By Joe Silha

 

NEW YORK, April 30 (Reuters) - Even if the U.S. economy stages a strong recovery this year or next, natural gas prices could stay relatively low for years as huge untapped reserves of shale gas stand ready to limit gains.

 

Shale gas, trapped in sedimentary beds making it more costly to extract than traditional reserves, has become a big factor in growing supplies this decade as conventional onshore and shallow offshore wells decline.

 

"We think shale gas resources and the development of the technology to extract them at lower cost is a complete game changer for the North American gas market," said said Jen Snyder, principal at consultants Wood Mackenzie in Boston.

 

"Given the magnitude of the resource base and what's happening to costs, we're looking at a five-year-plus period of lower prices."

 

(To view a map showing rising shale reserve estimates, click: http://link.reuters.com/fur74c )

Not long ago, some experts feared domestic gas producers were in a losing struggle to boost output due to rapidly depleting conventional supplies.

 

While producers were well aware of the vast reservoirs of shale gas, much of that supply was thought to be uneconomical until recent advances in horizontal drilling and rock fracturing techniques made shale production more viable and helped boost reserve estimates.

 

The United States is thought to have between 1,700 trillion and 2,200 trillion cubic feet of technically recoverable natural gas reserves, or enough gas at current production rates to supply the country for more than 90 years, according to industry estimates.

 

Shale reserves make up about 28 percent of the total, but that share is likely to grow in coming years as big new plays like Marcellus in Appalachia are more fully defined.

 

Analysts say gas in these shale formations, typically close to existing drilling and pipeline infrastructure, should be easy to tap when prices eventually recover.

 

"The moment gas prices rebound, drilling activity will rebound, and we know we can grow supply now with all these shale plays," said John Freeman at Raymond James in Houston.

 

PRICE PROBLEMS NOW

 

Natural gas, which burns cleaner than coal or oil, currently helps meet about 22 percent of total U.S. energy demand. That figure is expected to grow as the nation moves toward cleaner alternative fuels.

But after three straight years of domestic production gains, primarily due to increased output from shale wells, current gas prices have become a deterrent to development and production is expected to fall this year and in 2010.

 

Benchmark Henry Hub gas in Louisiana is now selling for about $3.50 per million British thermal units, down a whopping 75 percent from last summer's peak above $13 and well below the $4 to $5 break-even cost to produce most shale gas.

 

Analysts say the collapse in prices and tight credit during the economic crisis have forced many producers to scale back drilling or cut output from less profitable wells.

 

Last week, oil services firm Baker Hughes said the number of rigs drilling for natural gas in the United States fell to its lowest level in more than six years.

 

Most analysts expect year-on-year output declines soon, probably by late spring or early summer, as the number of gas rigs drops below 700. That should turn output negative and tighten the supply-demand balance.

 

As the economy picks up later this year or in 2010, demand for gas should too. Many analysts see prices rebounding above $6 next year, according to a recent Reuters poll, and that level should stir producers back into action.

 

"If service costs fall 30 percent from peak by the end of the year as expected, every shale play will work at $5, and definitely $6 will get the rig count back up to a level where you'll be growing supply again," Raymond James' Freeman said.

 

While it's not exactly a repeat of the "gas bubble" -- the oversupply in the 1990s that kept prices cheap for a decade -- the overhang in shale supplies has the potential to moderate domestic gas prices for a long time, analysts say.

 

"We see the market relatively well supplied even out to 2030. We don't see a situation where the U.S. will have to rely on a tremendous amount of imported gas to meet demand growth," Wood Mackenzie's Snyder said. (Reporting by Joe Silha; Editing by Matthew Robinson and David Gregorio)