Cost pressures, which in some areas already have begun to intensify, should help U.S. natural gas prices recover over the next few years to between $6.50/MMBtu and $7/MMBtu, an energy analyst said Wednesday.

Wood Mackenzie's Jen Snyder, the firm's principal natural gas analyst, offered her take on why gas prices should escalate at the annual Rocky Mountain Energy Epicenter, sponsored by the Colorado Oil & Gas Association.

The gas industry will begin to see "heavy cost pressures develop to around 2015," Snyder told delegates. Some producers have begun to report oilfield service costs escalating after plummeting in 2009 (see Daily GPI, July 8).

Higher costs will come not only from service costs and margins but also competition with oil projects for horizontal drilling rigs and an "overall" higher cost economy, said Snyder.

"We expect long term gas prices over the next five years to recover to between $6.50 to $7/MMBtu, reflecting both these cost pressures and the eventual need to access a higher-cost supply source," she said.

"The core, low-cost unconventional gas plays -- Marcellus, Haynesville and Barnett -- will continue to grow, but within a few years as the pace of demand growth accelerates, more expensive shale and tight gas supplies will be required."

Because of economy-wide inflationary pressures, "in nominal terms, prices could reach $8.50/MMBtu."

Gas demand growth long term also is expected to come from the power sector as more coal plants are retired, said Snyder.

"Even in the absence of carbon legislation, [the Environmental Protection Agency] and local regulations could lead to 45 GW of coal-fired power generation being retired by 2020, stimulating as much as 5 Bcf/d of gas demand just to offset lost generation from the idled plants.

"Total gas demand growth in the power sector alone could range between 8-10 Bcf/d by 2010."

Longer term, U.S. gas producers will have to decide whether it makes sense to export gas supplies via liquefied natural gas, said the analyst.

"Wood Mackenzie's evaluation of the benefits and risks of this show that the economics look extremely challenging, but other drivers, such as a portfolio approach by producers or buyers' desire for supply diversity, could support North American liquefaction," she said.

"However, much depends on how closely global gas prices will be linked to oil prices; how Russia may react to new competing supply from the U.S., and the extent and timing of new global unconventional gas supplies, for example in Poland or China -- all of which remain uncertain."

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