While some energy analysts recently have begun swinging for the fences, building high natural gas demand, low supply scenarios into ever higher prices, there is another “Now, hold on just a minute” faction, which claims they have forgotten to factor in the potential for competition from lower oil prices.

Andrew D. Weissman, publisher of Washington DC-based EnergyBusinessWatch (EBW), has been touting his recent study that shows lower production and increased power demand as causing massive changes in the natural gas market over the next five to seven years and pushing prices up to the $6/MMBtu realm (see Daily GPI, Dec.26). Weissman also is chairman of his own Energy Ventures Group, an investment firm with offices in Houston, Washington and San Francisco.

He’s not alone at the high end of the chart. Raymond James analyst Marshall Adkins and his group last week said they believe heating demand and short supplies will put the natural gas market into a crisis mode this winter, resulting in prices averaging $5/MMBtu next year (see Daily GPI, Dec. 24).

But, Stuart Wagner, a veteran analyst with the Denver-based investment banking firm, Petrie Parkman, recently challenged the high-priced scenario, pointing to competition from lower-priced oil once the international situation has settled down and Iraq production builds. Some analysts have predicted a drop of more than $10 a barrel to under $20 if the crises in Iraq and Venazuela are ended.

Wagner, who followed on a presentation by Weissman at a recent Denver conference on “The Coming Natural Gas Crisis,” sponsored by EBW, didn’t argue with the continuing low gas production levels, but it’s on the demand side that the two disagreed. Wagner pointed to the slowdown in the construction of new natural gas fueled-power generation projects and the potential for fuel switching as keeping prices in the $3-4 range.

Historically, oil prices always have served as a cap for gas prices — except in special situations like the California energy crisis. Wagner’s view then depends on a reading of inscrutable international events, an exercise about as valuable as predicting the weather — which is the other variable.

An in-depth report on the conference by the Rocky Mountain Oil Journal said Weissman countered the fuel switching argument, saying a Tcf of industrial demand had already switched or shut down and the industrials remaining are hard-core and would have to see much higher prices to convince them to go off gas. Here again, there would have to be some inspired tea leaf readings to forecast the status and reactions of a variety of industries.

The Journal points out, however, that while demand is variable, there’s no doubt whatsoever about supply. Weissman said domestic production is expected to decline by 2 Bcf/d next year which will increase the production/demand deficit. That deficit has been hidden by the 9/11 tragedy, the economic recession which cut into manufacturing and last year’s record warm winter. Given the lack of adequate measures of U.S. gas production capacity, the old hands in the gas industry will tell you it just takes a flat-out cold winter to show what kind of stuff the industry has got.

As for what’s ahead, the Journal cites a recent Lehman Brothers survey that shows E&P expenditures, while increasing next year in the rest of the world, will continue to decline in the U.S. due primarily, producers said, to a lack of prospects. The return on investment has something to do with that lack of prospects. A recent study by John S. Herold shows the finding costs in Africa and the Middle East at just over $3 a barrel of oil equivalent, while U.S. costs hover around $9.50 boe. It’s not rocket science determining where investment’s going.

Weissman’s study shows that the fewer new wells being drilled in the U.S. today have a half life of just one year. And Canadians already have warned of declining production since their easy targets have been exhausted.

“The bottom line is that with drilling activity continuing at low levels and with domestic and Canadian production both dropping, the U.S. could head into next year’s heating season with dangerously low levels of gas in storage, even if gas consumption simply stays flat,” says the Rocky Mountain Oil Journal, the publisher of record of western drilling activities (www.rmoj.com).

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