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Bentek: New Midcontinent Pipe Capacity, Drilling Plunge Lead to Mayhem

Completion this year of 3 Bcf/d of pipeline takeaway capacity within the 13-state Midcontinent region will give producers new marketing opportunities and improve regional pricing differentials, but the plunge in onshore gas drilling activity may have consequences, Bentek Energy reported last week.

Bentek's report, "Mayhem in the Midcon," cites several factors converging this year that may result in "major shifts" for gas markets within the Midcontinent. As new capacity is placed into service, the Rockies Express (REX) East pipeline expansion is scheduled for completion, which will bridge markets in Chicago, Michigan and Ohio with the supply areas of the Rockies, Midcontinent and the southeastern/Gulf Coast area.

"As these market events play out over the next few months, a radical change in basis relationships is expected because of the direct competition for market access among the suppliers in the Rockies, Midcontinent and Southeast/Gulf," Bentek stated. "The threat to traditional supply routes, which run for the most part north to south, will force producers in these regions to reevaluate prices in order to compete with lower-priced alternatives."

A "basis flattening" situation, said Bentek, would have three key dimensions:

"Midcontinent gas flow patterns have been in a state of flux over the past two years because of the REX West pipeline and the rapid growth of unconventional production across the region," said Bentek Managing Director Rusty Braziel. "As a result, the Midcontinent production zone basis dropped to an average of minus $1.73 in 2008, compared to only minus 88 cents in 2007.

"But new pipelines out of the region are changing things fast. Two major pipeline expansion projects, Midcontinent Express (MEP) and the Gulf Crossing project, recently began service and are providing Midcontinent producers with new outlets into the Southeast/Gulf region. In addition, Texas Gas has brought two laterals on-line to deliver more than 1 Bcf/d of Fayetteville Shale gas to pipelines serving markets in the Midcontinent, Northeast and Southeast."

The "bottom line" for near-term market impacts from these projects, said Braziel, is that together "they provide a significant supply relief valve as well as a doorway to the higher-priced Southeast/Gulf region. They should be expected to put upward pressure on Midcon producing zone price basis unless Midcontinent production growth fills the new capacity, but that's an unlikely prospect given recent drilling declines."

The sharp reduction in onshore gas drilling activity from a year ago, combined with the new pipe capacity, may result in gas market mayhem, according to Bentek.

Like nearly all of the domestic gas-producing regions, Midcontinent regional drilling has fallen sharply since last September. According to Bentek, the Midcontinent rig count fell to 147 active rigs in mid-April versus an average of 335 active rigs in 2008. Bentek is forecasting Midcontinent production to drop about 12% by the end of 2011, or from current levels of about 8 Bcf/d to about 7 Bcf/d.

"The combination of increased takeaway capacity along with declining production is expected to lead to rising basis within the region," Bentek noted. "The other significant factor to consider is the extension and expansion of the REX pipeline system beyond the region and into Ohio...

"The displacement effects of REX on Midcontinent and Canadian supply, the increases in gas storage levels in California and Canada and the resulting price movements show how the market adjusted to the arrival of REX. In effect, the project has been absorbed by the marketplace. However, REX shippers are about to gain access to a number of new, more lucrative markets for their gas as the REX pipeline is extended eastward into Indiana and Ohio."

For information on the report, visit www.bentekenergy.com.

Bentek President Porter Bennett is the keynote speaker on Wednesday at GasMart 2009, which is being held in Chicago. The annual event is sponsored by Intelligence Press Inc.

Bennett will offer Bentek's take on U.S. natural gas supply growth and pipeline constraints and how they could impact price basis differentials. To learn more about GasMart, which is considered the market center for natural gas buyers and sellers, visit http://gasmart.com/gasmart2009/.

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