All signs point to continued high natural gas prices, and continued challenges to adding gas supply, three speakers said in a wide-ranging, Q&A-style discussion at the IPAA's midyear meeting last month.

Natural gas supply is decreasing in Canada, said John Richels, president, Devon Energy Corp. 2007 daily production could be down by as much as 1 billion cubic feet, as the year-over-year rig count is only half what it was in 2006, and the heavy-oil-sands projects are using more gas.

"A number of companies, including our own, have scaled back by a significant amount," he said, given competition for, and the high costs of, personnel, supplies and services.

"This is having an almost immediate effect on gas supply. It's a fairly mature basin-unlike what we said back in the 1990s, when we thought it was under-developed. If we don't see a significant increase in drilling activity this winter, the supply decrease will be all that much greater."

Richels said it looks like the MacKenzie Valley pipeline project is "just a pipe dream for now. The Canadian government has dropped the ball and the industry can't make the economics work."

Merrill Lynch vice chairman Tom Petrie noted that, when trying to look at some producing properties for possible sale in Canada recently, industry feedback indicated that gas demand in the oil sands is up, and so, some producers were not as keen to sell their producing assets.

This is while drilling for gas increases in the U.S., yet production is still fairly flat.

That's why Chesapeake Energy Corp. chief executive Aubrey McClendon remains bullish on gas prices. "Even as the industry drills more gas wells, over time the reserves added per well have been decreasing. But, supply seems to be doing better right now than statistics would indicate as drilling in these resource plays increases. We have another 4,500 wells to drill in the Fayetteville alone."

Much of the increase in gas drilling in the past few years, especially in major resource plays, is due to closer well spacing, McClendon said. "So, some of the good news may abate as down-spacing gets down to its final limit. At a certain point there is not much more you can do. Once a field depletes, it depletes-regardless of the operator or the technology."

The U.S. appears to have flat-lined on gas supply, Richels said. "We could go up a percent or down a percent, but we are drilling twice as many gas wells now as in 2002, and the supply has plateaued."

Liquefied natural gas (LNG) imports will likely cap natural gas prices, but at a higher level than where they are today, Petrie said, noting that global competition for LNG supplies is heating up.

"By the end of this decade, we will have ridden the natural decline rates on conventional gas that much further down, so we'll need LNG-it will be a pretty competitive global market."

There will be price tension around LNG on both sides of the equation, creating a ceiling and a floor, Richels said, noting that Europe is getting more nervous about gas supply, what Russia will do, and whether an OPEC-like cartel of major gas-reserve-holders is formed.

If more gas producers form MLPs, what might that do to U.S. gas supply? Although MLPs are not exactly like Canadian royalty trusts, the speakers drew some parallels. Richels questioned, if most cash is distributed to unit-holders instead of being reinvested in the ground, how long can that model sustain itself?

"The Canadian royalty trust phenomenon lasted much longer than anybody would have thought-and was successful until the government acted."

Petrie said, "The wave of interest in MLPs has the potential to become a tsunami. There is broader interest from the financial community than anything I've seen since the 1980s. It's the American way-we do something until we kill it.

"And given the tone in Washington, that tone has to be factored into the longevity of this format as well."

McClendon said, "I like any entity that buys up assets for $4 an Mcf (thousand cubic feet) and who consolidates some of my assets and John's assets."