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Natural-Gas Prices May Fall Next Year On Supply Surge

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Natural-Gas Prices May Fall Next Year On Supply Surge

August 4, 2008; Page C8

U.S. natural-gas prices could be in for a fall next year, when additional output from elsewhere in the world should enter the market.

Overseas production of gas that is supercooled into liquid form for ocean transport is set to increase by about one-third, to more than 11 trillion cubic feet by the end of next year, according to Waterborne Energy Inc., a Houston research firm that tracks the world-wide liquefied-natural-gas business. The U.S. sees LNG imports in 2009 surpassing last year’s record levels.

[Natural-Gas Futures]

“There is a huge bubble of LNG about to hit the market,” said Waterborne President Steven Johnson.

This global surge coincides with a U.S. production boom, inflated by unexpectedly large amounts of so-called unconventional gas from shale deposits in Texas and Louisiana. Emboldened by that windfall, U.S. producers are pressing Congress to help expand the market for gas, pointing to forecasts showing that growth in domestic output will outstrip demand this year and next. A U.S. market well supplied with domestic gas, backed up by a ready supply of fresh LNG output from overseas, would likely keep prices low.

U.S. natural-gas prices, at $9 to $10 a million British thermal units, have fallen more than 30% in the last three weeks, although they are up 49% from 52 weeks ago.

Most liquefied natural gas is consumed in Europe and Asia, where a dearth of domestic supply and storage capacity tends to keep prices 50% to 100% higher than in the U.S. These high prices lured LNG shipments away from the U.S. this year, damping a trend of rising imports. A record 771 billion cubic feet of LNG, enough to heat about 12 million homes, reached the U.S. in 2007. LNG imports are down 60% this year, according to the Energy Information Administration.

Producers in Qatar, Russia, Indonesia and elsewhere are expected to increase global LNG production by about 34%, bringing nearly 2.8 trillion cubic feet a year of new supplies online by the end of 2009, Waterborne said.

Qatargas — a partnership of Qatar Petroleum, Exxon Mobil Corp. and several other oil companies — says it plans to quadruple LNG production to more than two trillion cubic feet. Qatar Petroleum has a separate venture with Exxon Mobil, called RasGas, that plans to expand LNG production by about 75%, to more than 1.74 trillion cubic feet by the end of 2009.

An additional 197 billion cubic feet of LNG is expected from a Nigerian project led by the national oil company and Royal Dutch Shell PLC, while the BP PLC-operated Tangguh field in Indonesia is expected to produce about 364 billion cubic feet of new LNG by mid-2009.

In Russia, state-owned gas firm OAO Gazprom is partnering with Shell and Japanese trading firms Mitsui & Co. and Mitsubishi Corp. to develop the Sakhalin 2 oil and gas field, with 460 billion cubic feet a year of LNG expected to come online next year. About 158 billion cubic feet a year of LNG are expected to come out of a Total SA-led project in Yemen by July 2009, according to Waterborne.

While most of the new LNG is slated for terminals in Europe and Asia, the large flow of new production is likely to saturate those markets and what is left over will come to the U.S., said Mr. Johnson.

Not everyone expects a flood of LNG into the U.S. “I think [2009] is going to be more like this year than last year,” said Zach Allen, an analyst at Pan EurAsian Enterprises, an energy-research firm in Raleigh, N.C.

Although there will be more LNG production next year, there will also be stiff competition from new import terminals in Europe and high prices in Asia. Robust domestic production will likely keep U.S. prices relatively low and unattractive, he said.

Write to Cassandra Sweet at [email protected]

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