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Analyst: '$8-10 World' In the Past

Judging by recent exploration and production (E&P) company behavior, some in the energy patch are in denial that low gas prices will be around for a while, Becca Followill, managing director at Tudor, Pickering Holt & Co. Securities Inc., told an industry audience in Houston last Thursday.

Followill recalled that recently an E&P company sold some assets and then turned around and raised its capital expenditure (capex) budget. "It's just like somebody who just got out of the hospital after having a heart attack lighting up as they're walking out the door," she said. "I think we've got some of that going on. You've got companies that are barely surviving and they're immediately raising their capex budget. I think there are some people...thinking we're going to be back to an $8-10 world...I just think there's some denial going on."

For a while now, low prices have been dogging gas producers like that ominous hospital gurney in the Plavix television commercials. Increased gas demand is the cure, and it could be had from gas-fired power generation, said Questar Pipeline CEO Allan Bradley, who shared a panel with Followill at Bentek Energy LLC's Benposium conference.

Gas-fired generation currently operates at a load factor of 20-25%, but what if that were doubled? "You could easily add another 18 Bcf/d of demand," Bradley said. "It's pretty simple." Climate change policy should be configured to capitalize on the environmental benefits of natural gas, he said.

Followill said she expects increasing regulation by the Environmental Protection Agency to make more older coal-fired power plants uneconomic, sliding some market share to natural gas, but it won't be a lot. "I think there's conservation, but I do think you have growth on the power side," she said.

Whenever increased gas-fired generation demand, the falling rig count and any economic recovery work their magic on gas supply-demand, don't look for a spike in prices. The recovery will be gradual, Bradley predicted, because there are reserves in the ground that are retrievable by essentially the turn of a tap.

"You just don't know the extent of how much gas is shut in," Bradley noted. "You don't know how much gas had to be produced to hold the lease or [whether] people don't want all that flood of production hitting the market at low prices, so you don't know how much is pinched back. You don't know how much has been drilled and cased because people had the rigs that they had to use...You have these various tranches of supply that can be brought on fairly quickly as prices rise...I don't think you're going to see big price spikes absent one-time events, explosions at a gas plant, things going down...

"I think you're going to see a pretty good transition. That's good for markets. I don't think it's good for natural gas to have wild swings every five or 10 years."

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