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Advent of REX-East Service Helps Compress Rockies Basis Spreads

It's been well established for a long time that prices in the Rockies, which slumped to record lows of 1 cent/Mcf in a few instances in 2007, have been the low market on the North American natural gas price totem pole. But the initiation of service in May 2008 on the western section of Rockies Express (REX-West), with its major addition of takeaway capacity for Rockies supplies through Audrain County, MO, eventually proved to be a major boon for Rockies numbers, and the addition of REX-East transport to the Lebanon Hub in Ohio near the end of June this year has further served to compress basis to other regions.

A producer who regularly charts daily CIG-Henry Hub (HH) basis differentials (the Hub average minus the CIG average) noted that the spread had still been as wide as $1.74 as recently as the Friday, June 19 trading date. Full REX-East operations commenced a little more than a week later on June 29, and although the effects took a few days to develop, the gap had fallen as low as 60 cents on the July 7 trading date.

Rockies-Gulf basis has continued to shrink since then as REX-East ramped up to full capacity, the producer said. The latest CIG-HH spread was only 32 cents last Thursday, he said. In recent months Rockies prices have often been at parity with or not much below Midcontinent quotes, and recent Gulf Coast numbers haven't been much more than 25-35 cents above their Rockies counterparts.

The producer said his charts show the CIG-HH basis differential has been less than a dollar since July 2, dropping to 74 cents the next day. The highest it's been this month was 47 cents on Aug. 11, he said.

During the booming market in the first half of last year, HH commanded a whopping $2.26 premium over CIG numbers on the trade date of May 19, 2008. The next day REX began service on the 713-mile, 42-inch diameter segment of its system running from Cheyenne Hub in Weld County, CO, to an interconnect with Panhandle Eastern in Audrain County, MO, raising its capacity (but not total flows) to 1.5 Bcf/d at that point. Because of the unprecedented price strength and market distortions at that time, the basis gap grew to as much as $3.45 on the trade date of May 29, 2008.

The unusual nature of the market in the first half of last year tended to delay any beneficial effects from the new REX-West takeaway capacity (also, the pipeline needed to ramp up to full linepack in its first few months). As recently as the Nov. 14, 2008 trade date the spread still exceeded $3. But just over a month later on Dec. 16 the gap had shrunk to 11 cents. It would expand to $2 or more on a few occasions in the early months of 2009, but has gotten much tighter again in recent weeks.

REX is still dropping off some gas at Midcontinent/Midwest interconnects, said Bentek Energy analyst Sam Duran, but its flow models show about 1.5 Bcf/d being delivered into REX-East beyond Audrain County, MO. When REX-East is extended to Clarington, OH, scheduled for November, capacity will be 1.8 Bcf/d from Wyoming to Clarington, he said.

About 200 MMcf/d is being delivered at old REX-West interconnects in the Midcontinent, with the lion's share of that volumes going into Northern Natural Gas, Duran said About 875 MMcf/d is going as far east as Lebanon Hub at this point, he added. Most of the REX system is now pretty close to running at maximum capacity, Duran said.

The all-time biggest CIG-HH price differential in NGI's price database occurred on the Feb. 25, 2003 trade date, when HH's $18.85 average compared with CIG's $6.96 for a difference of $11.89. A source noted a late summer 2007 blowout of differentials to $6 or more that lasted into November that year. So far this month the average spread has been just 37 cents within a range of 24-50 cents, he said.

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