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Marcellus Boom Sending Rockies Gas Packing

Eastern markets used to look like the Promised Land to Rockies producers. But surging production growth from the Marcellus Shale amounts to a "keep out" sign planted along the side of Kinder Morgan Energy Partners LP's (KMP) Rockies Express Pipeline (REX).

El Paso Corp.'s Ruby Pipeline and REX have linked "western and Northeast markets in a way that they were not linked historically," according to Bentek Energy LLC. "Since the beginning of November, Rockies Express pipeline deliveries have begun to show significant declines year-over-year as spreads to the East have collapsed," Bentek analysts said in a recent Market Alert.

Meanwhile, "...Ruby has lifted the Opal cash price and allowed Rockies shippers at Opal to swing to the best-priced market. While Ruby only increased westbound capacity, the resulting price strength at Opal has effectively tightened the spread to all its downstream demand markets, including the Northeast."

According to Bentek, more gas will remain in the West due to eastern supply growth and better price spreads going west. And that outlook is reflected in an assessment by U.S. Capital Advisors of the pending KMI-El Paso pairing (see Shale Daily, Oct. 25, 2011), including what divestitures might be necessary to satisfy regulators at the Federal Trade Commission.

With Kinder Morgan Inc.'s (KMI) pending acquisition of El Paso, Ruby and REX are slated to be corporate cousins, at least for awhile.

U.S. Cap analysts Becca Followill and James Carreker pointed out in a note Friday "just how big the Kinder Morgan family of companies will be in the pipeline space once the transaction closes." By the analysts' math, the consolidated KMI-El Paso would have a roughly 52% market share in the Rockies based on 2010 throughput figures for interstate pipelines and estimates for Ruby from regulatory filings last year. Clearly, some assets will have to be sold.

"Selling El Paso's Ruby Pipeline (4.7% market share), El Paso's Cheyenne Plains (4.3%) and KMP's TransColorado Gas (2.7%) could get them" down to the low 40% area for market share, the analysts wrote. They predicted "a healthy appetite" among potential buyers such as CenterPoint Energy, TransCanada Corp., Boardwalk Pipeline Partners, Spectra Energy Partners, Williams and Sempra Energy.

And as for REX? "We don't see Rockies Express as a likely sales candidate given its below-market returns (2010 estimated return on equity of 3.2%) and the fact that ConocoPhillips was unable to find a buyer at the right price for their 25% share in 2010," U.S. Cap said.

According to U.S. Cap, net throughput on REX in 2010 was 412 Bcf, giving the pipeline 6.4% of the Rockies total. Based on data from 2011 filings at the Federal Energy Regulatory Commission, throughput on Ruby -- which entered service last July -- has been about 4.7% of the Rockies total at 300 Bcf.

"The combined sale of Ruby, Cheyenne Plains and either TransColorado or KM Interstate makes the most sense to us," U.S. Cap said. "Ruby and Cheyenne Plains (combined $2.2 billion rate base) are both owned by El Paso, so it's a cleaner transaction. Plus Ruby is a new pipeline, minimizing tax issues, and El Paso has already taken a writedown on the pipeline."

Meanwhile, supply growth in the East -- from the Marcellus and now Utica shales -- "will have a direct impact on western markets," according to Bentek. "Opal forms the hub that is at the center of this new East-to-West market corridor and will be influenced by supply and demand changes in both the East and the West."

Basis at Opal is predicted by Bentek to remain strong for the time being as the point is no longer capacity constrained, and "the pushback from the East will ensure that Ruby remains highly utilized for much of 2012 despite competition from Canadian and other supply sources for the PG&E citygate market," Bentek said.

Opal cash basis will be supported this year under normal or higher demand circumstances, the firm said. "Longer term, however, there is a threshold at which West capacity and demand constraints, combined with Rockies production growth, will pose downward risks to Opal basis," Bentek said.

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