Prudential's Gas Market/Price Forecast ,
 Prudential Sees Bull Market Running Two More Years

With gas futures prices soaring past $5, now is not a bad time to raise price 
forecasts and expectations for the coming winter and next year. Prudential 
Securities did just that yesterday, upping its predictions on spot wellhead 
prices to $4.10 for the second half of the year, $3.55 for all of 2000 and 
$3.65 for 2001. 

"[W]e believe the natural gas industry could continue its bullish run for 
another two years or more and the next 18 months look like a 'lay up,'" the 
investment banking firm said in its latest quarterly report on natural gas 
fundamentals. Below average storage inventories and increasing gas-fired 
electric generation demand should keep the bull market running, the report 
stated. 

Prudential expects storage to end the injection season at about 2,660 Bcf, or 
11% below last year's level. "This is assuming that the average injection 
rate is at or above the eight-year historical average during that period, and 
so far this year refills have been at or below the historical average. 
Depending on the winter weather, the industry typically consumes 2,000-2,500 
Bcf out of storage inventories, which would likely bring storage levels down 
close to record lows next spring." 

Prudential expects supply tightness to continue even with the addition of the 
1.325 Bcf/d Alliance project, which is due to come on line next month. "[W]e 
question whether the Alliance pipeline will add incremental supplies to the 
U.S. or simply displace gas supply out of the Alberta region currently 
flowing down the TransCanada pipeline system." Prudential predicts Alliance 
will open up Oct. 2 with 600-700 MMcf/d of gas flowing. "The perception of 
the continued tightness in the gas supply picture is likely to result in an 
increase in volatility in natural gas prices." 

Prudential also estimates that 1.5 Bcf/d of gas demand has been added this 
summer by new gas-fired power plants going on line. "Over the past few weeks, 
over 2,400 MW of new merchant capacity has been added to the grid, equating 
to about 480 MMcf/d of capacity. Earlier in the summer, 3,600 MW came on line 
and another 1,780 MW started up in May. In aggregate, about 7,800 MW of new 
summer generation load could collectively consume 1.5 Bcf/d, which is likely 
to be diverted from storage injections." 

The firm estimates that wellhead deliverability will pick up significantly. 
The rig count has grown 48% since last year. Production from the deep-water 
Gulf of Mexico is expected to add 3.6-4 Bcf/d of new supply, "more than 
offsetting the deliverability decline, but shy of total expected new demand. 
We forecast gas demand will rise 3.1% in 2001, fueled by growth in merchant 
power generation." 

Prudential noted that on the books is another 37,000 MW of additional new 
gas-fired generation capacity to be installed next year and 43,200 MW in 
2002.
julie.mccoy@enron.com, steve.klimesh@enron.com, gary.sova@enron.com, 