Rocky Mountain natural gas production is at a crawl and the economy isn’t moving any faster, but El Paso Corp.’s Ruby Pipeline Project is on track to begin service in 2011, an executive said Monday.

Jim Cleary, president of El Paso’s Western Pipelines segment, said that since the company filed its application with the Federal Energy Regulatory Commission (see Daily GPI, Jan. 28) to build the $3 billion project, “the Ruby Pipeline has been steadily, perhaps quietly, working on aspects of the pipeline project.”

Yes, said Cleary, El Paso continues to negotiate with potential partners for the east-to-west pipeline. And yes, he said, obtaining financing is a tricky dance in today’s credit market environment. But everything, he said, is a go.

“We have 1.1 Bcf/d of firm transportation capacity for 10-15 year agreements,” he said, and now one of the few questions remaining is whether to phase in the project with three instead of four compressors. With a phased-in project, El Paso would ramp up a 1.3 Bcf/d capacity pipeline. If four compressors were built before the ramp-up, the pipe would begin with 1.5 Bcf/d of capacity. “Depending on the ultimate size, we have another 200 to 400 MMcf/d to sell.”

Cleary disputed some of the facts in a report issued last week by Wachovia analysts, which questioned the viability of El Paso’s project. Wachovia downgraded El Paso to “market perform” from “outperform” and lowered the company’s valuation to $7-8/share from $8-10.

“We think pursuing the ambitious Ruby pipeline has become a significant potential liability;” Wachovia analysts wrote. “We think project financing and execution risk have increased as EP [El Paso] needs to get the uncommitted portion of Ruby contracted to make the project viable, in our view. EP would have a hard time weathering a significant cost overrun on the project as it is already highly leveraged at the parent.” Analysts said they thought “Rockies producers would have preferred an eastbound pipe versus a westbound pipe, especially in light of potential West Coast LNG [liquefied natural gas], anemic West Coast demand and lack of optionality on the pipe.”

El Paso, however, thinks it is “highly unlikely that a new LNG terminal will be built on the Pacific Northwest coast in any time frame that’s foreseeable…certainly not any time frame to hurt Ruby,” said Cleary. “While there is an existing LNG terminal in Baja [California], Mexico…there are limits to move gas from Southern California to Northern California. Even an existing terminal does not pose a competitive threat to Ruby. Looking at the degree of opposition from local and state government in states like Oregon, we don’t expect to see an LNG terminal on the West Coast in the foreseeable future.”

Cleary noted that in the fall of 2008, gas capacity out of the Rockies was “running at or near full…The Rockies was still growing on the market side…” Another advantage for Ruby is the decline in Canadian gas exports to West Coast markets, he said. “Canadian exports to the United States represent about 70% of the gas supplies in the Northwest, and they are declining year/year,” which is what drove Pacific Gas & Electric Co. to diversify its supplies and secure a 15-year, 375,000 Dth/d contract with Ruby to serve its West Coast customers (see Daily GPI, Nov. 7, 2008).

“The world has changed, but the long-term fundamentals, we believe, are still the same,” said Cleary. “To be sure Rockies drilling has slowed down, but we do more work in the Rockies than anyone else…In reviewing a basin by basin analysis of fields, the Rockies resource base is huge. The Colorado School of Mines estimates there may be 250 Tcf of recoverable reserves.

“Rockies production is going to be flat for a couple of years, but it will continue to increase once drilling resumes. Today is not forever. There’s still a huge natural resource that will be developed.”

The project remains “on budget and on time,” said Cleary. El Paso has had “significant, strong interest from a number of potential partners, and we’re far down the line with negotiations with that.” Besides securing a partner, project financing is the priority, he added.

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