Given what happened to the industry last year with Hurricanes Rita and Katrina, it’s pretty easy to make a bull’s case for the natural gas market. In fact many industry prognosticators expect that once the current gas storage surplus is worked off, an underlying tight supply-demand balance will return, driving prices back into the stratosphere. But Stephen Thumb at consulting firm Energy Ventures Analysis in Arlington, VA, believes many experts are underestimating the impact that LNG will have on the U.S. market.

“An assessment of the long-term fundamentals for the U.S. gas market tends to support the alternative view that 2005 gas prices, at $8.79 per MMBtu for the year, were an anomalous event (i.e., 2004 average gas price even with Hurricane Ivan was $5.85, while 2006 average gas price will be close to $6.56/MMBtu),” Thumb said. “The key factor in supporting this alternative view is the emergence of alternative sources of supply, or which LNG will have the largest and most immediate impact.”

Thumb predicts that by 2010 there will be eight major LNG supply points around the globe, each with more than 3 Bcf/d of liquefaction capacity. Supplementing these will be a series of smaller liquefaction facilities. About 43% of the total global LNG will be in the Atlantic Basin and another 28% will be located in the Persian Gulf with the ability to serve either the Atlantic Basin or the Pacific Basin. Out of a total of 23.4 Bcf/d of LNG that could serve the Atlantic Basin market in 2010, Thumb expects the U.S. market to take at least 11 Bcf/d.

“The moderation in U.S gas prices that started in 2006 as a result of the storage overhang likely will extend into 2007 — assuming anything close to normal weather conditions,” Thumb said. “After that, increasing U.S. LNG imports in late 2008 will improve substantially the overall supply-demand outlook and as a result further extend this period of moderation in gas prices.

“The highest probability scenario is U.S. gas prices will approach their ‘floor price’ (i.e, the point where gas-fired generation marginally displaces coal-fired generation) before the end of the decade, primarily as a result of increasing LNG supplies.”

Thumb sees about 26 Bcf/d of regasification capacity in service in the overbuilt U.S. LNG market by 2010, up from 5.5 Bcf/d currently. He expects U.S. terminals at the end of the decade to operate at about a 62% load factor while European terminals operate at 48%. Asian regasification, which is not expected to be overbuilt, should operate at 90% of capacity.

While some market observers have predicted that U.S. gas prices will remain strong and will be linked to the oil market, Thumb predicts gas prices will remain at “floor” levels below $6/MMBtu (2006 dollars) from 2009 through 2020. He expects 2007 Henry Hub prices to average $6.54 and 2008 to average $6.16. The current 2008 12-month strip of Nymex futures prices is $8.38, 2009 is sitting at $8.07 and 2010 is $7.83. However, EVA has 2010 Henry Hub gas averaging only $5.43.

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