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Western Joins Powder River Pact

Western Joins Powder River Pact

Western Gas Resources has joined the Fort Union Gas Gathering Partnership formed to deliver 450 MMcf/d or more of coal-bed methane from the Powder River Basin by the end of next year.

Western officially signed on for a 23.3% share of the partnership which will build a new 106-mile, 24-inch diameter gathering line to tap the basin in northeastern Wyoming. Western also will be the construction contractor and field operator of the header and a related gas treating facility. CMS Gas Transmission and Storage and Enron Capital &amp Trade Resources will each hold a 33.3% share, with CMS serving as the managing member. CIG Resources will hold a 10% interest and provide administrative and gas control services.

The partnership now has the two largest property owners in the basin on board. Western and joint development partner Barrett Resources control over 800,000 gross acres in the play and have big drilling plans for this year and the foreseeable future. And CMS Oil &amp Gas, whose affiliate CMS Gas Transmission and Storage owns a 33.3% share in Fort Union, bought into Pennaco Energy's position in the basin, which is estimated to cover about 600,000 acres.

The basin is expected to contain up to 30 Tcf of coal-bed methane reserves and production will be ramping up quickly this year. Western's current production is 72 MMcf/d from about 300 producing wells. But Western and Barrett plan to drill 500 more this year. CMS-Pennaco could be expected to drill a similar number.

"The Powder River development is expanding rapidly and these new projects should ensure that the increasing volumes from this low-risk, low-cost gas reserve will have an outlet to favorable markets," said Western President Lanny Outlaw.

Fort Union plans to build a gathering header with an initial capacity of 450 MMcf/d. It will deliver gas to a proposed treating facility near Glenrock, WY. Construction is scheduled to begin in April with operations to commence in September. Western currently is completing a 40 MMcf/d expansion of its existing MIGC gathering line in the basin, increasing total gathering capacity to 130 MMcf/d.

Wyoming Interstate Co. has filed with the FERC to construct a new 143-mile, 24-inch interstate gas transportation line known as the Medicine Bow Lateral that will bring gas from Fort Union at Glenrock to the Cheyenne Hub, where suppliers will have several options to downstream markets. But some regional players already are concerned the Rockies' age-old problem of transportation access once again will haunt producers.

'Gray Cloud' Approaching

"I see kind of a gray cloud on the horizon," said John Harpole of Mercator Energy, a marketing company based in Denver. Harpole noted the basin is likely to have a significant impact on the Rocky Mountain region marketplace in 1999 and 2000 because it could bring a flood of new supply on line. While more production generally is considered a good thing for producers, in the Rockies it is often considered the cause of a pipeline constraint. This time the situation could be even worse, Harpole noted, because in addition to the expected pipeline transportation constraints there will be more than the average amount of supply displacements. The production increase in the Rockies will come at a time when Northern Border and Alliance are displacing Rocky Mountain gas in the Midwest.

The region could end up with a supply glut unless demand from the western U.S. and the Denver market picks up considerably, said Harpole. "I think we're going to have a new CIG [price] index. You've got northern CIG and CIG DJ Basin. You may see DJ Basin go away. But there's going to be a CIG Cheyenne, WY. Gas is going to be stuck there."

Some Powder River Basin players are so nervous right now about being able to move gas away from Cheyenne that they already are buying up capacity on Trailblazer, one regional marketer said. "CIG has offered a 2-cent backhaul to Kern River and other westbound pipes and that's going to be a steal for Powder River shippers," the marketer said. He believes CIG could demand 10-15 cents for a backhaul to westbound pipes and still get producers to sign.

With potentially 300-500 MMcf/d of new Powder River production taking up space on pipes by the end of next year, at least some existing Wyoming production is going to be displaced. And when that happens, prices in the northern Rockies are likely to plummet from heights they've enjoyed over the past two years.

Rocco Canonica

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