The U.S. natural gas industry still faces a few challenges, although the ability to increase production is not one of them. First comes getting the point across that we have enough supply for 100 years and can replace some oil and coal in power generation and transportation. Second, in the near term, is the threat to gas prices from oversupply. What can producers do? Should they keep leasing and drilling to show investors growth, or hang back?

In October, several positive events caught our attention. National Public Radio aired a series explaining the importance of gas shales. It was accurate and—best of all—generally quite positive.

Royal Dutch Shell chief executive Peter Voser touted natural gas while speaking at the Woodrow Wilson International Center for Scholars in Washington, D.C. He said Shell will produce more natural gas equivalent energy in 2012 than oil. Shell is the biggest liquefied natural gas and gas-to-liquids producer in the world.

More than 1,300 people attended Hart Energy Publishing’s one-day conference in Pittsburgh on the Marcellus shale.

Finally, during a visit to New Orleans, President Obama, speaking about pending energy and climate legislation, responded to an audience question by saying, “What I think we need to do is increase our domestic energy production. I’m in favor of finding environmentally sound ways to tap our oil and natural gas.”

There you have it. The natural gas message has made it all the way to the White House. Gas producers are no longer on the sidelines.

All this anecdotal evidence adds up. Dare we say we have reached a tipping point?

And yet, it remains to be seen whether Obama’s words lead to the gas-positive legislation we need for the sake of our industry, but more important, for the sake of the environment.

In mid-October, U.S. gas in storage hit a worrisome all-time high of 3.7 trillion cubic feet (Tcf), closing in on estimated full capacity of 3.8 Tcf. That’s good for consumers, but bearish for producers. Right on the heels of that oversupply, however, demand kicked in. The cold came early to the gas-consuming Northeast, with snow obliterating the fallen maple leaves and Steelers’ fans shuddering in 40-degree weather.

Meanwhile, whether storage is full or not, producers continue to ramp up their gas plans. Hess Corp. and Newfield Exploration Co. announced their new joint venture in the Marcellus on about 140,000 acres, with drilling to begin in 2010.

Drilling activity in the play also continues to gain steam. Year-to-date, some 651 horizontal-well permits have been issued in the five most active counties: Bradford, Tioga, Washington, Greene and Susquehanna, according to Pennsylvania authorities. The most active drillers are Chesapeake Energy Corp., Range Resources Corp. and Fortuna Energy Inc.

But does success breed excess? “This sector has sown its own ‘weapons of gas destruction,’ ” noted Liam Denning, Wall Street Journal columnist, in remarks at the IHS Herold Pacesetters energy conference in September. “It’s been outspending cash flow since 2002 and it looks like it may again in 2009. It’s like the airline industry—plagued by overcapacity yet always able to go to the market and get more capital. If technology has been an enabler, so has access to capital.”

Since 2005, construction of gas-fired power-generating plants has increased more than 20% per year, reports Industrial Info Resources.

“While we do not expect new construction activity in 2009 to surpass last year, the number of projects under development continues to grow. Right now, projects currently on the books for kickoff by the end of the year could represent a 52% increase in construction kickoffs over the previous year.” Gas continues to take some market share from coal.

Even as gas demand may be rising due to these trends, however, the slowdown in drilling, and production curtailments, make the supply outlook murky in the near term.

We do know that U.S. gas production fell a bit in September, on a month-over-month basis, by about 0.7 billion cubic feet (Bcf) a day.

“That said, the downtick was at least in part driven by infrastructure maintenance, namely in the Rockies….We recommend being mindful of the underlying trend and continue to expect difficulty in industry’s ability to get production growing again,” said a Stifel Nicolaus & Co. report.

“For 2009, we estimate an oversupply of 2.7 Bcf a day, down from 2.9 Bcf a day previously, while for 2010, we estimate an undersupply of 1.1 Bcf a day. We remain confident in our call for a tight natural gas supply-and-demand environment in 2010.”

Natural gas price and deliverability remain key concerns for producers, government officials and consumers. For the industry, it will be two steps forward, one step back—but at least, it seems we are marching in the right direction.

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