The challenges faced by the North American natural gas industry, that include where will needed supplies come from and at what cost, will continue into the next decade, according to a report issued Friday by Wood Mackenzie.

The report, “Falling Short? The Growing Challenge to Supply the North American Natural Gas Market,” indicates that the biggest problem facing the industry will be where the gas comes from to “fill the acknowledged gap between indigenous supply and potential demand,” said Bob Fleck, vice president of North American Gas Consulting for Wood Mackenzie.

“Despite intensive efforts to increase North American supply, increasing well decline rates mean that any slowdown in drilling is followed quickly by declining production,” Fleck said. “With deepwater fields expected to reach peak in the next two-to-three years, the ability to stabilize, let alone grow U.S. production after 2005-2006, is very much in question.”

Liquefied natural gas (LNG) imports “will build strongly this decade, representing approximately 70% of overall growth of continental supply, with many proposed import and regasification facilities on tap by 2010 and beyond,” said Fleck.”However, growth in LNG imports alone will not and cannot outrun the need for new supply in North America. The timing of the completion of these LNG projects is critical.”

Expected supply will constrain demand, according to the report. Overall gas demand in the United States “is not likely to return to 2000 levels until 2009, as power growth is partly offset by stagnation and demand reduction in industrial and core markets.”

Fleck noted that the industrial sector, “already challenged by a combination of a slow U.S. economy, high gas prices and global competition, will struggle to maintain demand levels even equal to the already reduced 2003 level of 19.0 Bcf/d. This weakening in industrial demand has been caused primarily by switching to residual fuel oil, industrial product prices that have not matched the increase in natural gas prices, cutbacks in American production, and general belt tightening and cost cuttings across all manufacturing sectors.”

Tight supplies and a marginal power generation demand, that is at times inelastic, will force gas prices to remain strong, on average between $4.00-$5.50 in nominal terms through 2010, according to Wood Mackenzie.

For a copy of the report, visit the web site at www.woodmac.com.

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