Western North America has overreacted to price signals and taken “drill, baby, drill” to an extreme, and as a result the region is saturated with natural gas production that outstrips the current prospective markets, according to a panel of western energy executives speaking Tuesday at the 2008 LDC Forum Rockies & West Conference in Irvine, CA. Current swift drops in wholesale gas prices will help, but volatility still adds continued uncertainty for buyers, the panelists said.

Beth Bowman, senior vice president for Shell Trading Gas and Power, said the demand in the West is about half of what supply is, and it will not pick up much for another two years. Ultimately, she thinks it will be supply considerations that determine when, and if, liquefied natural gas (LNG) imports pick up — not price.

Calling it an overreaction, Stuart Nance, marketing vice president for Ultra Petroleum Corp., a Houston-based Rockies oil/gas producer, said every pipeline out of the region in any direction is filled to the brim, and that doesn’t reflect the market right now. He said the industry has been “too successful.”

An added pressure upward on production is the relatively new identified gas fields in northeast British Columbia (BC) — Montney and Horn River — that some observers in western Canada and Houston are considering on a scale that might rival the Alaska North Slope at Prudhoe Bay, according to Greg Staple, director of marketing at Spectra Energy.

All of the speakers prefaced their remarks by saying it is still uncertain what will happen with the current global economic tailspin and how deeply the recession cuts across the energy sector from both the supply and demand sides. They agreed with almost every other speaker at the first day of the two-day LDC forum in reiterating that both cash and liquidity are “king” in the current environment.

“Unlike in previous years, we’re starting to see a move westward of the increased gas production in the West’s five major basins,” Shell’s Bowman said. “As a result, the demand in the West is about half of what supply is. So the picture going forward isn’t about supply and demand, but it is really about price volatility.”

She sees both the West and the nation as a whole being “very integrated from a natural gas perspective,” with multiple linkages in all areas, even with LNG now available in the region through Sempra Energy’s Costa Azul import terminal along the Pacific Coast in North Baja California, Mexico.

“LNG is going to affect the West, and we now have a much more interconnected market globally,” Bowman said. “Right now Asia is willing to pay a lot more for LNG than North America is, although the prices are coming closer to each other. The fact is that there are few alternatives to LNG in Japan and China [if they want to lower carbon emissions]. In the long run what we have to watch for in LNG is the amounts contracted for exceeding the capacities of what the import terminals can take in.”

Supplies are full and pipeline capacity is being added eastward and westward out of the Rockies, but congestion prevails in a number of areas, so shippers all want access to as many of the 10 aggregation points in the Rockies as possible, said Bryan Hassler, regional director for natural gas origination at Enterprise Products Operating LLC. “There’ll be continued growth in reserves and production, but there may be a slight slowing in the pace of growth.”

The bottom line for Ultra’s Nance is that the industry has been “too successful in bringing new Rockies production to market, and we have driven all the LNG out of the marketplace. The key question is — for how long?”

And a new wild card among the competing western basins is developing in northeastern British Columbia, something Alex Douglas, managing director of west marketing for Alberta-based Nexen Marketing, and Spectra’s Staple, are keeping a close eye on.

“In just a year, so many things have changed,” Douglas said. “What you really see is a major shift from Alberta to British Columbia [in terms of future gas supplies].” Part of the shift is stimulated by the BC provincial government that has held land lease sales for energy exploration, adding about $2 billion to the provincial governments coffers during the past two years, he said.

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