While some energy industry members likely wish that so much gas-fired power generation capacity had not been built — industrial gas consumers, for instance — the fact is that it’s here to stay, and the gas-power convergence is still very much with us.

“The power generation market has continued to grow, and the power generation market is generally able to pay more for natural gas than some of the marginal industrial users can handle,” Hal Kvisle, TransCanada Corp. CEO, told a Houston audience Wednesday. “We can see two things going forward: If there is more gas supply, that growth curve will resume and there will be stable prices. If there is flat gas supply, the only thing that we can see resulting would be a higher price.

“We see power generation demand going up, industrial demand coming down, and in the absence of more gas, we think residential consumers are going to pay a very high price for the gas they need.”

Uncertainty of supply and the consequent high prices was the overarching theme of a panel of industry executives speaking at Cambridge Energy Research Associates’ CERAWeek 2006.

“We talk a lot about demand destruction, but I think somehow that can be a little bit overplayed,” said Robert Stibolt, a Suez Energy senior vice president. He said that while commercial and industrial demand for gas has shrunk a bit, the decline has been offset by demand from the power sector. “So I think power and gas convergence is still the story.

“It’s just a question of where will it happen; will it be North America; will it be Europe; will it be Asia in terms of where the nexus is?”

While gas and power will continue to hold hands on the demand side, at least in the near term, one speaker wondered whether natural gas and oil prices, which historically have been linked, might see a parting of the ways in the coming months.

“I think the question is will residual fuel oil continue to represent the floor [for natural gas prices], and will oil prices continue to influence gas prices going forward,” said Brian Frank, CEO of BP Canada. “I would say the general sentiment for oil pricing is one of uncertainty and, therefore, some bullishness. On the gas side, it’s very bearish; it will be very interesting to see whether gas prices and oil prices disconnect this summer.”

Regardless of whether that happens, a world natural gas market has been developing on the back of global LNG infrastructure. The CERA conference speakers concurred in the view that LNG is necessary but varied in their opinions of how significant a role in U.S. gas supply it ultimately will play.

“LNG is often suggested as the silver bullet for U.S. supply,” said Questar Corp. CEO Keith Rattie. However, he noted that global gas demand stands at about 260 Bcf/d and global production of LNG is just 18 Bcf/d. He predicted another 4 to 5 Bcf/d of new liquefaction capacity and upstream development to deliver new gas. “Now that’s a lot of gas, but in the context of global demand it’s not very much.”

Looking at U.S. decline rates of about 30% on 50 Bcf/d of domestic production, “the amount of decline in the U.S. is almost equal to the entire LNG supply in the world,” Rattie said. “So counting on LNG to be the silver bullet for U.S. supply can be a tall order…I believe that LNG is coming, maybe not in quite the volumes that CERA is predicting, but certainly significant amounts. But it won’t be cheap and it won’t be quick.”

Indeed. Frank said he is more concerned about the outlook for gas supply over the next five years than he is worried about supply 10 years from now. “The market does not respond real-time on the supply side, as we’ve seen. A lot of the incremental supply is very lumpy.

“It’s going to take three, five, seven years to develop. What kind of price environment are we going to have over the next five years, and what kind of signal is that going to send to the market? We’ve seen a very resilient market to date. I guess there’s a big question as to how resilient that market will be in the face of continued high prices.”

And according to Frank, there is a big question regarding who will pay the price and take on the risk of the necessary infrastructure development to get domestic and global gas to North American markets.

“There are billions and billions of dollars of infrastructure that need to be backstopped, and producers are prepared to take on some of that, and we’re seeing some of the supply push projects come out of the Rockies and in LNG,” said Frank. However, “LDCs are really the only creditworthy entity in the market that can make commitments to long-term infrastructure. And we think there needs to be a regulatory framework at the state and provincial levels to ensure that LDCs can make those type of commitments to ensure that the infrastructure is developed to their citygates.”

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