Shippers Like Kern's TDR Rates, Mainline Expansion Plan
A Kern River official said a large number of pipeline shippers
expressed interest in extending or signing new firm transportation
agreements under the pipeline's proposed term differentiated rate
proposal, a rate discounting plan announced in late October. The
pipeline company received requests from nine new shippers, mostly
marketers, for 900 MMcf/d of firm capacity on its mainline under
the new rate design during a recent open season. In addition, eight
out of its 11 existing shippers expressed interest in holding on to
600 MMcf/d under new discounted rates.
The pipeline's current capacity from the Rocky Mountain region
to markets in Southern California is 700 MMcf/d, which makes an
expansion appear likely. But the Kern official said it's still too
early in the process to determine if an expansion will be required.
Over the next month, existing and new shippers will be engaged in
negotiations over potential contract transfers or release
agreements, which will determine eventual capacity additions.
"What I'm expecting is a marriage between the serious new
shippers and any existing shippers that want to give up their
capacity. If for some reason we have new shippers that want
capacity but couldn't find it or existing shippers don't give it
up, I guess we'd have to look at an expansion. But it's my opinion
that might not happen," said Greg Snow, staff business development
representative. Snow said he expects "a good majority of existing
shippers" holding the current 700 MMcf/d of system capacity would
like to get out of their existing contracts with the pipeline and
let a marketer manage that pipeline space for them.
"Kern River was built based on the backbone of the producing
companies; they wanted an outlet for their gas. Since 1989, we've
had a proliferation of all these marketing companies come in and
fill a niche, that is getting more value for the transportation by
matching supply with a market. So we're seeing more and more
producing companies sign these marketing companies up as agents to
manage that. The majority of the new shippers are marketers."
If an expansion is required, something less than 500 MMcf/d
would be expected. Anything more would increase rates. A smaller
expansion would lower rates, said Snow.
He said the company also recently received requests from
shippers for 1 Bcf/d on a proposed 150-mile extension into Long
Beach, CA. The proposed lateral would be 24- or 30-inches in
diameter and would be designed to carry a minimum of 300 MMcf/d. If
the extension project progresses as planned, offering a new market
for more than 300 MMcf/d of gas, "I think that might be an
opportunity to expand the mainline."
The mainline rate proposal would provide discounts in varying
amounts depending on the terms of the contracts signed. A 15-year
deal would cut rates 25 cents/Dth to about 41 cents. It also would
allow existing customers to extend contracts or negotiate transfers
of their capacity to other parties. Most of Kern's existing
contracts expire in 2007.
"Kern River is taking some risk in doing this because we're
postponing the return of our equity into the outer years, but we're
doing this to try to bring more value to the transportation. Once
we got that message out and people looked at it they weren't quite
as scared about extending contracts."
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