Kinder Morgan Energy Partners LP (KMP) and Energy Transfer Partners LP (ETP) announced a partnership for a new west-east pipeline last week. Their project joins several others with a similar goal of tapping Midcontinent and Texas production for eastern markets while KMP-backed Rockies Express intends to do the same for Rocky Mountain producers.
KMP and ETP last week entered into 50-50 joint development of the Midcontinent Express Pipeline (MEP) and the start of a binding open season for firm capacity. The approximately 500-mile pipeline will originate near Bennington, OK, travel through Perryville, LA, and its growing gas pipeline hub, and terminate at an interconnect with Transco in Butler, AL. The $1.25 billion project will have an initial capacity of 1.4 Bcf/d.
MEP has executed a firm capacity lease agreement for up to 500,000 Dth/d with Enogex, an Oklahoma intrastate pipeline subsidiary of OGE Energy, to provide a seamless transportation path from various locations in Oklahoma into and through MEP. The new pipeline will also interconnect north of Carthage with Natural Gas Pipeline Company of America (NGPL), a wholly owned subsidiary of Kinder Morgan Inc., and with the previously announced ETP 36-inch pipeline extending from the Barnett Shale and interconnecting with ETP's Texoma pipeline near Paris, TX (see NGI, Dec. 11).
Chesapeake Energy Marketing Inc., an affiliate of Chesapeake Energy Corp., has stepped up for 500,000 Dth/d of capacity for a 10-year term at negotiated fixed rates. "We...feel that it provides the best short- and long-term option to provide takeaway capacity for Chesapeake's increasing supplies of gas out of the Midcontinent and Barnett Shale areas," said James C. Johnson, president of Chesapeake Energy Marketing.
As is the case with pipeline development, one project almost never stands alone. MEP joins previously announced projects predicated on the need to move Midcontinent and Texas gas eastward. MEP's company includes:
"It's a producer-driven project, so what you have is a lot of production increases in Oklahoma and North Texas," Scott Parker, president of Kinder Morgan's gas pipeline group, told NGI. "The production is increasing so dramatically that the gas has no outlet, no place to go. The producers are working with the pipelines to find a way to get that gas out to markets. You've got to get it clear of the local area, and that's what this pipeline does. It moves it 500 miles over to the interstate pipes that serve Florida and the East Coast where the gas is really needed."
Last Friday OGE Energy Corp. pipeline subsidiary Enogex Inc. said it signed on for long-term firm capacity on MEP of about 500 MMcf/d and is preparing to provide lease capacity to Boardwalk Pipeline Partners' Gulf Crossing project. The $1.1 billion Gulf Crossing pipeline includes 355 miles of new interstate line and will be initially certificated to carry about 1.65 Bcf/d from the Sherman, TX; Bennington, OK; and Paris, TX supply areas to the Perryville Hub. Plans also call for lease capacity on Boardwalk subsidiary Gulf South Pipeline Co. for deliveries from Perryville to Transcontinental Gas Pipe Line at Station 85 in Choctaw County, AL. Subject to approvals, Gulf Crossing could be in service in the fourth quarter of 2008.
Besides connecting supply to markets, the MEP project, once completed, could help keep the two connected during hurricane season in the Gulf of Mexico, Parker pointed out. "This is onshore gas, so it's not going to be really affected by a hurricane. This allows a path for gas to move into the East Coast pipes that are primarily being filled today by South Texas and offshore."
CEGT's Perryville Hub in Delhi, LA, is fast becoming the gateway to the East for gas coming from western supply basins and eventually liquefied natural gas (LNG) in the Gulf Coast. The Perryville Hub is actually an ellipse about 65 miles in diameter through which pass 10 interstates and one intrastate pipeline. The interstates are Columbia Gulf, ANR, Trunkline, Texas Gas Transmission, Texas Eastern Transmission, Sonat, Tennessee 100 Line, Tennessee 800 Line, CEGT sister pipeline MRT and CEGT itself. The intrastate is Enbridge's Mid-Louisiana line.
"There are two things going on here," said John Haynes, CEGT vice president of business development. "One is there's a lot of gas that's moving into the Perryville area as a result of our projects and then some other projects that will be coming on after us. That's sort of a supply push. But also there's been a drop off in the Gulf of Mexico shallow water areas. And some of the traditional basins that feed these same pipelines are seeing a decline in their supply. We're going to offset current declines in these existing basins, but we're also bringing enough gas in that I think there is a need for additional takeaway and that's why Centerpoint and Duke partnered up for the Southeast Supply Header."
Currently, CEGT delivers about 800 MMcf/d into the Perryville pipes and about another 700 MMcf/d comes from the Mid-Louisiana line. CEGT's Carthage-to-Perryville project will add about 1.2 Bcf/d, and GulfSouth's East Texas Expansion will add about 1.5 Bcf/d at Perryville, Haynes told NGI. That takes gas deliveries in the Perryville area from 1.5 Bcf/d currently to more than 4 Bcf/d by the end of 2007. MEP theoretically could move 1.4 Bcf/d to/through Perryville, and SESH would add 1 Bcf/d of takeaway from Perryville.
"The gas coming into the hub really is producer-driven, and it's gas coming from the Barnett Shale, as well as the Midcontinent area, the Arkoma Basin, the Anadarko Basin and the emerging Woodford shale," Haynes said. Depending on how producers in these regions price their gas, it could displace Gulf Coast production and eventually regasified LNG, Haynes said.
He said CEGT wouldn't mind seeing Perryville evolve to become an index point for traders. Currently traders use some of the Perryville interstate locations as pricing points. "We're hoping that the changes that we make here over the next year in the Perryville Hub area are going to allow that to become a recognized pricing zone," he told NGI. "I would love to see it before [the Southeast Supply Header comes on line], but I think by the middle of 2008 would be a reasonable expectation."
Back in Texas, Mackie McCrea, ETP president of midstream operations, said that it won't be long before plenty of Texas gas will have the means to get out of the state if it wants to go. The GulfSouth and CEGT projects will help, "but in the next couple of years there needs to be additional pipeline infrastructure," McCrea said. Hence ETP's partnership with KMP on the MEP project.
Today, McCrea said, the vast majority of throughput on the ETP system in Texas stays in Texas. However, starting in March or April, "we could be moving, if requested, an additional 1 Bcf into interstate markets that's currently flowing in Texas."
What this will mean for Texas-Louisiana basis remains to be seen, but McCrea told NGI that while basis will likely narrow, "throughout many months of the year we could see a significant spread because it's all relative. Yeah, there may be a lot of gas hitting Transco or Perryville, but there's also a lot of gas hitting Texas, South Texas, West Texas, western Oklahoma that there won't be enough pipeline infrastructure to move it east."
In about three years there could be another 2-3 Bcf/d flowing out of the Barnett Shale, based on current production curves, McCrea said. "There won't be that much capacity east. A lot of that will have to stay in Texas or move to Waha or other areas."
Further, as REX is completed "it's going to do nothing but shove more Midcontinent gas down into the Waha-Permian Basin area and also into Oklahoma. So once again you're going to have a lot of gas come into those areas. Our project will help alleviate a lot of that strain, but our project isn't going to move out an additional 4-5 Bcf that could be showing up in Texas through LNG, Barnett Shale, Bossier, West Texas, all of this potential volume that could be kind of stuck in the Midcontinent once the REX project and the Colorado and Wyoming volumes start displacing Midcontinent volumes."
Pending necessary regulatory approvals, MEP is expected to be in service by February 2009. MEP has prearranged binding commitments from multiple shippers for 800,000 Dth/d.
To gauge further shipper interest, MEP is currently conducting a binding open season ending at 3 p.m. CST on Jan. 15. Depending on shipper support during the open season, capacity on the proposed pipeline may be increased. Shippers seeking additional information may contact David Matney, (713) 369-9218, or Kim Watson, (713) 369-9233. Open season information is available at http://www.kindermorgan.com.
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