The depressed basis spread between the Rocky Mountain region and Nymex gas futures improved significantly with the addition of the 900 MMcf/d Kern River pipeline expansion, but spreads could begin to widen once again unless additional proposed pipelines are built, according to speakers at GasMart/Power in New Orleans last Tuesday.

While there is a growing consensus that North American gas prices will remain strong, perhaps even rising to more than $6, the Rocky Mountain region has been left out of the party many times in the recent past.

In March when Henry Hub prices rose above $9, Rockies basis blew out to a record $4.27 (for an average of Kern River, CIG, Questar and Northwest Pipeline compared to the Henry Hub) compared to a historical average of minus 62 cents. Over the last year (before the Kern River expansion went into service) Kern Opal basis was about minus $1.952.

But on May 1, when 900 MMcf/d of firm transportation capacity was added on Kern River between Wyoming and Southern California, the basis plummeted more than 87 cents to about $1.08.

“I came from a family with eight brothers and sisters, and I know if you put one more straw in that milkshake it will disappear quicker,” said John Harpole, president of Denver-based Mercator Energy. “We just added a 900 MMcf/d straw into southern Wyoming, and it obviously had its impact, and the generators behind it aren’t even up to full speed yet.

“It clearly has improved the basis, but in order for it to get down below historical norms you have to have an increase in demand relative to supply. Industrial demand can’t fall off at the same time that generation demand is rising.”

Currently, the market is waiting to see the completion of a significant amount of the proposed power generation demand that is to be served by Kern’s expansion. The existing power glut also will play a continuing role.

Since the significant improvement in the basis spread on May 1, the spread has actually started to widen again, and in fact one-year forward basis quotes are more than a quarter wider at minus 89 cents at Opal.

Bentek Energy’s Porter Bennett said the psychological impact of adding all that capacity actually served to hype the market initially, and now spreads are beginning to come back to reality. In fact, he said, spreads may widen even further in the next few months.

But both Harpole and Bennett agreed that once gas demand picks up and additional pipeline expansion projects fall in line, the regional basis spread is likely to return to near or perhaps even below historical norms. A lot still has to occur, however, for that to happen.

“What will really change the basis, in my mind, is an eastern pipeline, whether its Cheyenne Plains or [another project]. That will fundamentally change demand and improve the basis over the long term,” said Harpole.

About 1.4 Bcf of new eastbound pipeline capacity is planned and a significant amount of that capacity will be built based on the expectation that there will be a major increase in drilling and production in the Powder River Basin. The basin was expected to show significant growth this year, but has been held back by a delayed environmental impact assessment by the Bureau of Land Management.

The BLM finally issued a favorable record of decision last week on the EIS, which theoretically opens the door to increased drilling in the basin (see NGI, May 5). But producers may take a wait-and-see approach regarding potential litigation over the BLM decision. Once the air has cleared, however, additional pipeline expansions could follow Kern River to fruition.

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