Tight gas market is vulnerable, ESAI says

Boston, Mass., August 29, 2002 – The arraignment of the gas industry before the investment community, regulators, and the public continues to be headline news.

ESAI, in its latest North American Natural Gas Stockwatch 2-Year Outlook, suggests that the media spotlight has severely constrained the industry’s ability to develop new resources and head off an imminent supply crisis.

“Despite NYMEX strips well above $3.00, drilling activity has failed to pick up,” says Mary Menino, Senior Analyst at ESAI. “All indications are that gas production has fallen off year-on-year and that 2002 US output will be down 4% to 5%.” Canadian production is also expected to decline, which coupled with higher domestic demand will mean exports may drop 3% to 6%.

At the same time ESAI states that demand has continued to grow, largely as a function of increased volumes for power generation. Menino expects that the rate of growth in power usage will drop as the same capital and cashflow constraints prompt postponement and cancelation of plants not substantially underway today.

“However, the demands of gas-fired capacity added over the last three years will be sufficient to create a tight gas market in the face of expected production declines,” says Menino.

ESAI warns that the tight gas market over the next two years will be extremely vulnerable to price spikes associated with weather extremes, lack of transmission capacity, surges in power demand and changes in oil prices.

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