If the natural gas market is considered to be in a crisis now, or at least difficult straits, the outlook for the market ahead is anything but settling, according to a study released by Cambridge Energy Research Associates (CERA) and sponsored by Accenture Monday.

“Continental supply is expected to decline slowly, while demand is trying to grow, primarily from the power sector. This suggests a tightly balanced market over the next four to five years before substantial new liquefied natural gas (LNG) imports are scheduled to arrive in North America,” according to the study, entitled “Options for a Challenged North American Natural Gas Market.”

An event as “simple as an abnormally hot summer or cold winter could push prices well above recent levels, to the $6.50 to $8 per MMBtu range in the summer and above $10 per MMBtu during a particularly cold winter,” it said. “Thus without measures to boost supply or temper demand, the market is locked in a strong price environment.”

CERA said its outlook is for the benchmark Henry Hub gas price to average (all nominal dollars) $5.83/MMBtu for this year; $6.02/MMBtu in 2005; $6.40/MMBtu in 2006; and $6.62/MMBtu in 2007.

“The soonest the market could ease back to the $4.00 range would be after 2007, which is the soonest LNG could arrive in substantial quantities. However, new LNG facilities are not guaranteed, and if they are delayed, gas prices could continue their upward trajectory beyond 2007, CERA reported.

“The higher and volatile gas prices are not a failure of market. Rather they are the result of a disappointing geological experience over the last several years, compounded by access issues — combined with a shift to new uses of natural that is set to increase consumption. The result is a mismatch between ailing supply and increasing demand, and prices are performing their essential function — signaling the change in conditions to both producers and consumers,” the study said.

CERA anticipates ongoing declines in domestic gas production to continue despite an outlook for strong drilling levels, said Michael Zenker, CERA’s senior director for North American Natural Gas.

“The challenge is to understand and adjust to this new market…However, there is [a] lack of political consensus on how to provide relief to the natural gas market. Basic disagreement on even the causes of the stubbornly higher natural prices, combined with voter and consumer skepticism of the intentions of both the government and industry to address energy matters, and the uneven distribution of the costs and benefits of actions to mitigate higher gas prices have resulted in [the] lack of a strong mandate, as yet, to take action to provide relief for the market. Lack of consensus potentially threatens to delay development of domestic gas resources and could slow progress toward the opening of new LNG projects that could bring market relief after 2007.”

The CERA study identified several options for making the best of a bad situation, including reducing consumption of natural gas by encouraging fuel flexibility and the use of non-gas fuels in the power sector; promoting conservation through continuous consumer education programs; and promoting new supply sources. New supplies could come from expedited expansions of existing LNG facilities, encouraging the construction of new LNG facilities, boosting domestic supply by streamlining permitting for activity in areas already open for gas production, and lifting restrictions against drilling in other areas.

In the meantime, suppliers can anticipate a major backlash from consumers who are accustomed to plentiful, relatively inexpensive fuel to one marked by uncertainty, volatility and record price levels, said Ross Tokmakian, a partner in Accenture’s North American Utilities industry group.

LNG already is the fastest growing source of supply to the North American gas market. By CERA estimates, North America alone will require about 11 Bcf/d of LNG supply by 2010, making LNG the third largest supply source for North America. The market is moving quickly in that direction. One year ago, 13 new regasification terminals were being proposed, it noted. But now there are over 35 representing over 30 Bcf/d of regasification capacity.

“However, translating these proposals into reality has been difficult. Policymakers, thus, should review the siting and permitting process for new LNG regasification facilities or risk facing a much longer term tight market for natural gas,” CERA said.

U.S. land access will continue to be a key issue for natural gas production, especially in the Rockies, federal areas and offshore areas where there are known gas resources on lands currently restricted from exploration and productive activity. The largest basins in the U.S. have been thoroughly explored and the largest fields are in decline, CERA said.

The number of wells producing gas in the U.S. increased from about 300,000 in 1999 to more than 350,000 in 2001, but average well productivity declined from 171 to 145 Mcf/d over that same period, the study noted.

In addition, CERA called for companies and regulators to reconsider their bias in favor of short-term contracting. “Many of the new, non-utility power producers buy gas in the spot market do not hold pipeline or storage capacity…Regulatory commissions in some states have discouraged utilities from committing to long-term contracts,” it said.

“Longer term contracts are essential to underpin investment in pipelines, storage fields and LNG projects. In addition, longer term arrangements can significantly dampen spot price volatility. Policymakers should work to align the need for long-term commitments necessary to underpin new natural gas infrastructure with state level regulation and the design of some power markets that do not support long-term contracts.”

It also called for the preservation of coal-fired capacity and dual-fuel capacity plants. “Restrictions on coal-fired plants means that other plants must replace lost generation, exacerbating the high-priced, volatile natural gas market environment.”

©Copyright 2004 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.