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Kinder, Sempra Secure Commitments for $4B Rockies Express Project

One of the largest gas pipeline projects in the last two decades took a major step forward last week as Kinder Morgan and Sempra Energy announced that they secured shipper commitments for the entire 1.8 Bcf/d of proposed firm transportation capacity on the 1,323-mile, $4 billion Rockies Express pipeline project, which would bring desparately needed Rocky Mountain natural gas east to energy-starved markets in the Midwest and Northeast.

The largely supply-driven project, which will extend from supply basins in Colorado and Wyoming to Clarington, OH, and perhaps beyond, drew an interesting mix of large natural gas producers with unusual endorsements from the state of Wyoming and a capacity deal with the U.S. Interior Department's Minerals Management Service. MMS intends to ship up to 50 MMcf/d of royalty in-kind gas on the system.

Seldom has there been an energy project put together so quickly with the cooperation of so many. The project's sponsors said agreements also have been reached that will enable the upstream Entrega and Overthrust pipelines to connect with and extend the supply reach of Rockies Express. All of the related projects are expected to be brought online in segments with final completion of the Rockies Express system by June 2009.

"Rarely has a single pipeline had the potential to have such a transforming effect on the North American natural gas industry," said Kinder Morgan Energy Partners (KMP) CEO Richard Kinder, predicting that gas consumers across the country would see lower gas prices once the pipeline is built.

It would provide eastern markets greater access to 200 Tcf of potentially recoverable Rocky Mountain gas resources, positioning the Rockies to become "the most significant natural gas play in the United States," he said.

With more than 25 interconnects to intrastate and interstate pipelines along its route, Rockies Express would have a significant impact on the current price disparity between Rocky Mountain basins and other parts of the country. "Anytime you build a real big pipeline, a 42-inch diameter pipeline, across America from the Rockies to Ohio we suspect that it would tend to lower the price of gas in those regions that the pipeline is entering. At the same time it should raise the price of gas for Rockies producers," said Scott Parker, president of Kinder Morgan's natural gas pipelines group.

It was less than a year ago -- before the hurricanes -- that KMP started to sound out support for a west to east long line. Sempra Energy quickly stepped in as a one-third owner. Then the hurricanes hit, crippling production in the Gulf of Mexico, sending natural gas prices soaring and blowing out the basis differential between western supplies and eastern markets served by the Gulf. What had been potentially a good idea became an obvious necessity.

Furthermore, Rockies Express could serve as a "catalyst" for other natural gas projects along its geographic footprint, said Kinder. "Our next goal is to develop storage along the pipeline to provide additional growth opportunities for our shippers and investors," he said. "Discussions with shippers also indicate there is an opportunity to extend the original scope of the project further eastward, and we will begin working shortly to secure such commitments."

George Liparidas, president of Sempra Pipelines & Storage, said, "Not only will the project provide benefits for producers and end users, but also for the communities along the pipeline route by generating property tax payments, employment opportunities and increased spending on local goods and services."

EnCana deserves a lot of the credit for getting this supply-driven pipeline project off the ground. EnCana will hold the largest capacity position on Rockies Express with a 10-year contract for 500 MMcf/d and without the impetus from EnCana's 330-mile 1.5 Bcf/d Entrega project, phase I of which was brought into Feb. 24, Rockies Express may have remained just a pipe dream.

A sale agreement also has been signed that makes Entrega the upstream leg of Rockies Express, extending from the the Meeker Hub in the Piceance Basin in western Colorado north to Wamsutter in south-central Wyoming and then east to the Cheyenne Hub in northern Colorado where it will connect with the Rockies Express mainline.

In addition, Rockies Express has executed binding agreements with Questar Overthrust Pipeline Co., a wholly owned subsidiary of Questar Corp., for a long-term lease of 625 MMcf/d of capacity on Overthrust that will extend the reach of Rockies Express from the Wamsutter Hub to the Opal Hub in western Wyoming. The capacity lease on Overthrust can potentially be expanded up to 1.5 Bcf/d.

The agreement enables Overthrust to begin a $200 million expansion project that will include a 77-mile 36-inch diameter pipeline extension from the Kanda Station, near Rock Springs, WY, to an interconnection with Entrega at Wamsutter. As a result, Overthrust will become the westernmost segment of Rockies Express, providing seamless transportation from Opal to eastern Ohio.

The project sponsors also said they owe a "debt of gratitude" to the Wyoming Natural Gas Pipeline Authority (WPA), which has been an advocate of Rockies Express since the project's inception, from an initial firm capacity commitment through attendance at shipper meetings to support the project. The MMS also provided support. Major and independent producers form the bulk of the remaining firm commitments on the project.

"You look at the commitments we got from EnCana, ConocoPhillips (400 MMcf/d), BP (300 MMcf/d), EOG (50), Sempra (200), Ultra Petroleum (200), Barrett [Williams] and others; It is a supply-driven project with major producers standing behind it," said Parker.

One Rockies producer said his company chose Rockies Express over El Paso's competing Continental Connector project for several reasons. Continental Connector would bring Rocky Mountain gas from the Cheyenne Hub across Kansas, Oklahoma and Arkansas to multiple downstream pipelines serving the Southeast, Northeast and Midwest. It also would pick up supply from the growing producing areas in North and East Texas. However, the producer said it appeared that El Paso's main goal was to fill its existing pipelines -- Tennessee Gas and Southern Natural -- whereas the Rockies Express project appeared to be directly aimed at a market that needs supply.

Continental Connector would be going into Tennessee Gas Pipeline, which is an "old pipeline with lots of compression and isn't very efficient," the producer said, adding that fuel charges on Tennessee are very high (5%). That can add up to a lot of money in this marketplace, he said.

He also said that there is a perception currently that Rockies Express could "change the dynamics of the national grid and marginalize some of the older pipelines," such as Texas Eastern and Columbia Gulf.

"We think we've picked a winner," he said, noting however, that Continental Connector still may be a viable addition to the pipeline grid because of the tremendous market needs in the Southeast.

Kinder Morgan said it will charge a recourse rate of about $1.07/Dth on Rockies Express. However, most shippers have signed agreements with 10-year terms under negotiated rates.

KMP will operate Rockies Express and will own two-thirds of the project, while Sempra Energy has a one-third ownership stake. KMP and Sempra intend to file an application with the Federal Energy Regulatory Commission (FERC) in May for the first 710-mile pipeline segment of Rockies Express, from the Cheyenne Hub in Colorado to an interconnection with Panhandle Eastern Pipeline Co. in Audrain County, MO.

To help minimize the environmental impact of the pipeline project, Rockies Express has proposed that about 90% of the project's route parallel existing utility corridors. For the second and third segments, the system will parallel competitors' pipelines through Illinois and Ohio. The first segment of the system will parallel Kinder Morgan's Trailblazer Pipeline and an oil pipeline owned by Terasen, a company recently purchased by Kinder Morgan.

FERC granted the Rockies Express request to commence the pre-filing process under the National Energy Policy Act in November 2005, and has announced its intent to prepare an environmental impact statement for the first segment of the project, for which public scoping meetings have already been completed.

Service on the first segment, including transportation of gas from the capacity lease on Overthrust and any necessary expansion of Entrega, is expected to commence on Jan. 1, 2008, subject to regulatory approvals. The second segment, which is planned to be in service in January 2009, will continue to the Lebanon Hub in Ohio. The third segment to the Clarington Hub is expected to be in operation no later than June 2009.

However, Parker said that Kinder Morgan already is discussing expansion plans. "We're not going to sit on our laurels," he said. "We've talked about it and we are going to continue to look at expanding this pipeline further east and looking at adding storage to it also... By the time we [finish the Clarington segment] we should have something announced that moves the project even further East.

"We are just starting to talk to our shippers about where we go from here and there's a lot of interest in [extending Rockies Express to the Leidy Hub in Pennsylvania]," said Parker in an interview with NGI. "There [also] is a lot of interest even further East in penetrating the market further and those are some of the things we are just going to have to work through over the next few weeks and then come out and look at an open season."

He also said that Kinder Morgan probably will add storage capacity to the system through the addition of new and existing storage fields. "We are one of the biggest storage operators in the country today and in the Midwest we have a huge storage asset base," he noted. "We would expect to look at some new storage in the West. In the Midwest, we would look at some of our existing fields and our ability to expand them. In the East, we will definitely look at new storage development."

For more information on Rockies Express, contact Jeff Rawls at Kinder Morgan at (303) 914-4903 or Ryan O'Neal at Sempra Pipelines & Storage at (619) 696-4585.

Proposed Louisiana Pipeline

In a separate announcement last Tuesday, Kinder Morgan said it plans to finance the $4 billion Rockies Express project and its proposed $500 million Kinder Morgan Louisiana Pipeline with 50% equity and 50% debt.

"We will issue equity at KMP for these projects in tranches to coincide with construction and in-service dates," said Richard Kinder. "The permanent debt for the Rockies Express Pipeline, as a joint venture, will likely be non-recourse to KMP. We have already reviewed these financing plans with the ratings agencies and will continue to work with them to ensure that they are comfortable with our approach."

Standard & Poor's Ratings Service said the plans would not result in any change to KMP's near-term credit ratings. However, S&P placed a negative outlook on the partnership and its general partner, KMI, due to the possibility that "aggressive capital spending...could place undue stress on the financial protection measures and lead to lower ratings."

The Louisiana pipeline would transport up to 3.2 Bcf/d of regasified LNG from the Cheniere Energy LNG import terminal in Sabine Pass, LA, to various pipelines serving markets in the Southeast, Northeast, Midcontinent and Midwest. Construction on the Louisiana system is expected to begin in July 2008, with initial service slated for as early as October 2008.

It would consist of two segments: a 137-mile, 42-inch diameter pipeline with a maximum firm capacity of 2.13 MMDth/d connecting to a number of pipes within Louisiana; and a one-mile, 36-inch diameter line with maximum firm capacity of 1.26 MMDth/d that would interconnect with Kinder Morgan's Natural Gas Pipeline Co. of America system in the vicinity of the terminal. The project also calls for the construction of a 2.2-mile, 24-inch diameter lateral connecting with Florida Gas Transmission's system in Acadia Parish, LA. Total and Chevron have signed up for all of the capacity on the pipeline system.

Once completed, the combined financial impact of the Rockies Express and Louisiana pipeline projects is expected to allow for an increase of $0.15 to $0.20 in cash distribution per unit at KMP and $0.50 to $0.60 in earnings per share at KMI, Kinder Morgan said.

GasMart

Scott Parker and executives of other companies involved in the Rockies Express project will be among those speaking at the 20th annual GasMart conference and trade show in Denver May 3-5, hosted by Intelligence Press. FERC Chairman Joseph Kelliher will be keynoting the wide-ranging conference, "U.S. Natural Gas in a Global Market."

Questar Chairman Keith Rattie, and veteran Houston analyst John Olson will be among those making presentations (see http://gasmart.com/). Sponsors include the New York Mercantile Exchange, the IntercontinentalExchange and the Natural Gas Exchange.

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