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

The outlook for North American natural gas was “never better”than now, says the top Shell E&P executive. Additional factorsworking in favor of gas are environmental imperatives, integrationof the North American market, new supply sources and rising prices,said Shell Exploration and Production Co. CEO Walter van de Vijverat Ziff Energy Group’s North American Gas Strategies Conference inHouston last week.

“There will be more new gas demand over the next 10 years thanthere has been in the past 20 years in the U.S. alone. Equallystrong growth in Canada and Mexico create enormous opportunitiesfor our industry.”

His remarks were in sync with findings of the latest Ziff Energygas industry survey. The survey of 124 companies found slightlymore than half of U.S. producers responding expect to produce atleast 5% more at the end of this year, and 19% expect productionincreases exceeding 15%. In Canada, more than 70% of respondentsexpect to grow production by 5% or more, and 25% expect theirproduction to increase by more than 15%.

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

Van de Vijver and others said the industry must grow its supplybase to meet the coming demand for gas. The deep-water Gulf ofMexico, although “oilier” than originally thought by Shell, is onesource, offshore eastern Canada another. Supply frontiers alsoinclude Alaska and arctic Canada, assuming it someday becomeseconomic to transport gas from such a distance. Mexico’s role inthe North American market probably will grow but remains to beseen.

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

Although his company grew its Gulf of Mexico production by 30%last year, Kerr-McGee Vice president for Gulf of Mexico operationsDavid 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 Hagersaid he’s expecting to see steep declines there. “My conclusion isShelf 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 littleactivity in the western basin that could be considered uneconomic.”While oil drilling is coming back in Canada, “most Canadianproducers still view the gas play as the place to be long-term.”Further, his expectation is coalbed methane production technologywill continue to develop.

Overall, the gas industry now faces targeting new, morechallenging supply sources at a time when capital is tough to comeby, particularly in light of investors’ fascination with dot-comstocks, speakers lamented. “Longer lead times and higher capitalintensity will hinder the industry’s ability to respond quickly tochanges in market conditions,” said van de Vijver. However,”stronger gas prices are here to stay.

Joe Fisher, Houston

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