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Rockies Express Segment Begins Service at 500,000 Dth/d

After sub-zero cold set back construction several weeks, the second segment of the first leg of the Rockies Express Pipeline (REX) project finally entered service on Wednesday, Kinder Morgan Energy Partners (KMP) said. The system will provide significant new transportation capacity in the region, but until the eastern portions of the massive REX system enter service producers could face the age-old problem of getting their gas out of the region.

The second segment extends the system 192 miles from the Wamsutter Hub in Wyoming to the Cheyenne Hub in Colorado. The entire 328-mile First Leg pipeline system will be at 500,000 Dth/d of capacity until a new gas processing plant being built by Enterprise at the Meeker Hub in Colorado enters service later this year, KMP said. Once the processing plant is on-line, capacity will increase to 750,000 Dth/d. The first segment of Rockies Express -- a 136-mile, 36-inch diameter pipeline from the Meeker Hub to the Wamsutter Hub -- began interim service in February 2006.

"We are pleased to complete the first leg of REX, which was about six weeks behind schedule due to inclement weather in the Rocky Mountains," said Scott Parker, president of KMP's natural gas pipelines division. "We expect to receive the FERC certificate for REX-West this spring and commence construction shortly thereafter."

REX-West will consist of 713 miles of 42-inch diameter pipeline from Weld County, CO, to Audrain County, MO, and has a targeted in-service date of December 2007. REX-East, a 622-mile segment from eastern Missouri to the Clarington Hub in Ohio is expected to be in interim service as early as Jan. 1, 2009, and could be fully completed by June 2009.

Until the two eastern segments are built, however, there is the potential threat of significant capacity constraints exiting the Rockies that could back-up gas in the region, creating gas-on-gas competition and driving down prices, particularly in the summer, according to Porter Bennett, president of Denver-based consulting firm Bentek Energy.

"If production trends continue as they did in 2006 and we have summer weather patterns similar to those of 2006, then Rockies supplies will exceed export and local consumption capacities by summer," said Bennett. He said the result will be lower prices at Cheyenne Hub, Opal and other regional pricing points as basis widens. "Unless production slows and/or demand strengthens, Rockies producers will face yet another period where their netback prices are substantially below prices paid in other production regions of the country."

Mainly because of growing gas production in the Rockies and inadequate takeaway pipeline capacity, daily prices at the Cheyenne Hub dipped to $2.48 last fall (Sept. 18, 2006), and CIG prices tumbled to $1.78/MMBtu on Sept. 15, 2006 and $1.31 on Nov. 13, 2006. But those price declines were short-lived. With additional production coming on-line to fill up REX Phase 1, producers could face an even worse situation this summer and fall.

Bennett said incremental production growth in the Rockies last year was about 584 MMcf/d. Demand growth in the region and in other accessible markets was able to soak up that new supply, but it's doubtful that there will be enough demand growth in 2007 and available pipeline space if production grows by a similar amount this year. Bennett said although there appears to be a total of 879 MMcf/d of unused takeaway pipeline space, the practical available capacity will be much less.

He estimates that there could be 300-400 MMcf/d of takeaway space. As a result, if REX ramps up to 500,000 Dth/d of supply, about 200,000 Dth/d of that gas could have trouble finding a market and a route to get there. With 750,000 Dth/d of space on REX once Enterprise's Meeker plant enters service, the situation could be much worse.

Once the entire 1,663-mile REX pipeline, which is owned by KMP (51%), Sempra (25%) and ConocoPhillips (24%), is completed, however, Rockies producers could enjoy much higher netbacks by tapping higher-priced eastern markets. REX will be one of the largest gas pipelines ever constructed in North America and will transport gas from the prolific producing basins in Wyoming and Colorado to the Upper Midwest and eastern United States. The $4.4 billion project will have the capability to transport 1.8 Bcf/d.

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