Liquefied natural gas (LNG) can build U.S. gas supplies, but the country must become a more aggressive bidder, says Mark Papa, chief executive of Houston-based gas producer EOG Resources Inc. Not long ago, spot LNG cargoes were going to Spain where they could command $16 per thousand cubic feet (Mcf) and to the Far East for $13 per Mcf, he told Houston Producers' Forum members recently. "If we don't start competing, it will continue to go everywhere but the U.S., wherever it can be sold for top dollar...The idea that we have more terminals being built to increase capacity is not proving true. We have to start bidding against world markets," he said. The domestic natural gas decline rate is 30% per year. "This essentially means that if we didn't drill any gas wells in one calendar year, we would lose 30% of production," Papa said. "Now, all the rigs that can be employed are working and we're spending the capital, but how well are we really doing? Pre-Katrina, gas production in the U.S. had dropped 1.7%-which is better than the 3% decline last year." But producers' costs have grown 20% to 25%. "We're spending more but enjoying it less." Canadian production isn't growing this year. "You can't expect dramatic growth from Canada or the U.S.," Papa said. "During the next few years, growth is just unlikely to happen, and all the rigs are in the resource plays." Increased exports to Mexico have added further strain to U.S. gas supply. For 2006 and 2007, Papa does not foresee any help coming on the supply front. It isn't until 2008 that our "relief valve" begins via new LNG terminals. "But 10% of U.S. demand won't be supplied by LNG until 2010. "The next 24 months are going to be extremely tight, so how much relief can LNG really offer? It's only a partial solution to meet a percentage of U.S. demand. In 2025, 75% of domestic gas demand must still be met by indigenous sources." LNG prices are not likely to cause a significant diminution to North American drilling economics, he added. "Since most worldwide LNG is priced at 6:1 versus crude oil, North American gas will be tied more closely to oil. And because of world competition, a flood of low-cost LNG into the U.S. isn't likely." Meanwhile, he believes climbing gas prices will cause demand destruction. "We will have it. The only question is how much the prices will be and when the destruction will occur."
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