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Production Growth to Have 'Major Negative Impact' on LNG -- PIRA, Lippman

The drilling boom in the Gulf Coast and Midcontinent regions probably will end up stifling liquefied natural gas (LNG) import growth but won't come close to filling up the plethora of proposed gas pipelines, according to a new study by New York City-based consulting firm PIRA Energy Group and El Paso-based Lippman Consulting Inc. (LCI).

The two consulting firms just completed a two-day workshop in Houston to review the preliminary findings of the study, which is titled "The Outlook for Gulf of Mexico Supply and Pricing, Barnett Shale vs. LNG: A New Rivalry Reshaping the Gulf Coast Gas Market." The final report is expected to be released in April.

Despite sharp production declines in the shallow waters of the Gulf of Mexico, PIRA and LCI expect total Midcontinent and Gulf of Mexico production capacity will increase by at least 1.5 Bcf/d over the 2006-2010 forecast period.

The large and growing unconventional gas resource base in North and East Texas, in the Arkoma Basin in Arkansas and elsewhere in the region is benefiting from rapid advances in exploration, drilling and well completion technology, as well as relatively low production costs. This provides "a compelling reason for continuing high deployment of drilling rigs and personnel despite the recent escalation in service costs," the consulting firms said.

"The Barnett is currently running between 2 and 3 Bcf/d, and we're expecting about a 50% increase" by 2010, said PIRA's Harvey Harmon, senior director. "You are still going to have production declines in existing fields. The shallow-water Gulf will decline, and there will be declines in other areas. What the Rockies and the [Texas Gulf Coast and Midcontinent basins] are doing is keeping total Lower 48 production from declining; in fact we see slight annual increases continuing. PIRA has never been bearish on domestic production, and we continue to see strength there.

"The more gas you get out of Texas, the less [imported] gas you need to balance North America."

Harmon noted that LNG always has been a marginal player in the U.S. and probably will continue to be so. When domestic gas prices fall, he said, less LNG is imported, more gas is put into storage, and then domestic production is shut in.

Even with all the new LNG earmarked for the U.S. toward the end of the decade, global gas producers will still have options and will send their supply elsewhere for a higher price. "We think with all the regasification capacity being built in the Gulf Coast region, it will become a home for a fair amount of LNG. We think we'll see quite a bit coming in, particularly in the summer months," said Harmon. "But overall we're seeing more Lower 48 production and that will discourage some of the LNG from coming here. There will be higher prices in Europe and Asia, and if our growing production keeps our prices from increasing as fast as pricing in Europe and Asia, then we will see less LNG imports."

Although Henry Hub prices below $5-6/MMBtu would cause a domestic production slowdown, PIRA and LCI do not anticipate average annual gas prices dropping below that range over the next 10 years. Instead, they expect a "major negative impact on LNG imports."

Another impact of the growth of unconventional production will be a surplus of pipeline capacity, the two consulting firms said. Harmon noted that the production growth in the Barnett, Bossier and Fayetteville shale plays have prompted a significant number of new gas pipeline projects: Gulf South's East Texas to Mississippi project and its Gulf Crossing pipeline; CenterPoint's Carthage to Perryville pipeline; and Kinder Morgan's Midcontinent Express project, just to name a few. There is more than 6 Bcf/d of pipeline capacity in the works in the region.

"We're only projecting about 1.5 Bcf/d of [additional production growth]. Let's say we're wrong and it's double that, 3 Bcf/d. If you add up all these pipelines, it's way more than what is needed," said Harmon. "Even if three of these pipelines get built, that's more than 4 Bcf/d; that's still too much pipe. LNG pipelines also are being built."

The PIRA and LCI study is the second in a series of four regional studies providing analyses of future regional natural gas production, LNG, pipeline capacity, and basis pricing. The first study in the series examined the driving forces behind the future pace of Rocky Mountains supply development. For more information, contact Jeff Steele at (212) 686-6808 or jsteele@pira.com.

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