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Executives Bullish on Prices, Supply Outlook

Executives Bullish on Prices, Supply Outlook

Strong gas prices and the promise of robust demand from gas-fired generation are making industry executives almost giddy. Production may be waning in the shallow Gulf of Mexico, but it is waxing in the greater depths. Ditto for LNG imports. Canadian producers look south and see market, north and see future supply. It's all good if you can overlook the fact Wall Street isn't paying much attention.

The outlook for North American natural gas was "never better" than now, says the top Shell E&P executive. Additional factors working in favor of gas are environmental imperatives, integration of the North American market, new supply sources and rising prices, said Shell Exploration and Production Co. CEO Walter van de Vijver at Ziff Energy Group's North American Gas Strategies Conference in Houston last week.

"There will be more new gas demand over the next 10 years than there has been in the past 20 years in the U.S. alone. Equally strong growth in Canada and Mexico create enormous opportunities for our industry."

His remarks were in sync with findings of the latest Ziff Energy gas industry survey. The survey of 124 companies found slightly more than half of U.S. producers responding expect to produce at least 5% more at the end of this year, and 19% expect production increases exceeding 15%. In Canada, more than 70% of respondents expect to grow production by 5% or more, and 25% expect their production to increase by more than 15%.

Nearly all, 94%, of the Ziff survey respondents said they expect NYMEX gas prices to end the year above $2.73, and 40% expect Nymex prices to close above $3.13. Respondents expressed concern that gas would become non-competitive for power generation at burner-tip prices of $3.50/MMBtu, a significant rise from last year's estimate of $2.75 to $3/MMBtu.

Van de Vijver and others said the industry must grow its supply base to meet the coming demand for gas. The deep-water Gulf of Mexico, although "oilier" than originally thought by Shell, is one source, offshore eastern Canada another. Supply frontiers also include Alaska and arctic Canada, assuming it someday becomes economic to transport gas from such a distance. Mexico's role in the North American market probably will grow but remains to be seen.

Although it still only accounts for a sliver of the market, liquefied natural gas (LNG) has seen robust growth. LNG imports at CMS Energy's Lake Charles, LA, terminal set a new record at 27 cargoes last year. The company predicts it will bring in nearly 30 cargoes this year and 100 in 2010, said Ziff speaker William J. Haener, CEO of CMS Gas Transmission and Storage Co. "I think we will see a significant trend to increased LNG usage." He also pointed to emerging gas-to-liquids technologies and said distributed generation will be playing a role in the development of the gas market.

Although his company grew its Gulf of Mexico production by 30% last year, Kerr-McGee Vice president for Gulf of Mexico operations David A. Hager is pessimistic about the Continental Shelf's future. Half of Kerr-McGee's Gulf production came from the Shelf, and "there's still a lot of money to be made" on the Shelf, but Hager said he's expecting to see steep declines there. "My conclusion is Shelf production will be ugly, and it's going to go down rapidly."

That's not the case in western Canada, according to Gerald J. Protti, a vice president with PanCanadian Resources Petroleum Ltd. at today's gas prices at least, Protti said there is "very little activity in the western basin that could be considered uneconomic." While oil drilling is coming back in Canada, "most Canadian producers still view the gas play as the place to be long-term." Further, his expectation is coalbed methane production technology will continue to develop.

Overall, the gas industry now faces targeting new, more challenging supply sources at a time when capital is tough to come by, particularly in light of investors' fascination with dot-com stocks, speakers lamented. "Longer lead times and higher capital intensity will hinder the industry's ability to respond quickly to changes in market conditions," said van de Vijver. However, "stronger gas prices are here to stay.

Joe Fisher, Houston

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