With the mammoth 1,600-mile Rockies Express Pipeline (REX) making its way eastward, liquefied natural gas (LNG) terminals scheduled to come on line in the Gulf Coast region over the next two to three years and increasing amounts of gas flowing from Texas basins, there will be a number of significant changes to the market, many of which aren't yet appreciated, said Bentek Energy LLC CEO Porter Bennett.

The REX pipeline alone "will cause a dramatic realignment of flow patterns and dramatically alter the basis relationships throughout the U.S.," Bennett said during FERC's "State of the Natural Gas" conference last Tuesday. The gas market "does not fully appreciate the magnitude of the changes that lie ahead."

The New York Mercantile Exchange (Nymex) forward curves "are not adequately depicting the changes that will occur," he told the FERC Commissioners and staff during the day-long conference.

Kevin Petak, vice president of ICF International, agreed that the gas market is at a "crossroads," with a lot of fundamental changes taking place and more anticipated.

The change in the market dynamics will have "several implications," Bennett said. It will create winners and losers, with the winners being the new pipelines -- such as REX and proposed Gulf Coast pipelines that will serve Southeast markets -- and the losers being the incumbent pipelines with high fuel costs and lost and unaccounted-for charges, he noted.

Expansion isn't an option for these incumbent pipelines, Bennett said. "Some of these [pipelines] are fairly old," and can't add compression, he noted. Their "options are not very great."

Moreover, Bennett said the physical gas market will increasingly drive changes in the financial markets, not the other way around. Both Bennett and Petak believe the two markets have converged, which could signal a need for the Federal Energy Regulatory Commission to expand its oversight beyond the physical gas market..

Bennett said the current assumption is that production appears to be booming relative to demand. This, when combined with the market dynamics ahead, suggests that prices could fall even further, he noted.

It "appears [we] could be headed for a period of $90-plus oil combined with sub-$5 gas." Bennett believes the pressure on gas prices will be "most acute" over the next few years. If the prices fall low enough, capital will flee the sector and exploration activities will stall, he said. This could be followed two or three years later by a period of soaring gas prices.

ICF's Petak expects the natural gas supply-demand to remain tight, prices to stay in the $6 range and market volatility to continue for the forseeable future.

As a result of pipeline capacity constraints east of Ohio, Bennett said he sees only 600 MMcf/d of the 1.8 Bcf/d of gas supplied by REX being absorbed by the Northeast gas market, with the remainder (1.2 Bcf/d) being pushed back to the Gulf Coast region. This pushed-back REX gas, combined Gulf LNG imports, 1 Bcf/d of production from the Independence Hub and gas from Texas, will depress prices significantly in the region, he noted.

"I think you're going to see a buildup in the Gulf," Bennett said. He estimated that the region could be flooded with as much as 7.5 Bcf/d of supply (mostly from LNG). LNG could be a "fairly disruptive influence down there." While there are major pipeline expansions occurring in the Gulf to handle additional supplies, they will mainly move gas around the region and to Southeast markets, he noted.

From a supply standpoint, Petak said he believes LNG and other frontier sources of supply, such as shale gas, Rockies gas and Alaska/Mackenzie gas, "are saving us," although he conceded that he was concerned that the U.S. was growing dependent on a gas source that is in high demand by other countries, such as Japan, China and India.

As far as demand, "carbon policy is the big wild card hanging out there for the United States," Petak said. If Congress enacts a stringent policy, he believes gas consumption could rise significantly. However, a milder carbon policy, such as the one proposed by Sen. Jeff Bingaman (D-NM), would require far less gas, Petak said.

By 2010, Bennett said he expects capacity on the REX pipeline to be full, prompting the need for another long-haul pipeline out of the Rockies. He estimates the line would have to be sized at 1 Bcf/d.

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