The media spotlight on the natural gas industry has “severely constrained” the industry’s ability to develop new resources and prevent an “imminent supply crisis,” according to a new report by Boston-based Energy Security Analysis Inc. (ESAI) Calling it the “arraignment of the gas industry before the investment community, regulators and the public,” ESAI suggested that the headlines have done more damage to the natural gas industry — and future supplies — than just a few black eyes to a few companies.

In ESAI’s “North American Natural Gas Stockwatch 2-Year Outlook,” senior analyst Mary Menino noted that even with the low natural gas prices in recent weeks, drilling activity remains low. “Despite Nymex strips well above $3.00, drilling activity has failed to pick up,” she said. “All indications are that gas production has fallen off year-on-year and that 2002 U.S. output will be down 4% to 5%.” At the same time, Canadian production also is expected to decline, and coupled with higher demand throughout the provinces, exports from the United States could fall 3% to 6%, according to ESAI.

Meanwhile, demand continues to grow, strongly pushed by increased volumes for power generation. According to Menino, the rate of growth in power usage most likely will drop, as more companies — hit by the same problems of capital and cash flow constraints that have already stifled the gas industry — postpone or even cancel plants that are not “substantially under way” already.

Still, said Menino, gas-fired capacity demands that have been improved over the past three years “will be sufficient to create a tight gas market in the face of expected production declines.” ESAI analysts warned, however, that the tight gas market over the next two years “will be extremely vulnerable to price spikes associated with weather extremes, lack of transmission capacity, surges in power demand and changes in oil prices.”

For more information on the two-year outlook, visit ESAI’s web site at www.esai.com.

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