When the second (western) leg of the Rockies Express (REX) pipeline goes into service in early 2008, it could put pipelines transporting natural gas from the Anadarko and Permian basins at a distinct disadvantage, said Denver-based Bentek Energy LLC in a report released Wednesday.
The second or western leg of the proposed line being built by Kinder Morgan, Sempra Pipelines & Storage and ConocoPhillips would stretch 712 miles from the Cheyenne Hub in northeastern Colorado to a Panhandle Eastern Pipe Line interconnect in Audrain County, MO. The third or eastern leg, REX-East, would extend the pipeline 622 miles from Missouri to Monroe County, OH. This portion is scheduled for service in 2009. When fully completed, Rockies Express would have the capacity to move 1.8 Bcf/d of gas, and would be the largest gas pipeline built in the United States in more than 20 years.
"In contrast to the south-to-north flows of many of the nation's [existing] major gas pipeline systems, REX will run west-to-east from the cheapest supply source in the nation to the northern half of many of the pipeline systems that service premium markets in the Midwest and Northeast," said Porter Bennett, president of Bentek, an energy markets information company. "This fact, along with the operational efficiency of the REX system, will provide buyers in midwestern and eastern markets with access to cheaper supply via a less expensive transportation route," he noted. Bentek projects that an additional 600-700 MMcf/d of Rockies gas production will be seen this year.
The Bentek report pointed out that the second leg of the Rockies Express pipeline will deliver natural gas into pipelines that are running near their full capacity. "As a result, some of the gas flowing north from the traditional supply areas in the Anadarko and Permian basins in Texas and Oklahoma will be pinched out of the market. Transportation capacity and market access previously enjoyed by producers in the Anadarko and Permian basins will now be taken up by Rockies producers shipping lower-cost Rockies gas through the REX system," it said.
"Our analysis of REX [second leg] indicates that gas supplies on Panhandle Eastern and Northern Natural Gas will be at a distinct disadvantage because of their transportation rates and more expensive supply sources in the Anadarko and Permian basins," said Rusty Braziel, Bentek managing director. "During the winter when demand puts maximum pressure on the constraints of these connecting pipelines, REX's advantages likely will push Permian Basin gas back into Texas or California markets and Anadarko Basin production back into Oklahoma and Texas markets."
The 16-page report further said REX affiliate Natural Gas Pipeline Company of America (NGPL) would face less of an impact; only Permian Basin gas on NGPL would be priced out of the Midwest market. But other pipelines, most notably El Paso's Cheyenne Plains, that ship gas east from the Rockies will suffer from cost as well as locational disadvantages, it noted.
"Soon after REX [second leg] becomes operational, the pipeline's cost advantage will encourage certain shippers currently moving gas down Cheyenne Plains to the Anadarko and then on to Midwest markets to shift those volumes to REX," the report said.
The Bentek report further indicates that Rockies producers most likely will see comparatively higher prices at Opal and the Cheyenne Hub in Colorado. The 11-13 cent price advantage enjoyed by Anadarko Basin producers last year compared to Rockies' producers at Cheyenne Hub is expected to vanish, it said.
The current forward markets already indicate that price differentials between Rockies' spot points and locations in the Midcontinent region will be cut by about two-thirds starting in the summer of 2008, according to the report. However, if Rockies prices remain lower than prices in competing basins in the Southwest, Bentek said it would only ensure that Midwest markets would rely more heavily on the Rockies Express pipeline to the detriment of pipelines serving the Anadarko and Permian basins.
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