Assuming a $3.50/Mcf price, demand for natural gas will grow 2.3% in 2003, with total supply declining 1%, according to Mississippi-based natural gas analyst Stephen Smith’s December energy outlook. Overall, the U.S. gas supply and demand picture looks positive in 2003, he said.

The 1% decline is “deliberately conservative,” Smith said, resulting in a supply/demand gap of 800 Bcf under a base $3.50 gas price assumption. The gap would close if the price moved higher than $3.50, which he said likely will “turn out to be $4.00 or better for 2003 on average.” To clear markets, he predicted a demand-destruction process “similar to that seen in 2001.”

The gas demand forecast assumes there will be a 3.2% real gross domestic product growth; normal winter weather versus the 2% warmer-than-normal in 2002; normal hydro power; continued share gains for gas in power generation; and a normal 2003 summer, unlike the 18% warmer-than-normal 2002.

Also, the share price valuation for 2003 assumes that sustainable gas price expectations over three to five years will reach $3.50/Mcf and $23.50/bbl. “This might require several months of $4 gas to generate this type of expectation,” Smith said, but “our supply/demand outlook suggests that this should be achievable.”

For his domestic gas production forecasts, Smith uses three sources, the monthly Department of Energy data, state production data for Texas and Louisiana (representing almost 40% of total production), and his survey of gas producers, which represent about 47% of U.S. production.

“Some of the majors had some very large gas reservoirs that were being drawn down over the last two years,” said Smith. “Also, an increasing share of drilling is being directed to regions that tend to have a much smaller share of total reserves that are produced in the first year. So, it is possible that the decline rate might ease somewhat going forward.” However, he said the basic conclusion remains in a trend decline for domestic gas production. “The end result was that market balance was achieved by gas prices that were sufficiently high to destroy the most price-elastic demand.”

Regarding natural gas imports, Smith predicts that in 2003, Canadian imports will decline about 5%. However, next year and beyond, liquefied natural gas (LNG) imports are expected to steadily rise. “The main reason is that Lower 48 and Canadian supplies yielded such a meager supply response to the recent price boom, and we don’t expect a much better response the next time markets turn tight.”

LNG imports, said Smith, are “generally economic at $3.50+, and maybe a bit lower with advancing technology and some sunk-cost receiving terminals. Current sustainable capacity (surge capacity is higher) of the three existing U.S. LNG terminals (Everett, Elba Island and Lake Charles) is about 1.3 Bcf/d. In mid-2003, the start-up of the refurbished Cove Point terminal will add 1.0 Bcf/d of sustainable capacity.” The next “expansion increment” won’t come until the second half of 2005, he said.

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