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West Awash in Gas, LNG Uncertain, But New Pipes Roll On

Western North America has overreacted to price signals and taken "drill, baby, drill" to an extreme, and as a result the region is saturated with natural gas production that outstrips the current prospective markets, according to a panel of western energy executives who spoke last Tuesday at the 2008 LDC Forum Rockies & West Conference in Irvine, CA. Current swift drops in wholesale gas prices will help, but volatility still adds continued uncertainty for buyers, the panelists said.

As reinforcement, another panel at the conference for gas buyers and marketers confirmed that slowing demand and an existing surfeit of supply pipelines haven't caused many of the major natural gas infrastructure projects in the West to pause or even slow down in their development. If anything, some of the proponents said they may have new capacity in place ahead of schedule.

None of the panelists -- Jeff Rush, vice president of TransCanada Pipelines; John Dushinske, vice president of marketing and regulatory affairs for Kern River Gas Transmission Co.; Laura Luce, president of NGS Energy; and Craig Coombs, business development for El Paso Western Pipelines -- said they have considered the potential siting of a liquefied natural gas (LNG) import terminal along the U.S. West Coast as an inhibiting factor for their new pipeline and storage projects.

On another panel at the forum, Beth Bowman, senior vice president for Shell Trading Gas and Power, said the demand in the West is about half of what supply is, and it will not pick up much for another two years. Ultimately, she thinks it will be supply considerations that determine when, and if, LNG imports pick up -- not price.

Calling it an overreaction, Stuart Nance, marketing vice president for Ultra Petroleum Corp., a Houston-based Rockies oil/gas producer, said every pipeline out of the region in any direction is filled to the brim, and that doesn't reflect the market right now. He said the industry has been "too successful."

An added pressure upward on production is the relatively new identified gas fields in northeast British Columbia (BC) -- Montney and Horn River -- that some observers in western Canada and Houston are considering on a scale that might rival the Alaska North Slope at Prudhoe Bay, according to Greg Staple, director of marketing at Spectra Energy.

All of the speakers prefaced their remarks by saying it is still uncertain what will happen with the current global economic tailspin and how deeply the recession cuts across the energy sector from both the supply and demand sides. They agreed with almost every other speaker at the first day of the two-day LDC forum in reiterating that both cash and liquidity are "king" in the current environment.

"Unlike in previous years, we're starting to see a move westward of the increased gas production in the West's five major basins," Shell's Bowman said. "As a result, the demand in the West is about half of what supply is. So the picture going forward isn't about supply and demand, but it is really about price volatility."

She sees both the West and the nation as a whole being "very integrated from a natural gas perspective," with multiple linkages in all areas, even with LNG now available in the region through Sempra Energy's Costa Azul import terminal along the Pacific Coast in North Baja California, Mexico.

"LNG is going to affect the West, and we now have a much more interconnected market globally," Bowman said. "Right now Asia is willing to pay a lot more for LNG than North America is, although the prices are coming closer to each other. The fact is that there are few alternatives to LNG in Japan and China [if they want to lower carbon emissions]. In the long run what we have to watch for in LNG is the amounts contracted for exceeding the capacities of what the import terminals can take in."

Supplies are full and pipeline capacity is being added eastward and westward out of the Rockies, but congestion prevails in a number of areas, so shippers all want access to as many of the 10 aggregation points in the Rockies as possible, said Bryan Hassler, regional director for natural gas origination at Enterprise Products Operating LLC. "There'll be continued growth in reserves and production, but there may be a slight slowing in the pace of growth."

And a new wild card among the competing western basins is developing in northeastern British Columbia, something Alex Douglas, managing director of west marketing for Alberta-based Nexen Marketing, and Spectra's Staple, are keeping a close eye on.

"In just a year, so many things have changed," Douglas said. "What you really see is a major shift from Alberta to British Columbia [in terms of future gas supplies]." Part of the shift is stimulated by the BC provincial government that has held land lease sales for energy exploration, adding about $2 billion to the provincial governments coffers during the past two years, he said.

While stressing there are still a lot of unanswered questions about a myriad of gas pipeline project proposals from Alaska, Western Canada and various basins in the United States, TransCanada's Portland, OR-based Rush stressed that there are factors lurking on the horizon that deal with climate change that could greatly inflate gas demand.

He cited TransCanada's estimate that the added gas-fired power generation load to balance the intermittency of the prospective new wind power generation in the West equates to an added 9 Bcf/d of supplies by 2020. Similarly, massive conversion to natural gas-powered vehicles for transportation would mean an added 3 Bcf/d.

Despite market signals that called for less-than-anticipated added supplies, Kern River Gas Transmission from Wyoming to California has two expansions in the works that could add more than 400 MMcf/d of capacity to its system. The first increment -- a 145 MMcf/d expansion handled entirely by added compression at the northern end of the pipeline in Wyoming -- is scheduled to come on-line in November 2010, and Dushinske, Kern River's marketing/regulatory affairs vice president, said the MidAmerican Energy Holdings company plans to accelerate that date considerably.

El Paso's Coombs confirmed that an application for the proposed 680-mile, 42-inch diameter Ruby Pipeline with 1.3 Bcf/d of capacity, and probably more like 1.5 Bcf/d, will be filed with the Federal Energy Regulatory Commission early next year, and it hopes to be in service from Wyoming to Malin, OR, in March 2011. Like Kern River's estimates, he thinks that date may come sooner.

El Paso has 12 shippers lined up, including Pacific Gas and Electric Co., with collective capacity needs of 1.1 Bcf/d.

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