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Hurricanes, Prices Drive Interest in Cross-Country Pipeline Capacity

El Paso Corp.'s Stephen C. Beasley said open season results on the company's proposed Colorado-to-Mississippi Continental Connector pipeline project "validated what we thought would be the appropriate outcome." The company received preliminary expressions of interest for about 3 Bcf/d of firm transportation capacity on the pipeline, which would deliver production from the Rockies, Midcontinent and East Texas to markets in the Southeast, Northeast and Midwest.

In an interview with NGI, Beasley, El Paso's eastern pipeline president, said the project has attracted interest from a "big cross section" of the industry, including producers from all the supply areas along the project's route, and markets as far away as New York, New England, the Great Lakes and the Midwest.

The project would link El Paso's Rocky Mountain region pipelines, including Colorado Interstate, Wyoming Interstate and Cheyenne Plains, with its three pipeline systems in the eastern half of the country: ANR Pipeline, Tennessee Gas Pipeline and Southern Natural Gas.

The hurricane damage to Gulf of Mexico and Gulf Coast infrastructure this year, the impact of production shut-ins on supply reliability and the high pricing environment have led to a shift in the market and in regulatory policy, said Beasley.

"All of a sudden, people are beginning to realize that access to physical supplies from a contractual perspective -- firm entitlements -- and the ability to focus on the diversity and reliability of supply has become almost paramount," he said.

"The downstream market has shifted its emphasis away from the financial view of things to more of a physical view of things."

In the past, state regulators would look at proposed long-term transportation agreements on new pipelines and say "'unless you are going to use this capacity 365 days a year and show there's a systemwide savings to your constituents 365 days a year, then we may disavow the roll-in of those costs into the systemwide rates...'"

But now "many of the public utility commissioners have come out and are supporting long-term contracting, which is something that was not a policy 12 months ago," he said.

This has created a favorable environment for new pipeline construction, but El Paso still must work with customers to hammer out binding contracts. Early indications of customer interest in a project do not ensure eventual construction of a pipeline. Binding contracts generally end up covering a much smaller amount of capacity than what was initially indicated.

Beasley did mention that none of the 3 Bcf/d in interest came from affiliated pipelines signing up for capacity on behalf of their customers. However, it was unclear whether a commitment from Enogex to take 500,000 Dth/d on the pipeline was included in the 3 Bcf/d total.

Beasley said that some potential customers are taking more of a wait-and-see approach because Kinder Morgan and Sempra also have a plan to ship Rockies gas east on a new pipeline system and have some pretty large commitments already signed up, including a deal with EnCana and another one with the state of Wyoming (see NGI, Nov. 28; Nov. 21; Oct. 10).

El Paso announced Continental Connector in October as a competing project to Kinder-Sempra's Rockies Express pipeline, which would extend from the Cheyenne Hub in northern Colorado to connections with Dominion Transmission and Texas Eastern Transmission in Ohio. Both systems would be designed to bring growing Rocky Mountain region gas production to premium markets in the East. The 1-2 Bcf/d Continental Connector project also would tap production in the Midcontinent and in North and East Texas, eventually terminating in northern Mississippi.

El Paso said it received requests during the open season for transportation services on pipeline segments in Rockies production areas upstream of the Cheyenne Hub as well as Midcontinent and East Texas basins to markets in New England, the Upper Midwest and Gulf Coast. In addition, several participants asked to submit late responses, which the company plans to accommodate pursuant to open season guidelines.

The winner in this pipeline competition most likely will be whichever project can enter service first. Beasley believes Continental Connector has the upper hand because it will require less greenfield pipeline construction than Rockies Express. "They are going to require predominantly greenfield construction from one end to the other. Whereas, if you look at ours, we're going down existing corridors for the lion's share of the project." That could end up being a deciding factor in the regulatory process.

El Paso is planning to loop its Cheyenne Plains system from Colorado to Kansas. It has signed a partnership agreement with Enogex for the Oklahoma segment, which will include an expansion of the existing Enogex pipeline. Continental Connector would lease 750,000 Dth/d of capacity on Enogex initially with an option to expand that lease to 1.5 million Dth/d.

The Enogex pipeline system would receive gas at Custer, OK, and transport it under the long-term lease arrangement for redelivery in Bennington, OK. From there, gas would be transported on new pipeline facilities through the Perryville Hub in North Louisiana to a termination with Tennessee Gas and Southern Natural Gas at Pugh, MS. Contingent upon the requests of participants in the open season, El Paso anticipates that the project also would interconnect with Florida Gas Transmission.

The bulk of the greenfield construction for Continental Connector would be from the eastern end of Enogex in Arkansas to the Perryville hub in northern Louisiana. The Perryville-to-Pugh, MS, segment would be an expansion of the existing Southern Natural Gas system.

It is too early in the process to reveal project cost or potential transportation charges that are being offered to shippers, Beasley said. "If you look at the forward market, it's in the money," he said. "That's why many of the merchant customers have an interest in being a participant."

"When we say it's in the money we say that based on forward basis differentials," he said. "We also know that the minute we build our system, there is going to be equilibrium that's created to some degree, which means that prices in the Rockies and the Midcontinent should go up. But we think that the customers at the end of the line will still be able to hold capacity, will have higher reliability, greater diversity of supply sources, optionality in terms of their ability to go to the Gulf of Mexico or to the Midcontinent from one day to the next. At the end of the day, the ratepayers are going to be the beneficiaries."

El Paso plans to announce an open house in early December to bring potential participants from all segments of the marketplace together to further detail the project's scope and opportunities. El Paso hopes to bring Continental Connector online in 2008, but may be able to offer transportation on some segments in winter 2007-2008. For details on Continental Connector go to http://www.elpaso.com/business/continentalconnector.shtm.

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