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Shippers Like Kern's TDR Rates, Mainline Expansion Plan

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."

Rocco Canonica

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