The natural gas industry faces several key challenges in the short- to medium-term, says Jen Snyder, North America natural gas principal analyst for U.K-based consulting firm Wood Mackenzie.

First, difficult conditions in the power market, including lower generation loads and new coal capacity coming online, are reducing demand for natural gas. Second, the wave of global liquefied natural gas (LNG) capacity and oversupply in Europe and Asia will depress natural gas prices worldwide and subsequently attract additional LNG cargoes to the U.S. And third, the time lag between drilling decisions and supply responses makes planning more difficult than ever.

“The natural gas industry is a victim of its own dramatic success in developing new supplies,” Snyder says. “The industry is now long on supply in a weak environment. We expect prices will not rebound until demand picks up, and we don’t see demand starting to pick up until 2012, when the coal (power generation plants) build stalls, and the global market starts to tighten and draws LNG cargoes away from the U.S.”

Until 2012, however, North America will remain an attractive market for LNG, despite available domestic supply of gas. The inflows are likely to be highly seasonable, meaning summer volumes will be considerably higher than the year averages. Also, any deepening of the global recession will drive more LNG into the highly liquid North American market. As global gas demand recovers, and liquefaction new-builds stall after 2011, flexible cargoes will seek higher value markets in Europe and Asia.

Meanwhile, further cuts in drilling can reduce supply, but they also put downward pressure on costs, she says. “So any price increase or perception of market recovery will be met by highly productive wells.”

Demand from the power sector will also affect recovery. “Contrary to conventional thinking, even as the economy recovers around 2010, Wood Mackenzie forecasts that demand for gas will lag, largely due to the displacement of gas from new coal capacity. It isn’t until the wave of new coal capacity ends around 2013 that we see gas picking up where the additional coal capacity comes off.”

—Jeannie Stell