While a significant amount of Gulf of Mexico natural gas production will be offline during the winter heating season as a result of post-hurricane damage, residential customer needs will be met due to the high level of demand destruction in the industrial sector that is anticipated, says a new study that was released by a major pipeline group Wednesday.

As much as 3.5 Bcf/d, or 7% of U.S. gas output, will be missing from the market this winter, but that is likely to be offset by 3.0-3.5 Bcf/d of demand destruction in the industrial sector if the weather is cold during the same period, according to the study commissioned by the Interstate Natural Gas Association of America (INGAA).

Industrial demand destruction “will help to keep the market in balance,” said Kevin R. Petak, director of energy modeling and forecasting for Arlington, VA-based Energy and Environmental Analysis (EMERA), which conducted the study for INGAA.

Overall, gas demand is anticipated to range from 71.9 to 72.6 Bcf/d this winter, down from 73.8 a year ago, while gas supply (includes storage) will hover between 72.5 and 73.3 Bcf/d, down from 74.3 Bcf/d during the 2004-2005 winter heating season, the study said. It predicted that winter gas prices would even be greater than the expiration-day price for the November futures contract, which was $13.832/Mcf. The December futures contract closed at $11.604 on Wednesday.

Regulatory allocation of supplies by states and local distribution companies (LDCs) may occur if recovery along the Gulf Coast is slower than expected and the winter is 5% or more colder than normal, according to the study. A major factor in the recovery will be the restoration of gas processing plants. The study’s findings were unveiled during an briefing at INGAA’s headquarters in Washington, DC, and later submitted during a House subcommittee hearing.

The latest National Oceanic and Atmospheric Administration forecast predicts a warmer than usual weather for much of the nation this winter, while other forecasters see a cold winter ahead. Regulatory allocation, if and when it should occur, would likely be concentrated in states east of the Mississippi (particularly the Northeast and New England regions) that are heavily dependent on Gulf supplies.

The study stressed, however, residential and commercial customers served by LDCs that hold firm transportation and gas supply entitlements would continue to receive natural gas service to meet their requirements throughout the winter, even during periods of peak demand. The odds of curtailment (25%) would be greatest for power generation and industrial customers in New England.

Depending on the pace of recovery in the Gulf Coast and restoration of supplies, the study said the probability that the weather will be cold enough to require regulatory allocation on a few days will range from 27% to 40%.

Regulatory allocation would most likely occur if working gas storage levels were poised to fall below 700 Bcf nationally toward the end of winter, said Bruce Henning, director of regulatory and market analysis for EEA. He said he didn’t necessarily see a problem with respect to storage in December or January, but it could hit low levels in February or March.

INGAA President Don Santa urged state regulators and LDCs to dust off their curtailment plans for this winter.

Under a best-case scenario, the study projects that 2.5 Bcf/d of Gulf gas output would be offline this winter, and that total recovery would occur around May of next year. The worst-case scenario assumes that 3.53 Bcf/d of Gulf gas would be out of service and that recovery would be delayed until August-September of 2006. Figures include both offshore and onshore Louisiana production.

“It’s very hard to [pin down an exact recovery timeframe] because there’s an awful lot of fog out there,” Henning said. “There still is an awful lot of uncertainty.”

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