The gas market seems to be taking note of the fact that the final leg of the Rockies Express (REX) pipeline, REX-East, could be delayed by environmental review at FERC as the impact of the project on eastern markets has yet to be reflected in forward basis, says an analyst at Barclays Capital.
"While there is no consensus for where the post-REX Rockies basis should settle, a differential of more than $1 per MMBtu could be read as a continued bearish outlook for it, a sign that the market is discounting the effect of REX," wrote George Hopley in a research note last week. "This would reflect either doubts about the on-line date or an expectation that growing production will overcome the de-bottlenecking that REX is intended to provide. A basis level below $1 per MMBtu would be our threshold for saying that REX has done its task of reconnecting the Rockies with the broader market."
And that is yet to be seen. Hopley noted that forward basis on Colorado Interstate Gas remains at more than $1/MMBtu until 2011, long after the planned mid-2009 completion of the second and final leg of REX-East. Looking at forward market spreads between the Rockies and the Midcontinent (on NGPL) and the Rockies and Appalachia (on Columbia Gas) versus Henry Hub, "the footprint of REX is not strongly evident on forward spreads at these market points," Hopley said. "Note that the significant gas flow displacements by REX on existing, competing pipelines in the Midwest and in the Appalachia market are likely to result in unexpected shifts in flows and regional basis. Nevertheless, the basic narrowing of spreads that one would look for is not evident..."
Uncertainty over the actual completion date of REX-East could be causing the market to discount the effect of the project for the time being. As it stands now, the first leg of REX-East, from Missouri to Lebanon, OH, is due to come on line by Jan. 1, 2009, and the second leg of REX-East, from Lebanon to Clarington, OH, is due by mid-2009. Earlier this month REX backers asked the Federal Energy Regulatory Commission to revise its schedule to allow for earlier release of the draft environmental impact statement (DEIS) for REX-East. They want FERC to release the DEIS by the end of November and complete the final environmental impact statement in March 2008 to allow for FERC certification by April 2008 and in-service of the first leg of REX-East by Jan. 1, 2009 (see NGI, Oct. 8).
REX backers -- Kinder Morgan Energy Partners, Sempra Pipelines & Storage and ConocoPhillips -- have said that if FERC does not grant a certificate for REX-East by May 1, 2008, construction could be delayed until spring 2009 due to winter. A one-quarter delay in approval could push the on-line date of the project back by as much as a year, noted Hopley.
"A significant delay in the project poses the risk that gas productive capacity in the Rockies grows enough to more than fill REX, allowing the basis in the Rockies to remain wide even as the project comes fully onstream," Hopley said.
"While we would expect REX, once fully in operation, to narrow the Rockies basis and depress the Rockies-to-Midcontinent and Rockies-to-Appalachia spreads, the lack of obvious shifts in the basis and spreads in the forwards market is striking...The start date of the REX-East legs should provide the trigger to the most significant of the pricing shifts. Yet this is the phase of the project most likely to experience delay."
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