Wood Mackenzie's Natural Gas Price Outlook Lower than Previous Estimates

Speaking at Wood Mackenzie's recent Houston Energy Forum, Jen Snyder, Head of Wood Mackenzie North American Gas Research, presented the company's new (lower than previous estimates and current market view) US natural gas price outlook, warning of a prolonged period of significant weakness.

Snyder stated, "We expect US natural gas prices to trade in the range of US $5.00 to US $6.00 mmbtu for the next five years. We are now in a position of significant potential over-supply brought about by the huge success experienced in the development of shale gas plays. Whilst most commentators are pointing towards prices settling at the marginal cost of the most expensive shale plays, we think this is a mistaken reading of the current and future environment. Simply stated, there is no requirement for the rapid near to mid-term development of some of the more expensive or challenging shales such as the Marcellus or Horn River; the market can be adequately supplied without these volumes. We believe that there are sufficient volumes available at a development break-even price of US $5.50 mmbtu or below for the market to balance."

Snyder continued, "In coming to our conclusions, we have taken account of both the decline in demand due to a prolonged recession to Q4 2010, new wind and coal-fired capacity coming online to serve power load and a significant drop in drilling activity arising from the lower prices. We have also factored in the positive impact on break-even costs due to cost reductions associated with this drilling slow-down and continued optimisation of drilling solutions at those plays that will continue to be aggressively developed."

Snyder also pointed out the potential of outside factors that have not yet been taken into account by the market. Snyder stated that, "The results of our Global Gas Optimisation Model point to significant import volumes of LNG over the next few years, despite the recent growth in unconventionals. There are a number of reasons for this. Existing offtake agreements for some suppliers make diversions from North America unlikely. In addition, other suppliers with flexible LNG will want to avoid jeopardising long-term contract prices in Europe and Asia, through a further weakening of spot prices in these areas, and the Qataris in particular are likely to direct some of their new volumes to the US market, where there are no long-term contract implications and a large and liquid market to absorb the volumes."

In addition Snyder pointed out that the US $5.00 to US $6.00 mmbtu was not a floor price and near term weakness could see prices undershooting this. Snyder commented, "Our near term forecast is predicated on a normal winter. While a severe winter could tighten up the market and provide some near term support, equally a mild winter could exacerbate the current position of over-supply and lead to prices into the US $4.00 mmbtu range in the near term. We have also assumed that gas demand benefits from a 1.5 bcf/d switch from coal to gas-fired power generation. If this fails to materialize, due to collapsing coal prices, this would further add to short-term price weakness."



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