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Wide, Volatile Midcontinent Basis Market Expected to Continue

Widening Midcontinent basis has caused some Rocky Mountain pipeline planners to rethink proposed expansion projects, and the problem is likely to get even worse before it gets better.

The situation was largely created by unexpected production growth (or absence of declines) in Midcontinent producing basins and pipeline constraints downstream of the new Cheyenne Plains pipeline system, according to data from Denver-based consulting firm Bentek Energy.

Basis, or the price difference between Midcontinent locations and the near-month futures contract (tied to the Henry Hub in Louisiana), has gone from the minus-$0.40s/MMBtu in April, to more than minus-$1.00 in early June, minus-$0.40 again at the start of July, back to minus-$1.00 in early July, and finally to the minus-$0.60 area currently. That compares to average basis at Panhandle Eastern, for example, of about minus 12 cents for the 1998-2002 period.

There are some obvious reasons for basis to widen. Cheyenne Plains suddenly dumped 560,000 Dth/d of new Rocky Mountain gas supply at Greensburg, KS, in January. However, that gas was supposed to have plenty of market outlets among the many pipelines connecting at Greensburg. What has happened is that there has been an unexpected increase in production from Midcontinent producing basins, said Jim Simpson, managing director at Bentek.

"The theory was that Cheyenne Plains would help fill in the void of declining Anadarko [basin and to a lesser extent Permian basin] production," said Simpson. "As long as Anadarko production is declining, they're okay, it makes sense and works great. But with prices where they are, Anadarko production has not been declining. It's such a large basin that even if you could stop the 3% a year decline and make that flat so that it is not declining, it's a lot of gas."

While most of the pipelines downstream of Greensburg have physical capacity to handle the Cheyenne Plains supply, they were ill-equipped to accommodate Cheyenne Plains, plus production growth from the Anadarko and Permian Basins.

"If you look at the constraint points on Panhandle -- at Haven, KS, where the pipeline can take only 1.5 Bcf/d of gas -- and on ANR at Greensburg (which can take about 700,000 Dth/d of gas)," that is where there's a bottleneck, said Simpson. And the situation will only get worse if Cheyenne Plains raises its capacity to 730 MMcf/d early next year as expected.

It's hard to imagine what will happen once EnCana's 1.5 Bcf/d Entrega Pipeline is built between the Piceance Basin in western Colorado and the Cheyenne Hub at the inlet of Cheyenne Plains.

The proposed 328-mile Entrega pipeline would transport 1.5 Bcf/d of gas from the Piceance Basin through the Wamsutter Basin and Hub in Sweetwater County, WY, to the Cheyenne hub in Weld County, CO, where several eastbound pipelines converge, including Cheyenne Plains. Entrega plans to construct the pipeline in two 750 MMcf/d phases.

However, it plans to have the capability of delivering up to 800 MMcf/d of gas to the Wamsutter Hub in Wyoming (Colorado Interstate Gas and Wyoming Interstate Co. Ltd.) as early as December. Those pipelines can take the gas East or West. Bob Hampton, Entrega's manager of business development, said Entrega probably won't flow that much gas (800 MMcf/d) until late 2006 because construction of upstream processing and compression has been delayed.

The first full phase of the $650 million project will deliver 750 MMcf/d of gas to the Cheyenne Hub in December 2006. The pipeline could have an ultimate capacity of 2.3 Bcf/d when fully developed.

"The question is what are they going to do with all that gas," said Simpson. "It's almost like they have to build another pipeline to bring gas out of the Rockies area because it's starting to fill everything up that is built."

To bring even more gas into the Greensburg area through Cheyenne Plains really won't help producers and it certainly will drive down Midcontinent prices and widen basis even further.

"What really needs to be done is to somehow bring that additional supply even farther east and get it to the Northeast," said Simpson. What Rockies producers want to avoid is competition for transportation with booming East Texas production and new supply arriving from LNG import terminals.

"I think EnCana has been very careful not to push Entrega along [too fast] because they really do have a problem, and that is what do they do with that gas. They need another straw out of the area to be able to move it. I would not be surprised if Kinder Morgan came out with a pipeline project to say Lebanon, OH, and kind of cut out Chicago or just made a stop in a Chicago with the ultimate goal of Lebanon," said Simpson.

There also might be more of an appetite for more gas in the West than previously expected. Northwest Pipeline could accommodate more supply. Opal prices have been relatively strong. In fact the spread between Sumas and Opal has been flat. "Bringing some of that gas to the Opal area probably is not a bad idea and certainly helps Northwest out," said Simpson. It also would not exacerbate the Midcontinent basis problem.

Unless and until Rockies producers come up with a way to bypass the depressed Midcontinent region, the situation is unlikely to improve.

"We recognize that there could be a lot of gas showing up at Cheyenne over the next few years," said Entrega's Hampton. "We're looking at alternatives. We just haven't sorted anything out yet. We don't have any real response yet. We have absolutely nothing concrete."

For more details on national pipeline gas receipts and deliveries, pipeline utilization, and other market fundamentals visit http://www.bentekenergy.com.

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