Study sees gas price slump in Rockies next year

By OGJ editors

HOUSTON, Dec. 14 -- The Rocky Mountain natural gas market could experience a price slump by fall 2005 because a medium-term surplus is developing, said market research consultant Bentek Energy LLC, Golden, Colo.

Bentek reached that conclusion in a multiclient study entitled "Catch The Wave—Risks and Rewards in the Expanding Rocky Mountain Gas Market."

Porter Bennett, Bentek president, said, "We were quite surprised by study findings that Rockies gas prices could be much lower by this time next year, perhaps down into the low $3/MMbtu range." He referred to a spot Rocky Mountain price not tied to any particular hub.

"We expected that the new pipeline capacity out of the Rockies providing increased access to Midwest markets would improve the market for western gas production. Instead, any improvement in market access has been overshadowed by dramatic increases in competitive supplies from new production in West Texas and Oklahoma," Bennett said.

He acknowledged the study contradicts forecasts by other analysts who suggest US production is declining.

Bentek statistics indicate stable US production with Rocky Mountain states increasing gas production by more than 5%/year since 1995. During that period, Paradox basin production was up over 16%/year, Unita-Piceance basin production increased 20%/year, and Powder River basin production was up 73%/year.

The consultant's long-term base scenario forecast is for US gas supply to average 2.9%/year growth during 2005-10. Increases in Rockies and Midcontinent production are expected to account for virtually all of that growth.

US gas prices
Citing gas price increases since 2000, the study said, "With these high prices, it was only a matter of time before producers responded. That response happened much more quickly than expected. Producers throughout the US reacted to the higher prices by dramatically increasing drilling activity," the study said.

But, the magnitude of increased drilling activity only became evident in recent production volumes, the study said. During the first quarter, production levels in 19 of the 32 major US basins were up compared with the first quarter of 2003.

Rockies gas production rose 4% during the period with similar increases on track for the remainder of 2004. The more mature Midcontinent basins including Anadarko, Arkoma, Arkla, East Texas, and Fort Worth also demonstrated growth.

"Although much of this increased production seems to be from infill drilling and other
enhanced recovery techniques and thus may not be sustainable over the
long run, the short-run impact in 2005 and 2006 will be formidable," the study said.

Medium-term surplus
The increased production and slow demand growth due to a sluggish economic recovery set the stage for a gas surplus. Bentek's model of US and Canadian supply and demand predicts a gas surplus of almost 1.9 bcfd by late 2005.

"Furthermore, if recent production gains continue through 2005 and 2006, the surplus could be such that even lower prices may result. Producers in the Rockies could get a double-whammy," the report said, noting incremental Midcontinent production is directly competitive with Rockies gas for Midwest markets.

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