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Questar CEO: REX Pipe Won't Solve Rockies Basis Problem

The Rockies Express Pipeline (REX) will give producers an avenue to carry natural gas supplies to eastern markets, but Questar Corp. CEO Keith Rattie said his company will remain "cautious" about basis prices in the region over the next few years --at least until another pipeline is built.

"The collective wisdom of the market is telling us...that REX-West is not going to solve the basis problem," Rattie told financial analysts during a conference call last week. "We are going to need REX-East in service...and as we look over the course of this year, basis could be wider in the latter part of the summer months, the early part of fall."

Weather-related incidents and liquefied natural gas (LNG) imports, the "other big unknown," he said, also may affect Rockies basis prices over the next few months.

"We do expect to see more freed up LNG floating supply this summer, and some of that could end up in the United States," said Rattie. "The bottom line is, we are cautious about Rockies basis prices over the next couple of years, which is why [Questar Overthrust Pipeline] is focused on getting another project going."

Questar Overthrust and Alliance Pipeline Inc. in March entered into a memorandum of understanding to develop the Rockies Alliance Pipeline (RAP), which would extend from Wamsutter, WY, to the Minnesota/Canadian border at the Emerson trading hub (see NGI, March 31). The proposed 42-inch diameter pipe would extend about 800 miles on a northeasterly route through Wyoming, Montana and North Dakota, connecting Rockies production to markets in the Midwest and central Canada.

However, RAP faces competition from TransCanada Corp. and Williams, which are evaluating whether to develop Sunstone Pipeline, Rattie noted. Sunstone, which was announced shortly before RAP, would follow a similar route to the Questar/Alliance project (see NGI, March 17). Sunstone, proposed to run 618 miles, would have capacity of up to 1.2 Bcf/d and would parallel the existing Williams Northwest Pipeline system between the Opal Hub in Wyoming and Stanfield, OR. The system would interconnect at Stanfield with TransCanada's Gas Transmission Northwest system.

An open season for RAP is scheduled to launch in May, and once Questar determines the level of interest, it may proceed, said Rattie.

There may be more pipeline capacity from the Rockies this summer, but Questar "has taken the risk out of the equation" by hedging 80% of its gas output, said the CEO.

Asked what else Questar might do "if things deteriorate" this summer, COO Chuck Stanley said the company likely would do what it has done in the past: shut in some of its production. Following severe gas price decreases, Questar shut in about 4.4 Bcfe net of unhedged Rockies gas and natural gas liquids (NGL) in 3Q2007 (see NGI, Oct. 29, 2007).

"We don't have a magic model that predicts everybody else's production," Stanley said. "We're watching growth from our own properties, and we study the forecasts from competitors in the region. It doesn't take a genius to add up all of the forecasts and realize that we see a transportation bottleneck, if not this year then in a couple of years, which is why our affiliate pipeline is tasked with trying to develop a new project to take gas out of the Rockies region to Northeast markets.

"The key here is that we hedge to protect against basis volatility. The reality is that that's a derivative transaction. We will not give our gas away, and as we did last summer and fall, when the basis was dramatically wider than it is today, we will shut in to fulfill our hedges and enjoy the benefit from other people's production that is not hedged."

Rattie noted that Questar has firm transportation agreements on the Kern River Gas Transmission system, fixed-price swaps and a "modest amount of basis hedging...The potential volumes exposed to a wider basis this summer are not significant...It should be enough to transport out of the Rockies this summer."

Questar also was asked whether environmental regulations, specifically about the sage grouse, were affecting any of its operations in the Pinedale Anticline. An Idaho judge in December said the U.S. Fish and Wildlife Service ignored the best available science and has to reconsider its decision not to list the bird under the U.S. Endangered Species Act (see NGI, Dec. 10, 2007).

Questar believes the judge's ruling in the case was incorrect, said Stanley. For now, he said, the sage grouse and its proposed listing has been a nonfactor on Questar's operations.

"If it did happen, though, it would be significant not only on us, but it would be significant for all E&Ps [exploration and production companies], and also on ranching, grazing, hunting and fishing," Stanley said. "Not all public lands, but a substantial portion of public lands, would be affected...Data exists that a lot of work has been done and is being undertaken by various game and fish agencies and the private sector to protect the critters, and it's not deserving of listing."

Questar reported that net income jumped 23% in 1Q2008 to $185.8 million ($1.05/share), compared with $151.1 million (86 cents) in 1Q2007.

Questar E&P grew gas and LNG output 13% to 39.5 Bcfe from 34.9 Bcfe a year earlier. Gas comprised 88% of Questar's reported volumes. Realized gas prices at Questar E&P increased 57 cents/Mcf, or 9%, while oil and NGL prices jumped 53%, or $25.57/bbl. Gas hedges increased reported revenues by $6.9 million, while oil hedges decreased revenues by $7.4 million.

Based on strong performance from its Pinedale Anticline operations in Wyoming and results from its Cotton Valley trend in East Texas, the Salt Lake City-based producer boosted its full-year profit forecast and production outlook for 2008. Net income is expected to be $3.25-3.40/share, up from a previous forecast of $3.05-3.20. Questar also increased its 2008 production forecast to 166-169 Bcfe, ahead of its previous estimate of 160-163 Bcfe.

Questar's guidance now assumes that the New York Mercantile Exchange/Rockies basis differential will range from $2.50/MMBtu to $3.00/MMBtu for the rest of the year, compared with an earlier forecast of $1.20-1.45/MMBtu. The guidance assumes that the Nymex price will range from $10.00/MMBtu to $11.00/MMBtu for currently unhedged 2008 gas production through 2008 and prompt-month Nymex crude will range from $105/bbl to $115/bbl for unhedged crude oil volumes.

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