In its recent report on the future of natural gas prices,Friedman, Billings, Ramsey & Co., Inc. (FBR), a Virginia-basedfinancial institution, predicted continued price increases throughthe summer, giving way to price moderation over the long-term. Thereport, titled “The Boom in the Natural Gas Markets — Fact orFiction?” was released earlier this month.

FBR predicts that because of the recent high oil prices, manypower generation facilities will switch to gas this summer. Awarmer-than-normal summer is expected. Additionally, snow-packlevels appear to be below-normal, the firm said, causing areduction in hydroelectric power generation. This expected relianceon gas caused the firm to set its composite spot wellhead gas priceestimates for the year between $2.50-$2.60/Mcf. While this estimateis significantly higher that 1999’s average of $2.13 Mcf/d and1998’s average of $2.01 Mcf/d, FBR senior energy analyst DavidKhani said it is just a slight increase from composite averages in1996 and 1997.

It is important to note, FBR points out, that although only asmall percentage of generating facilities have the ability toswitch fuels, switching has a profound effect on gas prices. “Themost important point..is that short-term fuel switching can have avery pronounced effect on natural gas demand and can translate intoextreme price spikes if the relative price of natural gas ischeaper than heavy oil.” The firm points out that in thehypothetical situation where all 2,300 generating facilities withthe ability to switch from oil to gas do so, demand would increase104% from current regulated and unregulated estimated 1999consumption.

After the summer, FBR cools on the market’s ability to pushprices higher. Its conservative forecast for composite prices in2001 is $2.35/Mcf. The reduction will occur, FBR said, because ofincreased production from the Gulf of Mexico and Canada over thenext few years. In the Gulf, a 900 MMcf/d increase in production isexpected for 2000. In Canada, the production is expected to rise by600 MMcf/d during this year.

FBR added that the report differs from other forecasts in thatit does not think lack of supply is the driver of the bull market.”Our findings indicate that supply has not dropped as precipitouslyas many industry experts anticipated and that demand is currently amore meaningful indicator of future pricing.”

Overall supply declines will be a “mere” 0.7 to 0.9 Bcf/d for1999. In 2000, the firm is expecting a 1% rise in supply. Alsoworking against price bulls is the firm’s belief that nucleargeneration will remain strong. While gas demand estimates forelectric generation are bullish, FBR said it believes that themarket has “overstated” the rising long-term trend gas-firedelectric generation.

“Unless [a host of bullish factors] dictate, we do not subscribeto the theory that natural gas prices will average north of$3.00/Mcf…” Instead, the firm said a realistic estimate forlong-term (over the next two to three year period) composite gasprices is $2.75/Mcf.

One aspect of the supply and demand balance that will have agrowing presence moving forward is increasing liquefied natural gas(LNG) production. Although LNG represents only 1% of total gassupply currently, FBR expects that number to triple by 2002. Thefirm said the current high prices in natural gas combined with theabundant LNG supply found in Trinidad “should promote the use ofLNG as an everyday supply source rather than strictly a peakingfuel.” The firm also noted that two more LNG facilities will bereactivating in the near future. Both Columbia’s Cove Point plantand Sonat’s Elba Island plant are undergoing the process ofreactivating. The added supply would serve to moderate pricespikes, FBR said.

Friedman, Billings, Ramsey Group, Inc., the parent company ofFriedman, Billings, Ramsey, & Co, Inc., is a holding companyfor three businesses: venture capital, investment banking. FBRprovides capital and financial expertise throughout a company’slifecycle.

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