Economic strife and the consequent downturn in gas demand, particularly for power generation, and growing domestic production have flipped the priorities of the gas industry, at least for the time being, according to analysts at Barclays Capital.

“[T]he natural gas industry is arguably more concerned about finding new sources of demand than new sources of supply, as it rapidly cuts drilling in an attempt to balance the market,” the analysts wrote in a research note Wednesday in which they examined the outlook for gas demand among power generators.

A mild summer and the economic recession caused gas demand among power generators to fall last year, and Barclays expects more of the same this year as the economy worsens. Add to this the growing push for renewable energy and “there has been growing concern that the gas-fired party is over, or at least the growth prospects stunted,” the analysts noted.

“Combine mild summer weather, hurricane effects and the recession-driven pullback in electricity consumption, and in our view, 2008 should register a decline in gas demand for power of 0.5 Bcf/d compared to 2007 levels.”

Further economic contraction — expected by Barclays to be 1.9% this year — would lead to a 1.3% decline in power consumption in 2009. But with normal weather consumption could be even with 2007 levels. “Without any major shifts in coal, nuclear or hydro plant output in 2009, this should translate into a pullback of roughly 0.1 Bcf/d” in gas demand, the analysts said. In fact, gas demand growth from power generators could turn positive if western hydroelectric output is crimped by drought, which seems possible.

With economic recovery, the analysts predicted that gas demand could resume growth of about 750 MMcf/d in a typical year.

“[T]he power sector holds the best hope for growing gas consumption in the medium term,” the analysts wrote.

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