Tight gas market is vulnerable

Boston

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”, said Mary Menino, ESAI senior analyst. “All indications are that gas production has fallen off year-on-year and that 2002 U.S. output will be down four percent to five percent.” Canadian production is also expected to decline, which coupled with higher domestic demand will mean exports may drop three percent to six percent.

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 cancellation 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,” said Menino. ESAI warned 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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