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Bentek: REX Cargoes Could Erode Marcellus Value

Later this year Gulf of Mexico region gas supplies will have a new nemesis in the form of gas from the Rocky Mountains as the final legs of the Rockies Express Pipeline (REX) reach Lebanon, OH, in June and then Clarington, OH, in November, according to Bentek Energy LLC.

"Certainly these new [Rockies] supplies will put downward pressure on prices in the Northeast. But the ripple effects will extend well upstream into supply areas across the continent," Bentek said. "In fact, downward price impacts could be even more severe in the Southeast/Gulf region than in the Northeast."

That finding is one of many in the second part of Bentek's three-part "Catch the Wave" series of reports, which examine pipeline capacity and market developments in the Northeast.

"REX is bringing 1.8 Bcf/d into the Ohio Valley and much of the Texas/Midcontinent production moving east on Gulf Crossing, Midcontinent Express and Texas Gas Transmission's Fayetteville and Greenville laterals is also targeting the same market," Rusty Braziel, Bentek energy director, told NGI. "With so much supply headed toward the Marcellus [Shale] area, there is a big question as to whether the economics of Marcellus development will hold up."

Bentek said the "epicenter" of the market shift to be brought about by the completion of REX will not be in the capacity-constrained Ohio Valley, but rather at the Henry Hub. And the ripple effect will spread westward as well, as West Texas supplies are forced toward California as their traditional eastward flow will have been curtailed, Bentek said.

"To some extent, the impact is already being felt," Braziel said. "But the larger question is when will we see most pipelines out of the Southeast/Gulf region full on a regular basis. We think that is likely by the winter of 2010, perhaps sooner. When that happens there will be significant downward pressure across the Southeast/Gulf, most specifically at the Henry Hub."

Producers are turning down activity in response to lower commodity prices, and this could conceivably yield production declines that would leave unused capacity in pipelines coming on-line this year. "While a slowdown is clearly under way, the impact is expected to be muted because of the highly prolific shale plays, which continue to grow despite cutbacks," Bentek noted. "Accordingly, the availability of new supplies will be more than adequate to shift gas flow patterns, pricing relationships, trading economics and hedging strategies in the near term and for years to come."

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