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Rockies Face Challenge Keeping Pipe Additions on Pace with Production Growth

Producers in the Rocky Mountain region could be facing that age-old problem of inadequate pipeline takeaway capacity and widening basis later this year as production continues to grow at a rapid pace, according to Golden, CO-based consulting firm Bentek Energy.

"A lot of it, of course, is timing," said Bentek founder Porter Bennett. "There's a lot of gas over there right now. There was probably close to an incremental 300 Bcf of deliverability added in 2005, so almost 1 Bcf/d of incremental production came out of the western basins last year. There was not a corresponding increase in demand in California, in the Pacific Northwest or locally to consume it."

Gas flows on interstate pipelines in the region last year showed production grew in nearly all of the regional basins led by a 16% increase in the Uinta and Piceance basins to 1.6 Bcf/d, according to gas pipeline data and state reports. Gas flows out of the Green River Basin were up 3% to 3.7 Bcf/d with volumes at 3.9 Bcf/d in December. Production in the Wind River Basin rose 6% to 0.693 Bcf/d, and the San Juan Basin was up about 0.1% to 4.229 Bcf/d.

While the Powder River Basin showed a 3% drop in 2005 to 1.019 Bcf/d, Bennett expects it to rebound in 2006. Permitting is finally catching up with planning, he said. Powder River production once again is on the rise or will be in the next few months.

"Drilling already has been very successful throughout the region and there's no reason to think it won't continue to be successful," he said. "We already have a build-up of about 1 Bcf/d for 2005. Unless you increase eastbound pipeline capacity, there's no demand increase in California that is going to absorb that gas. We're expecting growth to be at least another 1 Bcf/d in 2006."

EnCana Corp., the region's largest gas producer, will be a big part of the growth in 2006 and beyond with its two major plays, the Jonah Field in southwestern Wyoming and its operations in the Piceance Basin. Next month, the Bureau of Land Management will decide whether to allow EnCana and BP to produce nearly 8 Tcf of natural gas out of Jonah in Sublette County, WY.

Given a favorable decision, EnCana said it expects its Jonah production, currently 450 MMcf/d, to double over the next decade. The program includes drilling about 3,100 additional gas wells. Currently EnCana is running about eight rigs and plans to increase that to 15 or more under the program with wells spacing around 10 acres in some areas.

Meanwhile, EnCana expects its Piceance Basin production to increase to about 360 Bcf (986 MMcf/d) this year from 300 Bcf in 2005, said EnCana spokesman Doug Hock. EnCana has booked about 1.6 Tcf of proved reserves in the Piceance Basin, but believes there's a potential for another 4.6 Tcf.

The company is unwilling to say just how much production will be added in 2007 and 2008, but most experts believe there will be even faster growth out of the basin once Entrega compression enters service in 2007 and other pipeline expansion are in place.

"We're ramping up production in an incremental fashion this year," said Hock. "Over time our activity is going to shift to the north and the west in the Piceance. We have the North Parachute Ranch that we own, which is about 45,000 acres."

EnCana said Piceance Basin gas flows this year into the 136 mile, 36-inch diameter first segment of the Entrega Gas Pipeline from the Meeker Hub in Rio Blanco County, CO, to Wamsutter in Sweetwater County, WY, probably would not reach more than 350-400 MMcf/d given the lack of compression. The first segment of the line is expected to begin flowing gas in mid-February after FERC authorized service to begin late last month.

At Wamsutter, Entrega will interconnect with Wyoming Interstate Co. (WIC) and Colorado Interstate Gas., but it's unclear at this point how much gas will be flowing to Wamsutter initially and how much capacity will be available downstream of Wamsutter to the Cheyenne Hub until the 191-mile second segment of Entrega from Wamsutter to the Cheyenne Hub is finished in December.

WIC has a 333 MMcf/d expansion of its own scheduled to enter service in March. That pipeline will basically parallel Entrega, but also will end at Wamsutter. Shippers who signed up for capacity on the WIC project most likely will be taking up much of any available capacity downstream of Wamsutter on the WIC system.

After these projects enter service, it's uncertain how much pipeline capacity will be available to carry the gas out of the region to eastern markets. It will be a long wait until any additional eastbound capacity is put in the ground downstream of the Cheyenne Hub.

"Cheyenne Plains can absorb some of the growth, but not all of it," said Bennett, noting that Cheyenne Plains was running at about a 45% load factor in late December. The El Paso subsidiary recently completed its second phase expansion bringing its capacity to 730,000 Dth/d from about 560,000 Dth/d last year.

"This is why the [Kinder Morgan/Sempra] Rockies Express project is important and why the Continental Connector project from El Paso is important to get gas out of the West," he said. "But I don't think either of the big ones going East will be online until late 2007 or 2008. The question is will the production outstrip the timing of those pipelines.

"We could end up in 2007 with a basis problem in the Rockies again," said Bennett. "It could even happen in 2006. It depends on what demand is like. If it's a warm summer, maybe that won't happen."

He noted that gas storage levels in the West are very high right now, 27% above the five year average. "You need to have a place to put all this gas. If you don't have much storage space and you don't have any capacity out of the region, what do you do with the gas? That could cause basis problems."

The January bidweek price spread between the Opal Hub and the Henry Hub already was a massive minus $2.58, but the relationship is still suffering from the impact of shut-in Gulf gas production. CIG was minus $2.55 in January. That compares with an average monthly bidweek price difference of minus $1.00 and minus $1.14 for Opal and CIG, respectively, compared to the Henry Hub cash index over the last five years. The average CIG price spread last year was minus $1.65 compared to Henry. In 2004 it was minus 96 cents.

Supply growth in the Rockies and elsewhere may come as quite a surprise to market experts this year, particularly when combined with high storage levels. According to Bentek data, without the impact of the hurricanes on natural gas production in 2005, total gross U.S. production in the Lower 48 states would have grown about 2%. Gas flows on interstate pipelines across the U.S. show gas production was down only 0.2% in 2005, and Bennett said he's expecting production to grow at a healthy clip in 2006, most likely led by production in the Rocky Mountain region and in North and East Texas.

It remains to be seen, however, whether that production growth will be able to outpace the demand growth from new gas-fired power generation. The Energy Information Administration is predicting that domestic dry natural gas production will jump by 3.8% this year to 18.78 Tcf, while domestic gas demand will rise only 0.2% to 22.47 Tcf.

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