The official Wood Mackenzie gas-price floor for 2010 is $4.51 per thousand cubic feet (Mcf) “with bias to the upside,” said Edward Kelly, vice president of North America gas and power for the Edinburgh, Scotland-based consulting firm. Kelly made his remarks at the Leaders in Industry Lunch in Houston in September.

The WoodMac gas-price floor is mostly based on the marginal cost of gas production and coal displacement from power generation. “The gas price is up from our analysis in August when we were looking at $4.45,” he said, noting marginal costs of production in the range of $1 to $1.50 support the price forecast.

“During the first week of September, we noted a cash price at Henry Hub of $1.85 per Mcf, but the cash price now is more than $2.”

The lack of economic growth has driven demand and prices lower, said Kelly. “Industrial demand is one of the leaders to the downside, with power demand following shortly thereafter.” Although industrial demand is no longer declining 3 billion cubic feet per day, it remains flat.

“Power is a different story,” said Kelly. “The structural nature of power demand for the next two to four years will cause a gas-demand decline of about half a billion cubic feet per day.”

Two factors are causing the demand drop-off: zero to somewhat negative U.S. economic growth, and the 19.5 gigawatts of new coal-fired power-generation plants scheduled to come online during the next couple of years. The new capacity is based on plans from the late 1990s and early 2000s when the gas price was high and volatile. The first year for positive gas demand in the power-generation space is 2013.

Kelly said the U.S. has a “high probability of hitting the storage maximum,” as market fundamentals begin to tighten in October. The market should factor in the possibility that pipeline operation-flow orders will “cram gas back into producing regions which otherwise has nowhere else to go.”

On the upside, October injection rates may start to reflect shifting fundamentals, including coal displacement, Canadian imports that could begin to decline from September’s high levels, and further delays in liquefied natural gas (LNG) imports.

Yet, Kelly forecasts an uptick in LNG imports in the medium term. “It’s kind of inevitable at this point. All it takes is completion of projects nearly done. Between 2011 and 2012 we will hit a peak of LNG imports into North America of approximately 4.6 billion cubic feet per day, before it starts to decline again when the rest of the world demands more LNG.”

On an annual basis, gas production in 2009 could be flat to slightly down from 2008, but it won’t vary much, he said. “However, 2010 will be different. On average, it will be down 3.6 billion cubic feet, given the factors we are seeing now.”

Production shut-ins and curtailments are a fact of the current market, he said, and are suppressing about half to three-quarters of a billion cubic feet per day, but that supply can come online fairly quickly if prices rebound.

Also, smaller storage volumes and declining Canadian imports could support a price rebound, but a mild winter could negate any significant increase. Kelly predicted that next year’s price will be much less than producers hope for.

“Forward oil still props up forward gas, but it is an unprecedented spread in width and duration, in our analysis,” he said. “This shows our belief that the next increment of gas can be found much easier than the next increment of oil. But if the shales disappoint, and there is still room for that, then the gas price will more quickly follow oil upward.”

Kelly said that in the past, it was difficult to point to specific plays where production had shifted market fundamentals. But today, analysts “can physically point to gas plays that have the potentiality to satisfy demand for 10 to 15 years,” a phenomenon different from the world’s oil situation.

Also, operators have succeeded in lowering costs and are drilling to hold production levels, while long-term demand “has rarely been more questioned.”

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