged basic assumptions about gas supply and pricing and impacted the perceived political influence" of at least two the world's top gas producers, Russia and Qatar.

"The medium-term gas production profile for the U.S. is stunning," even though "many analysts still think that the U.S. shale play is a temporary phenomenon due to high cost and pending environmental uncertainties," Morse said. "But a median-case scenario sees U.S. gas production rising an astonishing 50% by 2040."

Proposals to build new gas pipelines and related infrastructure have led to midstream growth in "relatively undeveloped production regions," which also will change the volatility of gas prices, Morse said. By "de-bottlenecking" the pipeline grid, the chronic boom-to-bust cycles in the industry should be reduced.

The forward curve for natural gas prices "has shifted downward and become significantly flatter," said the analyst. "Of particular note is the reduction in seasonality." He pointed to the summer-to-winter spread, which was trading "at under 60 cents/MMBtu" a few weeks ago. The summer of 2011 "is trading flat to this coming winter...Volatility has been reduced by two-thirds over the past two years, providing another sign of forthcoming price stability."

With reduced volatility and overwhelming gas supplies, "utilities are poised to negotiate long-term supply contracts that could further smooth out price changes in their own and suppliers' long-term interests, removing putative market obstacles to eliminating coal." In any case, electric power demand "is the key to the medium-term outlook for gas," said the Credit Suisse analyst.

"By and large industrial demand will likely be capped by industry's exodus abroad, whereas high industrial end users," such as petrochemical companies, "are already at high levels of capacity utilization." The residential and commercial market still requires more recovery time. But "environmental constraints will likely push utilities to natural gas as a bridge to the future," he said.

"How will they do this? New market structures and conditions should reduce significantly the major obstacles to natural gas use by providing significantly reduced seasonality and short-term volatility."

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