If there were any market bears at the 55th annual meeting of theInterstate Natural Gas Association of America, they must have beenscared into the closet by Curt Launer, vice president of theresearch department at Donaldson, Lufkin & Jenrette, and TomasA. Petrie, CEO of Petrie Parkman. Petrie sees $30/bbl oil and$3/Mcf or higher natural gas in the near future.

“We’ve worked through a lot of low-hanging fruit in terms ofsupply that’s been developed in the last 10 years,” said Petrie.”There are marginal benefits to that and I think we’re coming up ona step function on the costs in the next round of supply. Somewheresoon I think we’ll hit a wall. There are things we can do to unlockthe supply, but the maturity of the resource base at today’s levelof economics is something that we have to think about.”

Launer concurred, though his bullish view is somewhat morereserved and based on different factors. He points to the strengthof demand and the fact that at the current relatively strong pricesthe rig count is growing rapidly.

“There are nearly 600 rigs drilling for gas right now. That isone of the self-correcting mechanisms in the industry. When theproducers get more cash flow they immediately turn around and drillmore wells.

“What we’re looking at is a very strong story for natural gas,and supply has not been keeping pace with demand growth. There havebeen a number of reasons for that.” One was the nuclear outages inthe spring. Thirty-five percent of all nuclear plants were downthis spring, the largest outage ever seen. That caused a shift tosupplying electric generation from injecting gas into storage,which resulted in the large storage overhang compared to last yearbeing reduced rapidly. That will have a lasting impact this winterand into next year, Launer predicted. Storage levels currently are5% lower than they were last year, and if winter does decide toshow up this year in contrast to last, there will be a significantprice reaction.

Petrie added yet another factor to this bullish arsenal: rigcrew shortages. Petrie sees the rig count rise possibly being cutshort by a labor problem. “You don’t have the labor force today tokeep growing. We’re getting very close on deliverability,” he said.

“The recent rig rate increases, while impressive, aren’t enoughto correct the supply problem,” he added. Looking far ahead to the30 Tcf market projected by 2010-15, Petrie said the industry willhave to reach a new supply frontier in the coming years. Hementioned the Mackenzie Delta in the Northwest Territories, onwhich TransCanada PipeLines has its sights.

With the supply constraints, demand increases and higher priceswill come a return of investment to the energy sector, both Launerand Petrie agreed. The sector has fallen to representing about 6%of the S&P 500 from about 28%. The analysts expect investmentto begin to focus more on the energy sector with or without aneconomic downturn. “Just a partial liquidation of the S&P intoenergy could be strong,” said Petrie. “The ground has been laid fora return to the sector in a way that I haven’t seen in a longtime.”

Launer, however, said that there’s a possibility that oilfieldservices companies will soak up more than their share ofinvestment. He said a lot of the 40% stock price growth the energysector has seen between April and September of this year was takenup by oilfield services companies. While not doubting that theenergy sector as a whole is in for some significant investmentgrowth, he suggested that investors would be selective about whichcompanies they want to make the big winners.

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