Scott Atha et al,

When I got this article through my email service I saved it because I thought it contained an interesting set of ideas which deserve further discussion. On various energy boards over the course of this year there has been a bit of a debate about the future of natural gas pricing in North America especially as that future relates to shale gas plays. You could say that there might be two armed camps on natural gas pricing: the first might assert that the low US rig count will eventually drive US production down while the second asserts that NA shale plays represent so much reserves that they will soon create so much supply that they will overwhelm NA natural gas demand.

To my mind, either scenario could play out or both. I say both because the ideas have different time frames so the former theorists could, for example, be right in the short term while the latter will be right in the long term. That's kind of my camp, incidentally.

To really know how things are going to work out, however, since supply and demand equations are solved for price and since cost basis and reserves (and or storage) have a lot also to do with price, for future pricing equations it is important to think about how much readily available future supply is available at what number.

Talisman is one company that is sort of telling us that:

http://www.ogj.com/index/article-display...

What Talisman is saying, simply put, is that longer term they have tremendous potential supply which they can bring on line profitably at $4 per mcf. We all know that they had to make some assumptions to come to that conclusion: rig rates, drilling cycles, completion costs, etc. But I'd say that even if their estimates are low by a very big double digit percentage, the break even point for drilling a new well is probably not much over $5.

Therefore, I would say that Talisman is telling us that the NA American natural gas business is completely changed from what we have know over the course of 2002 to 2008. That period was characterized by an inability to adequately supply the market in a structural sense (There will always be short term variability in any such proposition due to weather, short term prices, however.) Accordingly, during that period of about 7 years, we saw typical natural gas pricing go from $2 per mcf to $8 per mcf with some temporary spikes higher. It is my belief that the Talisman article is telling us (after consideration of the large NA shale reserves that exist and similar reports from others) that what we should expect to see in the next 7 years of the NA natural gas market is structural oversupply at any number over $6 per mcf (a bit arbitrary on my part but I've been out here a long time) and adequate supply at numbers between $4 and $6. Therefore, any very long term natural gas investor, in my estimation, should use 2010 to 2017 average price decks between $4 and $6 with the top or the bottom of the range being effected by any foreseeable shorter term patterns which will result in spikes to as low as $2 and as high as $10.

That analysis assumes that we cannot begin to export NA natural gas within the next 7 years and it also assumes that LNG imports, which are essentially nil, cannot fall any further. I hope that Scott, Ed Ajootian or any others interested in natural gas will comment specifically.

Regards,

Peter