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NEW YORK (Reuters) - While the United States is sitting on a bounty of natural gas, the wild volatility of prices this winter could soon become a regular feature as growing demand begins to test supply, potentially curbing plans to increase exports and switch power plants to gas from coal.
Ample reserves have depressed prices since 2008, but sudden surges in consumption could jolt the market as early as 2015 when new exports coincide with higher domestic demand and lagging production for the fuel championed by President Barack Obama in his State of the Union speech on Tuesday.
Signs of strain have already emerged. The coldest winter in decades pushed prices for natural gas, which is used to heat homes and produce electricity, to four year highs and exposed inadequacies in the pipeline network. Some prices in the poorly supplied northeast of the country rose to all-time highs above $120 per million British thermal units on January 21, more than $100 higher than the previous week.
"As demand comes, we are sitting here fat, dumb and happy," said Vikas Dwivedi, an energy market strategist at Macquarie Group. "But you need a price signal ahead of time to stimulate the production growth."
Dwivedi predicts a first period of high prices to last for up to 6 months in 2016 and be followed by continual unpredicted surges as new projects demanding natural gas come online.
The current price spike and any future volatility will not alter the decades' worth of supply - thanks to new techniques such as fracking to release oil and gas from shale deposits - so the long-term outlook should remain the same.
Exports of natural gas to Mexico are expected to double in the next two years, just as companies begin shipping liquefied natural gas from new export projects to Europe and Asia. At the same time, more gas will be used at home in industry and electricity generation as coal plants retire.
In all, U.S. demand for gas, including domestic use and exports, could rise by 15 percent by 2018, according to Reuters estimates. Meanwhile, after a 20 percent growth in supply because of booming shale drilling since 2007, production increases are expected to slow to only 2.1 percent in 2014 and 1.3 percent in 2015.
In the State of the Union address, Obama called for more trucks to switch to natural gas and the creation of more jobs in the sector. He described natural gas as "the bridge fuel that can power our economy," on the way to a less carbon-intensive future.
But the big supplies have pushed down prices of contracts for delivery this year and in the future, dampening investment in pipelines and drilling, despite potential demand rises in the coming years. Prices for delivery in 2018 are lower than today, according to Reuters data.
The largest contributor to demand will be exports of liquefied natural gas (LNG). Spurred by the low cost of American natural gas compared with European and Asian supplies, more than a dozen companies have submitted proposals to build export plants.
The government, wary that exports will push domestic prices higher, has not said how many projects will be approved. But the four projects allowed so far have the capacity to export 7.1 billion cubic feet (bcfd) of natural gas by 2018, more than 10 percent of today's daily 70 bcfd supply.
Even though it is difficult to assess how many projects will be built - local permitting can be contentious, construction takes up to five years, and only one of the four approved projects is being built - LNG developers are signing deals with potential buyers across the globe. These deals depend on U.S. construction and export permits.
"U.S. natural gas prices have not yet priced a rise in demand because there are too many unknowns at this point. One unknown is the demand for LNG itself," said Abhishek Kumar, an energy and modeling analyst at Interfax Energy's Global Gas Analytics in London.
Indeed, export plans are risky and could come under threat if prices rise high enough for exports to not be viable for European and Asian buyers.
At the same time, U.S. exports of natural gas to Mexico are expected to rise by 3.5 bcfd by the end of 2014, nearly doubling from their current rate, according to the U.S. Energy Information Administration.
Coal plants retiring between now and 2018 to make room for cleaner fuels will be replaced by gas-generated power plants requiring 1.9 bcfd, according to the Thomson Reuters North America Natural Gas Research Team.
Though suppliers could ramp up production to meet new demand, they will be delayed if the required infrastructure is not built ahead of time or wells are not ready to flow gas.
Pipeline constraints like those seen between Marcellus shale fields centered in Pennsylvania and New England customers can cause a bottle neck during high demand periods, as evidenced during the arctic cold snap that led to record high prices in the region.
The number of rigs drilling for natural gas has fallen dramatically over the last two years as companies target more lucrative oil. In 2013, the rig count reached 349, its lowest number since 1995. In 2011, the rig count was near 1,000. Some analysts did note that rigs in use today are more efficient and therefore fewer are needed.
Producers currently have an incentive to taper back production to prevent flooding the market and driving down prices, but analysts fear the infrastructure such as pipelines may not be ready when demand peaks.
When it comes to predicting demand, much remains unknown. Should natural gas prices rise far enough to lose their competitive edge, potential customers may cut back. Aaron Calder, a market analyst at Gelber & Associates, said utilities who have switched from coal to natural gas may think differently should prices rise.
"Who pays for the very last molecule of gas sets the market, and that's power generators. We would see utilities hit the breaks on natural gas power generation if prices got too high," said Calder.
Editing by Edward McAllister, Peter Henderson and Grant McCool