With 87% of its reserves in gas, Chesapeake Energy Corp. CEOAubrey McClendon said his company is “a natural gas company onpurpose.” McClendon told attendees at the PLS Dealmakers prospectconference in Houston Wednesday that both the supply and demandsides look very bright for gas producers, especially relative tooil.

“We believe there’s just no long-term upside beyond 20 [dollarsper barrel for oil], and there will be periodic bouts ofover-production that will drive the price down,” he said. “We thinkon the other hand, North American natural gas producers, andparticularly U.S. producers, do have considerable upside in theirbusiness. I said in February…when gas prices were around, Iguess, $1.70 at that time and oil prices were $10, that I thoughtin the next 18 months that gas prices would spend more time above$3.00 than below, and everybody thought that was crazy at the time,but I think it has a very high likelihood of actually occurring.”

One reason is the boom in gas-fired power generation. While manyprojects have been announced, “you don’t see the follow-up pressrelease about where the gas is going to come from to supply allthose plants. We think that a 30 Tcf economy is absolutelyunreachable at the present price decks being talked about, and thatrequires a substantial and sustainable increase in gas prices to beable to power that kind of economy.” With all that demand on thehorizon, McClendon suggests supply won’t be there to meet it. Hesaid Chesapeake pegs the North American decline rate at about 15 to20%. “And we think the production of gas drops substantially in thesecond half of the year. And it already looks down 4 or 5% in thesecond quarter.”

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