In an examination of last week's Rockies basis to Henry Hub blowout -- which saw Opal basis collapse to minus $6.71/MMBtu and Cheyenne Hub basis plummet to minus $7.23/MMBtu -- Bentek Energy LLC finds "not much relief in sight" this summer for the region's producers.
"With no other new pipeline expansions scheduled until late 2007 or early 2008 when Rockies Express (REX) Phase II comes on-line, Rockies natural gas markets are clearly vulnerable to repeated shocks like last week throughout the summer," the Golden, CO-based consultancy warned. Indeed, producers are likely to find themselves waiting for winter to create gas demand locally and for the 713-mile REX Phase II to enter service. "It is going to be a long summer for producers not holding firm capacity out of the Rockies region."
Save for Questar's South System Expansion, which will add an incremental 175 MMcf/d of capacity out of the Uinta Basin for delivery into an already nearly full Kern River beginning in November, there's not much to look forward to but Phase II of REX.
In the meantime, smart players will be monitoring weather reports and pipeline bulletin boards to determine when what Bentek called a "perfect storm" might rear up again like a Colorado Front Range squall. Bentek analyzed the events of June 4-8 and found that the signs were there leading up to the blowout.
"The market was primed for a crash," Bentek analysts said in their report. "The early warning signals of the impending disruption came in the form of two pipeline notices posted by Trailblazer and Northwest at the end of May." Trailblazer posted a notice on May 21 that said on June 5 the pipeline would be pigging Segment 40 of its line, resulting in curtailments to 41% of maximum daily quantity. The Northwest notice on May 28 said the pipeline's La Plata B and Moab compressors would undergo maintenance June 5 and 6 (see Daily GPI, May 31).
Bentek also noted that on June 1 Cheyenne Plains pipeline reduced its available capacity from its winter maximum of 841 MMcf/d to its summer rate of 797 MMcf/d. On June 5 capacity out of the Rockies dropped by about 660 MMcf/d. Northwest was down by 170 MMcf/d, and Trailblazer was down by 500 MMcf/d. Once work was completed at the Northwest La Plata station and on Trailblazer flows partially recovered, Bentek said, but continued work at Northwest Moab meant that constraints continued.
To avoid shutting in production or paying penalties, nonfirm shippers were forced to cut prices. "As a result, prices dropped to record levels," Bentek said. A 15-cent/MMBtu deal was reported for CIG, not to mention the blowouts of Opal and Cheyenne Hub basis (see Daily GPI, June 5).
The last time any pipe had averaged less than a dollar was on the trade date of Sept. 24, 2002 (see Daily GPI, Sept. 25, 2002). On Monday, June 5, CIG tied the record for lowest price ever at 15 cents that had been established previously in 2002 by both Kern River and Opal on the trade date of April 8 (see Daily GPI, April 9, 2002).
Bentek said its West Production Market Model showed that production dropped from 12,039 MMcf on June 4 to 11,678 MMcf on June 5, a decline of 361 MMcf. "Most of the decline was in the Green River-Overthrust basin area with the Powder River and Uinta-Piceance also contributing significant volumes," Bentek said. "Production was back up to almost 12,000 MMcf on June 7."
Looking ahead, Bentek said there are four factors that could mitigate the threat of more Rockies basis shocks this summer. They are weather-related demand, slower drilling and development, increasing storage fills and a new outlet for gas molecules in the form of natural gas liquids plants slated to come on-line in September.
Hot weather this summer could add an additional 150 MMcf to gas-fired power demand in the power plant sector served by the Kern River and Questar pipelines.
Bentek noted evidence that Rockies producers are slowing activity due to lower regional prices and higher drilling costs; monthly applications for permits to drill have fallen by 308 since the peak last summer, the firm said. "This development, combined with the expected winter reduction in drilling activity, has resulted in a leveling off and slight decline in the number of rigs drilling for gas."
On June 1, storage in Clay Basin was about 5 Bcf below where it was a year ago, and Kinder Morgan storage is lower than last year by about 3.8 Bcf, Bentek said; CIG is about the same. The Clay Basin and Kinder Morgan storage facilities could absorb some surplus production. The 5 Bcf at Clay Basin could mean about 39,000 MMBtu/d of additional pipeline capacity for the remainder of the season, Bentek said. The 3.8 Bcf at Kinder Morgan could mean an additional 24,000 MMBtu/d.
Last month, Northwest held a conference call with shippers to discuss moving balancing gas from Clay Basin storage to Jackson Prairie storage. "The economics of gas prices in the Rockies throughout this summer and fall indicate that north flow demands through the Kemmerer Compressor Station will exceed design capacity for the foreseeable future," Northwest cautioned in its notice to shippers about the meeting (see Daily GPI, May 15).
Finally, startup of Phase I of an expansion at Enterprise Products Partners LP's Meeker gas plant, expected in early September, could take an additional 121 MMcf/d out of the region, Bentek said. Phase II of the Meeker expansion is expected to take an additional 242 MMcf/d, but it is not expected to come on-line until mid-2008. Additionally, Enterprise is in the process of expanding its Pioneer gas processing plant near Opal, WY. "Construction of the new [650 MMcf/d] plant next to the existing [600 MMcf/d] facility is expected to be completed in the third quarter of this year," Bentek said.
If the mitigating factors don't play out, Rockies producers this summer will be praying for snow and for REX Phase II, which will extend the pipeline from the Cheyenne Hub to Audrain County, MO. It has a targeted in-service date of January 2008 (see Daily GPI, April 20). Phase III of REX would extend the pipeline into Clarington, OH, and is scheduled to be operable in mid-June 2009. REX is predicted by Bentek to be a game-changer for the gas industry (see Daily GPI, May 14).
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