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Forward Price Spread Strongly Supports Rockies Express Extension

There's no better time than the present to plan a pipeline or storage expansion project, and despite having a dozen or so projects already in the works, Kinder Morgan said Friday more are on the way. Kinder Morgan Pipelines President Scott E. Parker told a GasMart audience in Denver that Clarington, OH, the current terminus of the proposed $4.4 billion Rockies Express pipeline, probably will end up being an intermediate point with extensions to Oakford, PA, and then possibly Leidy, PA.

Other market observers believe an extension of the 1.8 Bcf/d, 1,323-mile Rockies Express project will be necessary for western producers and eastern markets to reap the full benefit of the system, which will bring growing Rockies gas production from Colorado and Wyoming to markets across the Midwest and Northeast. Bentek Energy President Porter Bennett, who also spoke at the conference, said without a complete reach into the Northeast markets, constraints will prevent gas flows from reaching premium points that need supply the most, thereby limiting the benefits of the project for both producers and markets.

"I love to build pipelines where you can say that basis spreads supported the pipeline from day one, and this one worked on 10 to 20-year contracts," said Parker, referring to Rockies Express. "The basis supported it. We'll see what happens when the pipeline gets built.

"If you looked [at forward prices] in October of 2005...and look out to 2007, Rockies producers still could not get [a good value for their gas]." Forward prices in 2005 showed a 2007 Rockies basis of minus $1.42 compared to Henry Hub, Parker said. And Dominion forwards at Clarington, OH, were 54 cents more than the Hub. "And it's only gotten worse" since last fall, said Parker. In March 2006, forwards showed 2007 Rockies basis at minus $1.92 and 2007 Dominion prices at a 34-cent premium to the Hub. That's a more than a $2.25 price spread for Rockies Express shippers to capture. Parker said the firm recourse rate on the project will be about $1.07/MMBtu to Dominion at Clarington.

"We believe -- and producers and eastern buyers believe -- that this pipeline is going to provide Rockies producers with a better price for their gas than they get today based on differentials to the Henry Hub. But it's also going to provide, we think, the consumers on the East Coast, a lower price of gas than they get today. We've done studies and others have. Anytime you get more gas to move into a market and compete it lowers the overall market cost."

What's next? Parker said there is clear market proof that an extension is needed. If the project is extended, it captures even better spreads because forward prices show that Texas Eastern M3 at Oakford, PA. is at a $1.13/MMBtu premium to the Henry Hub in 2007, leaving a more than $3 price spread to the Rockies. Transco Zone 6 in 2007 carries a $1.65 premium, leaving a $3.57 price spread.

'That's where we see opportunity," said Parker. "There's even a greater premium between Dominion, Tetco and Transco today" in the forward market than there was six months ago, he said. "We're going to land 1.8 Bcf/d at the Dominion point but there seems to be a need to move this gas even farther.

"I will say that our shippers would have liked to go to New York or Washington, DC; it's just that you can only get so much done in the time period that we needed to get it done," he said. "But we are glad to look at other extensions, and what we are looking at now is a pipeline route that passes through Waynesburg, PA -- there's a lot of storage at Waynesburg and a lot of interconnectability -- and then up to Oakford to get into the Tetco [M3] zone. We think this is very doable. We'll be out on the market with it soon. We're talking to our existing customers and others right now."

The problem getting to New York or Washington, DC, is mainly landowner issues, said Porter Bennett of Bentek. Millennium Pipeline is proof of that challenge. But with prices rising and consumers paying more to heat their homes than ever before, sentiment may be changing.

In his presentation, Parker also mentioned that Kinder Morgan is working hard to develop new storage capacity along the Rockies Express system. The problem, he noted, with building new storage fields is the high cost of base gas, which won't be withdrawn until the storage facility is decommmissioned. The way Kinder and other companies are getting around that issue is to expand existing storage fields, which already have infrastructure and base gas in place. Kinder already is expanding the Sayre and North Lansing storage fields. It plans to expand others and is looking at developing new greenfield storage possibly somewhere on the eastern end of the project.

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