Washington (Platts)--21Apr2008

US natural gas prices, buffered now by rapid production growth from
shale and other unconventional plays, will regain their link to global crude
prices in roughly five years, a top energy consultant said on Monday.
Speaking to the American Association of Petroleum Geologists meeting in
San Antonio, Texas, Wood Mackenzie's vice president for North American Gas &
Power Ed Kelly said gas and oil prices will reconnect when North American
production is unable to keep up with demand from US power generators and the
country is forced to turn more toward liquefied natural gas imports.
When that turnover occurs, US natural gas prices will become linked to
worldwide prices for LNG cargoes, and those prices are largely set by indexes
based on crude prices.
"Domestic supplies could insulate [North American] gas prices from rising
oil prices over the next 3-4 years, but our analysis concludes that around
2012, there will be a re-linkage to the oil price," Kelly said.
"Under current market conditions with oil pricing over $100/barrel, a
relinkage, would mean gas prices of as much as $13 to $14," he said.
"High prices and technical drilling advances have spurred record drilling
levels and revived domestic US supplies and this will be enough to stave off
the re-linkage for the next three to four years," Kelly said.
"Natural gas is again the fuel of choice for power generation build for
the foreseeable future due to lead time constraints and the lack of viable
alternatives," Kelly told the meeting.
As the demand from power accelerates, gas supply growth will have
flattened, Kelly said, forcing users to rely more and more on LNG.
"The picture beyond 2011 remains uncertain due to the lack of viable
alternatives to continued reliance on natural gas for power load growth,"
Kelly said. "Relying on LNG will tie gas prices more tightly to oil. Hence in
the long term, if oil prices remain high, we could see gas prices following
suit," Kelly said.