FERC last Tuesday denied producer-shippers' request for a Commission injunction to block Rockies Express Pipeline (REX) from carrying out hydrostatic testing on its line, a move that producers contend will shut in half of the Rockies natural gas flowing on the pipeline at the height of hurricane and storage injection seasons. Rockies produers' gas prices fell below $1 at the start of the testing, but then quickly rebounded.
REX shippers ConocoPhillips, Shell North America LP and Yates Petroleum Corp. told the Federal Energy Regulatory Commission (FERC) that the testing on the REX pipeline would idle nearly 1 Bcf/d of capacity through the end of the month, which they said would result in the shut-in of approximately 750 MMcf/d of natural gas (see NGI, Sept. 1). The domestic gas market would be shorted by approximately 18 Bcf during the peak of the hurricane season as a result of the downtime caused by the REX test, which began last Wednesday and is scheduled to run through Sept. 26, the producers said. Besides being a shipper, ConocoPhillips also is part owner of the REX pipeline.
While acknowledging that there will be a "reduction of firm service on the REX-West system" and producers "may have more difficulty finding desirable markets for their gas" during the September test period, the FERC order said "we concur with Rockies Express' assertion that the timely completion of the required testing would be a much greater risk if it were delayed such that it might have to be performed under winter conditions, since test water could freeze in the lower temperatures and access to right-of-way could be encumbered by snow and inclement weather."
The producer trio, known as Indicated Shippers, had asked FERC to postpone the REX testing for a period of 60 to 90 days, which would have put the downtime in the heating season.
"We find that Rockies Express has complied with all applicable provisions of its tariff in scheduling the planned September testing...Here, Rockies Express provided over seven weeks of notice to allow the market to adjust to the planned outage. Shippers have been offered the opportunity to redesignate their primary delivery point rights along the affected pipeline segment to other points. Pursuant to its tariff, Rockies Express will provide reservation credits to affected shippers whose nominations to their primary delivery points cannot be confirmed," the order said [CP08-460].
Moreover, "we find that Rockies Express has complied with the provisions in its tariff that require it to perform maintenance when the reduction in firm service will be minimized," it noted.
REX claimed that the producers had asked FERC to delay its hydrostatic testing of its line for one simple reason -- monetary gain (see NGI, Sept. 1). ConocoPhillips, Shell and Yates Petroleum "are only interested in delaying the test and the outage until the demand for gas is stronger due to the winter season, thus yielding them higher prices in the marketplace."
The REX pipeline further refuted claims that Rockies producers will be forced to shut in their gas as a result of the testing. "There is more than adequate capacity to move production to trading hubs in the Rockies and out of the Rockies during September and October; the issue for Indicated Shippers is merely low demand, which affects price, not the ability to keep wells flowing."
But Rockies producers painted a different story. "With the way production has been growing out here -- up about 1 Bcf/d so far this year -- pipelines will be maxed out with the loss of so much REX capacity," one producer told NGI. He said he expected several independent producers to shut in their gas during the test period. Houston-based Ultra Petroleum said it will be forced to shut in 100 Mcf/d (a total of 3 Bcf) of its Rockies gas due to the REX testing.
Some weakness in natural gas prices in the Rockies is likely to continue this month due to low regional gas demand and the reduction of pipeline capacity caused primarily by the REX testing, said Denver, CO-based Double Eagle Petroleum (see related story). The company said it has approximately 50% of its current production priced under various hedging instruments to reduce its exposure to the current price weakness.
Rockies gas was below $1/Mcf last Tuesday, rebounding to $2-$2.50/Mcf on Wednesday and around $4/Mcf on Thursday and Friday. The increase was due in part to the fact that an outage on Wyoming Interstate Co. ended Thursday, adding 700 MMcf/d of pipeline capacity. And a fair amount of supply had been taken off the market last week in response to the REX test, thus pushing prices up.
REX is conducting the hydrostatic testing on a segment of its mainline between Steele City Compressor Station in Gage County, NE, and Turney Compressor Station in Clinton County, MO. REX said the 26.6-mile leg of the pipeline did not get tested at a high enough pressure to allow for the maximum allowable operating pressure of 1,480 psig. It added that this will be necessary before the REX-East segment of the line is placed in service to Lebanon, OH, in January 2009.
Hydrostatic testing will require all of the natural gas to be removed from the pipeline, after which the pipe is filled with water, at a designated pressure, for additional testing.
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