Despite the fact that rising domestic natural gas production costs and increased well decline rates will team to put pressure on commodity prices this summer, Energy Security Analysis (ESAI) said Monday that it expects liquefied natural gas (LNG) will offset some of that pressure with another year of strong imports.

“There will be two competing forces impacting natural gas prices during the cooling season,” said Scott DePasquale, ESAI energy analyst. “First, LNG imports are expected to rise again this year. Second, increased Gulf area production costs will continue to rise, in tandem with decreasing rig efficiencies.”

The energy analysis and monitoring group holds that the dynamics of the global LNG trade are changing, citing that during the last decade the world has seen decreasing development costs for liquefaction facilities, transportation, and regasification terminals, combined with increasing natural gas demand internationally. The group believes that this has led to a proliferation of LNG trade, as well as a near ten-fold increase in spot trade volumes. As a result, alternatives to traditional net-back pricing regimes are being examined by buyers, while burgeoning arbitrage opportunities are examined by sellers.

“Last year, LNG imports totaled 500 Bcf — more than double 2002 levels,” DePasquale said. “We expect total imports to exceed 700 Bcf in 2004, 70% of which will be delivered between April and October.”

If these predictions come to be true, LNG would be moved to the margin, serving more than 3.5% of 2004’s total demand, according to ESAI. “The imports will have a landed cost of between $2.50 and $2.75/MMBtu — which is extremely competitive with indigenous well head prices,” DePasquale added.

Domestic production woes are highlighted by the fact that the shallow depth, easy to recover gas reserves in the Gulf of Mexico have been depleted over the past decade, making each incremental MMBtu more difficult to find and more costly to bring to market. The group said it expects a 2-3% quarterly increase in production costs for the remainder of 2004.

“To make matters worse, reserve accounting practices have been called into question by the Securities and Exchange Commission,” said DePasquale. “It remains a very likely possibility that another scandal, impacting major oil and gas companies, could bring further uncertainty and volatility to North American natural gas markets this summer.”

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