The basis blow-out in the Rockies will narrow in the short term as Kern River pipeline’s 900 MMcf/d expansion goes into service May 1, but the situation may change beyond that as Kern River fills up and Powder River Basin production increases, according to attendees at a recent conference held by the Independent Petroleum Association of the Mountain States (IPAMS).

Depending on other factors, such as completion of feeder lines to the expansion, the basis could run as low as 50-70 cents over the next nine to 12 months, according to Robert O. Reid with energy eValuation services (eVs) in Colorado Springs, CO. That compares to a spread of more than $1 over the last year.

A second major line, El Paso’s 540 MMcf/d Cheyenne Plains Pipeline out of southwest Wyoming in mid-2005, plus the possibility of a doubling of its capacity as well as that of the Kern River expansion in later years, could help to keep the differential in line in the long term if those projects and other smaller ones keep pace with increasing gas development. It was noted that El Paso’s current financial difficulties might impact the Cheyenne schedule.

But, if Rockies production “growth continues at the current pace, new pipeline projects will not be adequate,” Reid said. With higher netbacks increasing cash flow to producers, which will fund added development, coalbed methane production could grow as much as 30% a year or about 400 MMcf/d once the new environmental impact statement (EIS) opening up the region for development is in place. A final decision on the EIS could come as early as April (see Daily GPI, Jan. 13), and development from that point could pressure pipeline capacity.

Overall, the way is clear for high natural gas prices across the U.S. and Canada for at least 24 months, Reid told the IPAMS meeting Jan. 23 in Denver, due to reduced production (5-7% last year) and an inelasticity of demand. He listed a combination of factors:

Declines already have occurred in industrial markets, and the industrial load that is left in many cases cannot switch to fuel oil because of environmental restrictions, Reid said, adding that the infrastructure no longer exists to make fuel oil a viable competitor. The industrial decline has been made up in demand from residential and commercial users, which cannot switch and power demand, which also is relatively inelastic. He noted that 85% of combined cycle power units are gas-only.

Contributing to greater volatility and wider price swings is the decline in the number of trading companies in the market. Reid pointed out that nine of the 14 major traders have dropped out, leaving only Duke, Coral, Entergy-Koch, Sempra and BP Amoco.

The IPAMS conference also heard an update on the expansion of Kern River Gas Transmission from Vice President Kirk Morgan who said the line is within budget and on schedule, according to a report on the meeting in the Rocky Mountain Oil Journal (www.rmoj.com), which tracks drilling and development activities in the Rockies.

The Journal report also said there may be some released capacity available. It listed capacity holders as:

“Producers seeking pipeline capacity are encouraged to contact Laurie Brown, project manager, at 1-801-584-6410,” the Journal said.

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