After seeing production declines in recent years, the Rockies region often goes overlooked in the North American natural gas supply landscape, overshadowed by the impressive growth in the Marcellus and Utica shales, and the promise of new associated gas output from oil-directed drilling on the Gulf Coast and Midcontinent.

It was a decade ago that Rockies supply, enticed by premium pricing in the Northeast, inspired the construction of the 1,700-mile cross-country Rockies Express Pipeline (REX) to transport gas west-to-east from Wyoming to Ohio.

Today REX is known more for its role in providing crucial east-to-west takeaway capacity out of the 24 Bcf/d Appalachian Basin.

But just as a wave of Northeast takeaway — including the Rover Pipeline and Nexus Gas Transmission projects — appears poised to remove the Appalachian bottleneck, the Rockies, led by growth in the Denver-Julesburg (DJ) Basin and aided by REX, could be poised to provide new competition from the west.

DJ Basin Poised For Growth

After kicking off an open season in September for its proposed 70-mile Cheyenne Connector Pipeline and the related Cheyenne Hub Enhancement project, Tallgrass Energy Partners LP is eyeing growth in the DJ — focused in Weld County, CO — as a means to continue REX’s legacy as a west-to-east pipeline.

Tallgrass has already secured long-term precedent agreements from affiliates of leading DJ producer Anadarko Petroleum Corp. and from DCP Midstream LP to move 600 MMcf/d on Cheyenne Connector, which could come online by 3Q2019. The projects could potentially add up to 1.3 Bcf/d of capacity into REX west-to-east out of the DJ.

Tallgrass projections show associated gas production out of the Rockies, driven by the DJ and to a lesser extent Wyoming’s Powder River Basin, rising over the next few years. Tallgrass’s Vice President of Business Development Doug Walker said during the Midwest LDC Forums in Chicago last month that the midstreamer thinks DJ gas output could grow by 1.5 Bcf/d by 2020, up from roughly 1.8 Bcf/d produced currently.

That jives with a recent analysis by RBN Energy LLC analyst Sheetal Nasta, who said the DJ is showing signs of a rebound driven by improving oil prices after activity in the Niobrara fell during the downturn.

“Through the first half of the 2010s, oil production from the Niobrara in Colorado and Wyoming — including the DJ and Powder River Basin (PRB) plays — rose rapidly,” Nasta said in a recent note to clients. “…By 2014, competition for existing oil pipeline capacity in the region was intensifying and it was clear that more capacity would be needed if the infrastructure in the region was to support more production growth.”

When oil prices crashed in 2014, drilling activity was cut and regional production declined, but new oil pipeline capacity, including Tallgrass’s Pony Express Pipeline, “was already on its way.”

“Now, in 2017, with oil prices ambling above $50/bbl, the rig count in the DJ has doubled in the past year, and crude oil production has been growing modestly in recent months,” Nasta said.

Activity is concentrated in Weld County, where 23 of the basin’s 26 active rigs were operating as of early October. Energy Information Administration (EIA) data shows Colorado output climbing to 342,000 b/d in July from 292,000 b/d in February, Nasta noted. “Moreover, with oil pipeline takeaway capacity additions over the past few years, there’s ample room for it to grow further and bring with it more associated gas volumes. There lies the impetus behind” the Cheyenne Connector and Cheyenne Hub Enhancement projects.

On the natural gas side, BTU Analytics analyst Matthew Hoza said his firm is “expecting associated gas growth from the DJ Basin of around 1.3 Bcf/d from September 2017 through the end of 2021. The DJ has strong oil economics and continues to remain a focus area for large players” like Anadarko and Noble Energy Corp. Additionally, he said, pure-play Rockies operators including Synergy Resources Corp. and Extraction Oil & Gas LLC want to grow production in the region as well.

“However, in 2018 the pace of growth in the DJ Basin will not only be dictated by oil prices, but will also be impacted by the pace of new gas processing plant completions,” Hoza said. “The region is once again expected to become processing constrained until new plants are completed in late 2018.”

BTU analysts are not not as bullish on natural gas supply from the other Rockies plays, such as the Powder River, where “economics are not as favorable as the DJ and we have seen activity in the region plummet from peak 2014 levels and never fully recover,” Hoza said. “As a result, we expect gas production in the region to remain flat over the next five years. In the dry gas Rockies plays we are expecting gas production to decline 1.7 Bcf/d from September 2017 through year-end 2021.”

NGI calculations based on EIA and state data show overall Rockies production (Colorado, Wyoming, Utah and the portion of the San Juan Basin in northwestern New Mexico) peaked in February 2009 at 14.8 Bcf/d. That number fell to 11.4 Bcf/d by June of this year.

Production from the DJ and Niobrara formation, as well as the Wattenberg formation in Weld County, “is the only area of the Rockies to show growth since that February 2009 peak, rising from 590 MMcf/d in February 2009 to 1.77 Bcf/d in June 2017,” said NGI’s Patrick Rau, director of strategy and research.

“REX is obviously the main conduit to move Rockies production to the east, and one of the main problems with the current configuration of REX is that it was built primarily to serve producers in the Piceance and Green River basins.”

A breakout of REX Zone 1 firm transportation capacity holders shows REX has “only about 60,000 MMcf/d of contract holders in Weld County, which is the heart of the DJ Basin. If the DJ Basin is the growth area of the Rockies, then REX must adapt, which it is in fact doing with the Cheyenne Connector project,” Rau said.

The Cheyenne Connector and Cheyenne Hub Enhancement project comes as Tallgrass prepares to replace REX west-to-east capacity commitments that are set to come off the books in 2019.

The 600,000 MMcf/d to 1.3 Bcf/d of supply from Cheyenne Connector “would go a long way toward replacing the declining supply from its more traditional Wyoming, Western Colorado and Utah receipt areas,” Rau said.

REX West-to-East Flows Rising

West-to-east flows on REX have increased year/year in 2017, but “have also fluctuated a bit more,” according to Genscape Inc. natural gas analyst Vanessa Witte.

“In December and January, Zone 1 flows overall decrease to the 400-600 MMcf/d range, which is a similar trend between 2015-16 and 2016-17. Flows regained strength in March through June 2017, increasing year/year by around 300 MMcf/d for the same months, with 2017 averaging around 1.66 Bcf/d,” Witte told NGI.

“However, in 2017 nominations reduced significantly in July through the end of September, while 2016 flows did not experience a similar decrease and stayed relatively consistent through the end of October and early November. From July to the end of September 2017, flows through Segment 160 averaged just 1.15 Bcf/d. The current 14-day average flow through Segment 160 is 1.62 Bcf/d, while 14-day average flow over this same time period last year was 1.32 Bcf/d.”

Witte said the periods of increased volumes in 2017 appear to be a result of additional receipts from Questar Overthrust. During a conference call earlier in the year, Tallgrass’s Chief Commercial Officer Matt Sheehy said the Leawood, KS-based operator has secured 700 MMcf/d of west-to-east commitments on REX beyond 2019, including a “meaningfully face-lifted” contract with Encana Corp. that will extend five years beyond 2019 and a seven-year contract with Ultra Petroleum Corp. that kicks in in 2019.

“What I would tell you is it’s not as if the pipe is going to be empty at the end of 2019,” Sheehy said. He pointed to efforts to work with utilities to add demand load to the system. All of that is value-enhancing for our west-to-east customers down the road, and when we talk about REX and moving gas west-to-east and east-to-west, we want to provide optionality for folks both coming in in the east and coming in in the west to jump off at different points.

“It’s going to move based on weather and different demand load, but the optionality that we’re building in for our Rockies folks, so they can go” into Opal or “take a turn to the east to go to power plants and so forth in the Midwest. As much demand load as possible is long-term how we are going to continue to create value for our customers and keep as many of them as possible, hopefully at attractive transportation rates post-2019.”

Competition Ramping Up

Over the next few years, the natural gas supply landscape is looking increasingly crowded, with more Marcellus and Utica shale takeaway projects and associated gas growth from the Permian Basin and Midcontinent.

Gas growth out of the Permian has already begun displacing Rockies supply headed west to the California market, according to BTU.

“Flows out of the Rockies fell by 270 MMcf/d in 3Q2017 compared to the same period in 2016, with most of the decrease falling on Kern and TransColorado pipelines,” according to BTU analyst Matt Hagerty. “Displacement of Rockies gas from the California market by the Permian has required natural gas prices in the Rockies to discount higher in 2017 to prevent the loss of even more market share. Despite Rockies production declining year/year, pressure from the Permian and other supply basins has led to a downward spiral in basis before winter weather sets in.”

Hagerty pointed to widening basis differentials at both the Waha Hub in the Permian and at CIG.

According to Daily GPI prices, CIG was trading at a 27 cent discount to Henry Hub on Sept. 1 and at a 45-cent discount as of Monday’s gas day. Waha was within 8 cents of Henry at the start of September and was trading at a negative 49-cent differential as of Monday.

Given this competition from the Permian, Rockies gas may have the most joy heading east, according to BTU’s Hoza.

“As associated gas in the region has grown and is expected to continue to grow it is pushing on Rockies and Midcontinent gas. Eastbound flows out of the Permian are capacity constrained, while Mexican exports and routes to California are demand constrained,” he said. “This is forcing the Permian to displace and discount at Waha to push into the Rockies and Midcontinent. In fact, we have already observed some Rockies pipes flip from moving Rockies gas south to moving Permian gas north.

“With more gas entering the Rockies, incremental gas will have to find a route out of the basin. We believe the only viable route for Rockies gas is to move east towards Upper Midwest markets (Chicago, MichCon, Dawn), however that is becoming an increasingly crowded market with new Appalachian volumes via Rover and Nexus, as well as entrenched baseload volumes from Western Canada.”

According to Monday’s Forward Look, fixed price trades at Chicago Citygate are averaging a 30-40 cent premium to the Cheyenne Hub across the curve, with the differential right around 30 cents for the 2019-2020 winter. The story is similar for the Dawn Hub in Ontario.

The 3.25 Bcf/d Rover and the 1.5 Bcf/d Nexus Gas Transmission project are both expected to be fully in-service by the time REX’s Cheyenne Connector project would be complete. Meanwhile, Encana, with bullish plans for its liquids-rich Montney Shale position in Western Canada, has said it plans to target Dawn via a discounted toll on TransCanada Corp.’s Mainline to help protect against potentially weak pricing at AECO.

As one of the largest planned Marcellus/Utica takeaway expansions, Rover in particular carries the potential to uncork the Appalachian bottleneck, having already started delivering around 1 Bcf/d east-to-west out of eastern Ohio with plans to ramp up to full capacity by the end of March.

“REX west-to-east gas from Zone 1 primarily serves interconnects in Illinois with NGPL, Midwest Gas Transmission (MGT) and Trunkline,” Genscape’s Witte said. “NGPL and MGT have received the vast majority of this gas, and deliveries to these two pipes have noticeably increased year/year.

“We don’t expect Nexus to fill capacity” once that project is complete in 2018, “though we do expect this for Rover,” she said. “As Rover’s Phase 2 comes online, we anticipate the market will rebalance and gas will be rerouted, as there is not a price incentive for new production in the Northeast.

“Rover’s cost for transport has been priced competitively, and will likely put pressure on REX. On Rover, we anticipate around 1.3 Bcf/d to head into Dawn on Vector, about 750 MMcf/d onto Panhandle Eastern/Trunkline, and some amount of the remainder (or all) could hit the Midwest market via ANR, depending on other factors such as weather, demand and/or pricing. This could push back on NGPL’s deliveries to the Midwest from REX Zone 1 gas. However, NGPL also feeds to increasing markets with connections to LNG and NET Mexico.”

RBN’s Nasta said the results of the Cheyenne Connector project’s open season, expected this month, may shed more light on how REX west-to-east flows will compete with supply from other regions.

“The bottom line is that in proposing this project, Tallgrass is banking on incremental DJ supply from Connector and REX via the Cheyenne Hub competing with other supply targeting markets east of Cheyenne,” Nasta said. “This increased supply competition would certainly benefit end-users. But the proposed projects also raise some important questions about how supply growth and pipeline projects will reshape the gas market in the next few years.”