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Geographic Center of Gas Industry Seen Shifting to Wyoming

Few people in the gas industry realize it, but Pinedale, WY, a tiny town with one flashing red stop light, soon could become the center of the domestic natural gas universe, said Stuart Nance, director of oil and gas marketing for Ultra Petroleum.

The Pinedale Anticline, a three-mile-wide-by-30-mile-long strip of acreage in southwestern Wyoming, and its neighbor, the Jonah Field, could harbor well over 50 Tcf of gas, said Nance. Within the next few years that gas along with supply from the prolific Piceance Basin in western Colorado will be heading to brand new markets in the Midwest and Northeast via the 1.8 Bcf/d Rockies Express project.

Ultra is an anchor shipper on Rockies Express with 200 MMcf/d of capacity under contract. The 1,323-mile pipeline planned by Kinder Morgan and Sempra Energy, along with its upstream extension by Overthrust Pipeline, soon will be putting Pinedale on the map for eastern markets. With more than 25 interconnects to intrastate and interstate pipelines along its route from Colorado and Wyoming to Ohio, the new pipeline will have a major impact on eastern markets and on the current price disparity between Rocky Mountain basins and other parts of the country.

Rockies producers have a message for eastern gas consumers, said Nance, who will be speaking at GasMart 2006 May 3-5 in Denver: "Ultra, EnCana, BP, ConocoPhillips, EOG and others will be bringing nearly 2 Bcf/d to a market near you soon." GasMart, he said, is "part of the beginning of the education process." It's a national gas industry audience and an opportunity to get the word out.

"Even sophisticated people in the industry still don't know what Pinedale is," he noted. But in a few years they definitely will. Kinder Morgan already has placed orders for tens of thousands of tons of steel pipe. The FERC filings for the project are expected to happen within the next few months.

"It's absolutely coming," said Nance. "There is no equivocation in any of this. I think a lot of people are shocked or will be soon. This is the largest project of its type in probably more than two decades. It's a huge deal. It's gotten tremendous momentum, scale and impact," he said.

Historical spot price relationships in the gas market probably will have to be thrown out the window once Rockies Express starts delivering that much gas across the midsection of the country. You can say goodbye to a portion of that $0.75-1.50 price premium commanded by the Northeast. And the Rockies discount to Henry Hub (CIG, minus $1.13/MMBtu recently) also will be cut sharply, said Nance.

"I don't think we really know how much it will change things right now. I had a conversation with a guy in Ohio and he said, 'Aren't you worried about how you are going to just destroy the basis in this market.' I said, 'No, we're not worried at all...because we are the low-cost operator.'

"Our finding and development costs are so low that we can cash-flow break even in Wyoming down to less than $1.00/MMBtu. That's orders of magnitude different than [other onshore plays in the U.S.]."

Nance said Pinedale and Jonah wells are unique because of the large reserves they are finding, which makes them much cheaper in the end than wells drilled in other fields. Multistage hydraulic fracturing is yielding per-well reserves of 6-7 Bcf, according to the Potential Gas Committee.

"I have to pay Kinder Morgan $1.10 to get to Ohio. I think we will be very competitive with other gas supplies whether it be LNG coming into Cove Point, with anything coming out of the Gulf of Mexico, with the Barnett Shale or anything else," said Nance. "I'm not saying that to be arrogant. I'm just not worried. Our focus isn't on basis, it's on improving our netbacks. I'm worried about having a physical outlet for my gas."

With much broader access to premium eastern markets, western gas markets could be facing some significant supply changes. "All of our markets today are essentially west of the Continental Divide, and that's going to be changing dramatically," he said.

"The guys in the West may find that their supply portfolio is changing over time because some of their gas will be going another direction." He noted that a lot still depends on how much liquefied natural gas (LNG) enters California.

There could be bad news for some westbound pipelines that could see lower load factors. "I'm of the opinion that more of [the gas flowing east] will be from incremental growth. I know BP and Conoco, now that they've bought Burlington, will be aggressively developing their holdings." Ultra will, too, as will EnCana and other producers who have been waiting for years for this kind of takeaway capacity.

Many major Rockies pipeline projects in the past sat on the books for what seemed like forever. Nance noted that even Kinder Morgan's own Advantage project, a looping and compression expansion of the existing Kinder Morgan Interstate line, went through many open seasons and eventually died when El Paso was successful in pushing through the Cheyenne Plains pipeline to Kansas from northern Colorado. "People are amazed at how all the things came into alignment on this [Rockies Express] project," he said.

What many people outside the Rockies fail to realize is the enormous supply that has built up there. "It's not a tsunami, but it is going to be a substantial groundswell of growth," said Nance.

"There are a handful of operators up here, and we are in one county in Wyoming. It's a super concentrated source of gas. We think the gross gas reserves in place at Pinedale are in excess of 44 Tcf. That's not all recoverable, but we think we can get two-thirds of it probably. Jonah by itself is probably 13-14 Tcf of gas in place with similar type of recoveries. What that means is we are going to be producing gas out here for decades. There also is a lot of activity in the Piceance Basin with Williams, EnCana, XTO, ExxonMobil developing there. This is a very significant development."

And it's perfect timing, too. "The Northeast is looking at the Gulf of Mexico and saying, 'You know, we are not so keen on having all of our eggs in this one hurricane-prone basket right now. We are bringing the right product to the market at the right time."

For more information on GasMart 2006 in Denver, visit http://gasmart.com/.

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