Improvements in the overall natural gas supply and demand balance are in store in the intermediate term, which should result in lower prices, according to a new report by an Arlington, VA-based energy consultant. But in the longer term, it said higher prices will be required to spur the development of adequate supplies to satisfy increasing demand.

Energy Ventures Analysis Inc. (EVA) said there were “two significant uncertainties” to the projections in its forecast, and added that “either one of them could adversely impact the overall long-term supply and demand balance, which can cause demand destruction and even higher gas prices.”

The first uncertainty involves the possibility of even greater natural gas demand by the power sector due to fewer coal-fired capacity additions. While the EVA report makes allowances for less coal-fired additions in the future, “a further reduction in this rebirth of coal-fired capacity additions due to a combination of local environmental pressures and increasing capital costs would cause natural gas demand to increase, potentially significantly, as natural gas is the marginal fuel for the power sector,” said the report, “The Long-Term Outlook.”

The second uncertainty involves the proposed Alaska and Mackenzie natural gas pipelines. “There is now considerable uncertainty over both the likelihood and timing for the two Arctic gas pipelines in light of [ExxonMobil’s] recent announcement that both pipelines are uneconomic under present conditions,” the report said.

“A significant delay in these pipelines likely would lead to higher prices and demand destruction within the various [consuming] sectors, as it appears that there are not adequate long-term supplies to offset the delay or elimination of such a major evolving resources,” EVA noted.

The anticipated improvement in the intermediate-term supply and demand balance would be brought on by a significant increase in U.S. liquefied natural gas (LNG) imports, resulting from record additions in global liquefied capacity (i.e., 5.4 Bcf/d) and regasification earmarked for the U.S. market; and the completion of Phase II and Phase III of the mammoth Rockies Express Pipeline (1.8 Bcf/d of capacity) in 2008 and 2009, which will give bottlenecked Rockies production access to Midwest and eastern gas markets, the report said.

In the long term, the report projected that natural gas demand will increase to 28.2 Tcf, or 17.5 Bcf/d, from its current level of 21.8 Tcf. An estimated 54% of the increase will occur within the power sector, with demand growing from 6.24 Tcf to 9.45 Tcf in 2025, it said. “Price-induced conservation (both structural and behavioral) occurs within other [consuming] sectors, which partially offsets increased demand associated with economic growth. The greatest level of demand destruction to date has occurred within the industrial sector and it likely will not reach 2000 demand levels by the end of the forecast period [2025].”

EVA expects natural gas supply to climb to 28.23 Tcf in 2025, with LNG imports accounting for 7.1 Tcf, Canadian pipeline imports making up 2.53 Tcf and domestic production representing 18.74 Tcf of the portfolio. In real dollars (2007), the report sees spot gas prices staying in the $6-7 range.

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