A rebound in U.S. natural gas prices and drilling activity may be three or four years away, a Wood Mackenzie energy analyst told attendees at the Colorado Oil & Gas Association’s Rocky Mountain Energy Epicenter Conference.

Jen Snyder, who heads the North American gas research arm for Wood Mackenzie, offered her assessment at the 21st annual conference in Denver.

Wood Mackenzie analysts now see U.S. gas prices averaging $4.50/MMBtu in 2010, gaining only a quarter to average $4.75 in 2011, Snyder said. By 2012, the analyst is predicting domestic gas prices may rise slightly above $5/MMBtu.

“Fundamentals will suppress upstream activity levels” and won’t rebound before a full economic recovery “takes hold in 2012 or 2013,” said Snyder. “We see strong growth in the gas sector after 2012.

Over the next three or four years, the UK-based analyst sees four factors limiting a rebound in U.S. gas markets:

Domestic gas producers have become more choosy about where and what they drill, Snyder noted. However, even though gas prices have fallen dramatically in the past year, explorers will continue to drill in the shale plays. Some of the drilling is defensive, she said, because producers have to drill to protect their leaseholds, which they likely secured at a premium when gas prices were higher.

U.S. gas drilling is predicted to climb slowly over the next three years, with the gas rig count reaching about 1,100 onshore by 2012, according to Wood Mackenzie. The domestic gas rig count may move no higher than 740 rigs in 2010, which would be slightly higher than the current rig count, Snyder noted.

However, more rigs are not necessarily the answer anymore, she added. Because of gains in drilling technology, producers are finding more gas at less cost. An example is Southwestern Energy Corp.’s work in Arkansas’ Fayetteville Shale, said Snyder.

The Fayetteville Shale and others “have become economic, even in a low-price environment,” she told the audience. “In the past two years Southwestern’s costs have dropped to less than $3.50/MMBtu” from $5/MMBtu. Those costs should continue to fall as more drilling and new technology takes hold, Snyder said.

There also may be better news for producers in the federal legislation now being considered on climate change, she added. If natural gas gains a more favorable role in the legislation, she said producers should look for gas prices to rebound faster.

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