Given the mild winter, the natural gas piled up in storage and the crippled economy, gas prices are expected to limp along in the $2.00 to $3.00 range for most of 2002, but watch out for the winter of 2003-2004; it could be a real zinger, with prices closing on $4.50, according to projections by Ben Schlesinger & Associates (BSA).

By the time the ’03-’04 winter hits, the economy will be back in high gear, and will run smack into reduced production brought on by the current decline in E&P spending, the Bethesda, MD-based consulting firm said in its monthly newsletter. In that case — the “stressed” case — the price at Henry Hub could hit as high as $4.30/MMBtu in mid-winter, while the price at Tetco (Texas Eastern pipeline) M3 (New York City) could go above $4.50. In BSA’s “normal” case the Henry Hub price will only hit $3.00, while Tetco M3 would go to about $3.40/MMBtu.

“The Enron debacle has chilled all aspects of the North American energy market in our view, including equity values, capital investments, and consequently prices for energy commodities. In the rush for cash to bolster corporate ratings, sponsors are deferring some important asset expenditures and fire-selling others (pipelines, power plants, storage). This will catch up with the energy industry by winter 2003-2004, intensifying price and supply pressures.”

Even this year could see some price run-ups along with the summer heat. “Early reports of excessive summer temperatures may force a quick rebound back into the mid-$3.00 per MMBtu range, particularly with 30,000 to 40,000 MW of electricity generating capacity due on line during 2002,” the Schlesinger group said. Overall through 2010 the group expects prices to range generally from $3.00 to $4.00 per MMBtu.

BSA, which does a broad range of market research, including analyses for market power, cost of capital, cost of service, and purchase/sale strategies for regulatory filings, also predicts a collapse of basis with the arrival of more imported liquefied natural gas (LNG). Basis differences already are declining, as markets access multiple supply sources in the U.S. and Canada. “As more LNG enters markets, and more LNG receiving terminals are built on coastlines, familiar regional price differences will disappear. Japan’s gas market exemplifies this effect in the extreme — gas is worth the same in most cities with LNG receiving terminals.” BSA energy updates can be accessed at www.BSAenergy.com.

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