Natural gas infrastructure development on hold


The gas industry’s ability to develop new resources and head off an imminent supply crisis is greatly hampered by reduced cashflow and lack of access to new capital. Market participants are afraid (or unable in a cash-constrained environment) to respond to above $3.00/MMBtu longer-term gas prices on NYMEX with aggressive exploration and production programs as they did beginning in spring 2000. Participants are uncertain with whom to strike deals, as credit worthiness becomes an ephemeral measure (though growing reliance on “sleeving”—contracting with less creditworthy entities through creditworthy entities—is bringing some relief).

Meanwhile all indications are that gas production has fallen off year-on-year and that 2002 U.S. gas output will be down 4 percent to 5 percent. Canadian output is similarly afflicted and with rising internal demand for power generation, imports of Canadian gas are expected to be 4 percent to 6 percent lower this year than last.

This sets the stage for tightening gas supplies in 2003, with little hope for relief from new gas supplies until at least the second half of 2003. During this period the gas market will be extremely vulnerable to spikes associated with weather, lack of transmission capacity, surges in demand for power generation and changes in oil prices, ESAI’s price forecast assumes seasonable weather, but a really cold winter (or very hot summer), would lead to substantially higher prices.

Set back but not out

Gradually the industry will extricate itself from the credit morass and invest in the drilling that will lead to expanded output. Current cash and futures prices are more than adequate to support new drilling. Our forecast is that the industry will begin a sustained expansion of exploration and development activities in the fourth quarter of this year, which will begin to bear fruit in the third quarter of 2003 and continue to expand through the following year.

Meanwhile, there will be an easing of demand growth. Growth in gas demand for power generation will slow, as new power plant construction is postponed or canceled due to capital constraints and a generally more risk-averse attitude on the part of investors, developers and consumers. Plants, which were expected in the second half of 2003, will now likely be postponed several years, or cancelled. Industrial gas consumption will increase, but only modestly given expected gas price levels and the questionable economic recovery. While shrinking heavy fuel oil demand in the U.S. and Europe will make fuel oil prices relatively attractive as an alternative to gas, the trend towards gas in the power sector will persist.

Regional differences to become less pronounced

In a competitive market, price signals are supposed to indicate surpluses and deficits. These signals seem to be working—albeit more slowly than some expected—in regards to regional transmission deficits. New supplies (Canadian and Rocky Mountain primarily) and additional transmission capacity will begin to reduce the basis with Henry Hub of spot prices at key hubs over the next two years. In Regional Outlook the future bases in the New England, New York City, the Rocky Mountain producing region and the Southern California border are projected based on the impact of new and expanded pipelines.

For more information about ESAI’s latest “North American Natural Gas Stockwatch 2-Year Outlook,” contact Patsy Norton at 781-245-2036, or e-mail


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