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Global Gas Glut Forecast to Hurt Prices, Projects

Global gas supplies are making for a buyer's market as demand weakens and new supplies come on stream, according to a draft 2009 World Energy Outlook (WEO) by the International Energy Agency (IEA). The agency, which is set to issue its final report on Tuesday, is expected to announce a downward revision to its world oil forecast for the second year in a row.

The annual WEO report provides a quantitative outlook for energy supply and demand in the medium term (2010-2015) and the longer term (2015-2030). In addition to analyzing global gas markets, the 2009 report analyzes financing energy investments under a post-2012 climate framework and details energy trends in Southeast Asia.

Overcapacity of global gas pipelines and liquefied natural gas (LNG) terminals could reach "at least" 250 billion cubic meters by 2015, which would be four times the spare capacity in 2007, according to the draft report.

"Projected global demand points to significant under utilization of inter-regional pipeline and LNG capacity around the world," the draft stated. "This looming glut could have far-reaching effects on gas pricing."

Countries expected to take the biggest hit in an oversupplied gas market would be Russia, Qatar and Iran, which control the most gas reserves, the draft noted. Russia's state-owned Gazprom could suffer a setback because an oversupply of gas would erode the control the company has held over consuming and transit countries; it also could leave the company's LNG ambitions "unfulfilled" before 2030, the draft noted.

By itself an oversupply of global gas would reduce prices, but the gas markets also are seen taking a hit as countries move ahead to develop more renewable energy and nuclear power, according to the draft. Environmental policies to limit carbon dioxide emissions, far from supporting gas demand, could cause gas demand to peak in the early 2020s, it said.

The 2009 outlook "will provide updated projections that take into account the implications of the global credit crisis, the economic slowdown and the recent slump in the prices of oil and other forms of energy," IEA said.

Separately, Moody's Investors Service said last week that independent exploration and production (E&P) companies remain under pressure in the near term from the U.S. gas supply glut, which could pinch cash flow and returns in 2010.

"We believe conditions in the E&P sector will continue to deteriorate somewhat over the next year -- with the benefits of lower oilfield services costs being more than offset by continued natural gas oversupply and weak spot prices," Moody's analysts said in their annual outlook report on the independent E&P sector.

A drilling and services cost adjustment is under way, but "we do not believe this adjustment will match the lower gas price environment, particularly not in such higher-activity shale plays as the Haynesville and the Marcellus. E&Ps whose production is heavily oriented toward natural gas could have trouble maintaining production without outspending cash flow and increasing debt."

Lower service costs, continued shale development and improved liquidity should enable many producers to maintain or even expand output going into 2010. In addition, more liquefied natural gas may be headed toward North American shores in the next year, Moody's noted.

Combine all of those factors with uncompleted gas wells that could begin flowing in the next few months and "the oversupply situation could continue well into 2010," said analysts. "Until we see more evidence of a healthier supply/demand balance for natural gas, our outlook for the E&P industry remains negative."

Most E&Ps late last year reduced capital expenditure (capex) budgets for 2009 as commodity prices fell and the credit markets froze access to capital for corporate borrowers. At the time, many said they intended to "live within cash flow" and limit capital spending to avoid more debt and to preserve their liquidity.

However, even for the many that embraced less spending, "contractual drilling commitments and the sheer momentum of spending before commodity prices collapsed meant that it took several quarters to reduce capital spending to a level within cash flow," the report noted. "This is why much of the decline in capex only occurred in the second half of 2009 -- another reason production volume has held up so far this year among rated issuers."

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