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ConocoPhillips Exec Sees Shale Gas Filling the Gap

The rapidly emerging shale gas plays across North America come at a higher cost than conventional resources, but this burgeoning supply could hold the line against the even higher prices of imported liquefied natural gas (LNG), a ConocoPhillips executive told the GasMart 2008 audience last week.

The North American gas market has changed dramatically since 2000, said Will Hussey, senior vice president of origination for ConocoPhillips Gas & Power. And the amount of shale gas coming to market could surprise.

"Gas drilling has...more than doubled" in the past seven years. There were, on average, 929 gas rigs running in 2000; in 2007 there were 1,892. Since 2000 more than 20,000 miles of gas pipe has been laid across the continent.

About 31 Tcf of gas reserves also has been added -- a number that Hussey thinks is "really understated" because of the emerging gas shales across North America.

"When you look at shale, you don't look at it in the same way as conventional gas," he said. "There's a lot of shale gas out there, but you can't book the reserves until it's producing. So that [reserves] number is probably understated...A year ago I said that the United States was on the decline, but I am happy to say that people proved me wrong."

Hussey was on the lead-off panel discussing North American gas supply and delivery capabilities on the opening day of GasMart 2008 in Chicago. He was joined by Nexen Marketing's David Slater, managing director of marketing and structured products, and TransCanada Corp.'s Dean Ferguson, vice president of U.S. marketing, business development and regulatory affairs.

Even with an expected sharp increase coming from untapped shale and tight gas reserves, ConocoPhillips does not expect gas prices to collapse below a floor of about $7 for a variety of reasons, Hussey said. Gas from these more complex formations comes at a cost, and equipment and manpower costs are rising exponentially.

"There's been a flurry of activity in the United States, combined with construction for [hurricanes] Rita and Katrina, and something else we didn't see seven or eight years ago, and that is that Asian demand is just going through the roof," Hussey said. High gas demand worldwide has also come as higher costs are building across the board. Hussey noted that since 2000:

Including capital expenditures, operating costs, royalties and returns, "full-cycle costs to develop are now above $6," Hussey noted. Natural gas prices are not likely to fall below $7/Mcf again "unless and until" there is an excess of liquefied natural gas (LNG) coming to the continent -- and that's not likely to happen anytime soon.

One factor keeping energy prices high is the lack of access to worldwide oil and gas reserves, he said. In the 1960s 85% of the world's reserves were open to development by international oil companies (IOC) like ConocoPhillips. State-owned national oil companies (NOC) at that time only controlled 1% of the world's reserves. By 2005, NOCs controlled 65% of the reserves and another 12% of reserves with equity access, and Russian companies held 16% of the world's reserves. IOC access had fallen to 7%.

"We've gone from full access to 7% access and revenues are stronger than they've ever been," Hussey said. "Where do we go with the money? North America. Even with costs high, North America still looks pretty good."

As far as having excess LNG in North America, Hussey noted that there already is enough regasification to meet demand, but the LNG has to come to the United States. "We don't see that playing into the floor on prices," he said. "It might happen the other way around. LNG and Asia are tied to oil, and as contracts go higher and higher, oil goes higher, and Asian LNG follows that."

Hussey noted that ConocoPhillips, as a producer, doesn't want to spend too much for reserves if the revenue won't support it.

"As for producers, is it time to sit back and wait for prices to settle down or keep marching? We see them continuing to march," he said. "We have a lot of confidence there. That's why people are coming into the United States, why they spend here, even with costs so high."

ConocoPhillips is one of the sponsors of the Rockies Express Pipeline (REX). On Wednesday Spectra Energy signed a transportation agreement with ConocoPhillips to deliver up to 395 MMcf/d of Rockies gas from Clarington, OH, the eventual endpoint of REX, to the Northeast by November 2010 (see related stories). Spectra plans to expand its Texas Eastern Transmission pipeline system.

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