The installation of about 41,700 MW of new gas-fired power generation in the Southwest and California over the next three years and the potential addition of 5 Bcf/d of new pipeline capacity out of the Rocky Mountain region over that period could forever end the price depression currently occurring in the Rockies, several experts agreed last week.

While the attention of most energy observers has been fixed on headlines about the credit and financial crisis and the continuing regulatory investigations into potential market manipulation, some significant changes have been occurring to gas prices in the Rockies and an even greater changes could be on the way because of Kern River Gas Transmission doubling its capacity, several other pipelines expanding or building new systems and multiple new power generators scrambling to line up fuel for their plants.

Over the last four years prior to Jan. 1, 2002, the daily spot price difference between Opal, WY, and the Henry Hub averaged 45 cents, according to NGI data. However, since the beginning of the year, the daily spread has averaged 99 cents and on April 1, the beginning of the traditional storage injection season, the spread jumped nearly $1 to $1.50. The following day, it soared to $2.46 and since April 1, the spread has averaged $1.72, with several jumps above $2.00.

The situation appears to have been started by a combination of pipeline and storage maintenance outages in April. Outages at Questar’s Clay Basin storage facility and at Transwestern’s La Plata (CO) Station, compounded by the longtime Kemmerer (WY) Station bottleneck for northward flows on Northwest Pipeline and high-linepack conditions on Kern River (see Daily GPI, April 3 ) triggered the basis blowout event. Trailblazer also was doing some pipeline relocation work related to its expansion project that temporarily removed a significant amount of capacity for eastward flows early in April.

Although the origins of the basis blowout might be traced back to those outages, they can’t explain why Rockies basis remains extremely wide. One source said that a lot of capacity, both transportation and storage, on certain pipelines is controlled by a handful companies who can exert downward pressure on prices much more easily now that production is ramping up. Most agree that the weak market in California this year, the abundance of hydroelectric power, combined with the growth of gas supply out of the Power River Basin, the Jonah Field and other areas in the northern Rockies, has led to greater gas-on-gas competition for available markets. They say the only thing that will solve the problem is significant new pipeline and storage space and demand growth, all of which is on the way.

“Ultimately we believe that additional infrastructure will lead to much narrower basis differentials in the Rockies,” Raymond James analyst Wayne Andrews agreed, noting that there are at least 11 pipeline expansions on the drawing board that potentially could add 5 Bcf/d of new firm transportation capacity out of the region.

Kern River Gas Transmission’s $1.2 billion 2003 expansion project will be one of the largest expansions out of the region in many years. It will create a huge new conduit for nearly 900 MMcf/d of additional gas to head to a surprisingly large number of power plants under construction in Nevada, California and other Southwestern states starting next May, if all goes as planned. In one fell swoop, the project could significantly alter current gas flows and wipe away the export constraints currently contributing to the price depression in the region, where production is rising rapidly. The project received a favorable final environmental review from FERC on June 21 and is on the FERC docket for the July 17 meeting,

While Kern River’s expansion certainly will provide some relief to bottlenecked supplies, some significant changes first have to take place in order for such a large amount of incremental gas to make it into the expanded pipeline, said Kern River’s Greg Snow, director of business development. Most of the pipelines connected at Opal, WY, take gas east from Opal to markets in Colorado, the Midcontinent and the Midwest. That probably will have to change once the 2003 expansion is put into service. In addition, power generators on the other end of the pipe better start thinking long and hard about where they will get their fuel.

“We’re trying to connect all the dots here so that 900 MMcf/d can show up at Opal,” but it’s not going to happen overnight, Snow said. “We’re having conversations with producers and interconnect pipelines and with our customers to get them to start thinking about it, asking them, ‘Where are you realistically going to get your gas supply? If you don’t think you can get it out of Opal, here are some other options on how gas can get there.’ The [upstream] pipelines are well aware of this as well, and a couple of them might come out here shortly with open seasons on building facilities so they could take gas to Opal.”

“A lot has to happen. You guys have to wake up here,” he said,conveying a sense of urgency. “We already started ordering pipe and compression turbines. We have approval for unloading sites. We’re already in motion.”

Some of the Wyoming pipelines — Wyoming Interstate Co. (WIC) in particular and possibly Overthrust and Colorado Interstate Gas (CIG), which operates WIC — might even have to entirely reverse their gas flows so that they would be transporting gas west rather than east, Snow advised.

“CIG could send gas up to Opal or could reverse WIC to deliver into Overthrust, which then could go to Opal or another point in that vicinity. None of this is enough to get the 900 MMcf/d,” he admitted. “It’s a good infusion of additional gas supply, so not all of it has to come from Opal, and we feel that is going to be needed.

“Powder River gas could easily find a home going west. I just don’t think people are getting off their duff to make it happen,” Snow added. “With everything going on in the industry, the customers are looking out 30 days, while we’re trying to get them to look out five years because that’s what it’s going to take.”

John Harpole of Mercator Energy, a Denver-based producer services company, thinks the situation is even more serious. Harpole and others say the amount of demand from new power generation in the Southwest will be far greater than can be supplied by production from the Rockies.

Harpole said he thinks that once the Kern expansion is in place and upstream pipelines are reconfigured to deliver gas at Opal, there won’t be any gas left to ship to eastern markets. “I don’t think gas in southwestern Wyoming will ever move east again in the winter or the summer,” he said. “I think there’s a train wreck coming in terms of gas availability out here. The demand from new electric generation in Nevada, Arizona and California [will be enormous] at the same time relative decline rates are getting steeper in [mature] producing fields in the western United States.”

Most people don’t realize the number of power plants already being built in the Southwest. A power supply glut is certain to occur, according to Porter Bennett, a consultant with Bentek Energy in Denver. Furthermore, said Bennett, the West already is a net importer of gas supply; the huge amount of new generation will tax the delivery system like never before.

Bennett said between 2003 and 2005 there will be nine new power plants built in Nevada, five in Colorado, five in New Mexico, 18 in Arizona and 25 in California. Most of the units are already under construction. He tallies the new generation load at 13,700 MW in 2003, 17,000 MW in 2004 and 11,000 MW in 2005.

“It seems to me that a lot of that is going to be just sitting there [idle] at some point,” said Bennett. “My guess is you will see some of them fall off. They’ll just get to a certain point and stop [construction]. A lot of them argue they are more efficient and will run instead of existing less efficient plants, and that’s probably true for some of them. It may be that they will sit there and take something to cover their capital costs. There’s a real good question about what their utilization is going to be.”

Even if only some of the 62 proposed power plants are built and run only part of the time, gas supply still could be a big problem, said Bennett. “I don’t think it’s going to be even close to enough,” he said.

“If all these new power plants were to run 24/7, then our expansion wouldn’t be big enough,” Snow admitted. However, many of the new plants won’t be running all year, he noted.

“Everyone says they are baseload, but we don’t believe so,” he said. “That’s why they haven’t signed up for the full peaking load either. In the case of Constellation’s [High Desert project on Kern’s new lateral] they haven’t signed up for any [mainline capacity]. They can take gas off of El Paso and Mojave as well as Kern because they are connected to the common system of Kern River/Mojave.”

Many of the generators are leaving their transportation options open, which may not be a smart move in light of the number of projects fighting for supply, and the contractual changes taking place on El Paso Natural Gas, Snow noted.

With 18 new plants planned for Arizona, El Paso will have its hands full, said Snow. “That’s taking away what El Paso once delivered into California,” he said. “There will be another void that could be served by Kern River.”

But a lot depends on lining up the required supply on the north end of the Kern River pipeline. While there are some doubters, Snow believes there is enough production growth in the Rockies to serve much of this new power generation load. The Jonah Field and the Powder River Basin won’t be the only basins serving the new demand, he said. Kern has another new connection with Questar in Utah. “That could be another excellent infusion of gas for Kern,” he said. About 150-200 MMcf/d already is flowing into the system from the Uinta Basin and what is called the Drunkard’s Wash area in the middle of Utah, which is displacing some supply that normally would enter the system at Opal.

Despite the increasing financial constraints in the industry and the dramatic shift in the western energy market since the California crisis, Kern River officials are hoping that producers, new power generators and upstream pipelines can look beyond the current situation and plan for the future.

Kern’s 2003 expansion will add 885,626 Dth/d of incremental pipeline space, bringing the total system capacity to 1.73 Bcf/d. It calls for about 717 miles of the pipeline’s 922-mile system to be looped from Wyoming to Bakersfield, CA, and for the addition of 163,700 horsepower of compression at three new and six existing compressor stations. Once in place, the system will provide significant room for supply to exit the Rockies and serve new power generation in the Southwest, but it’s clearly up to the producers and consumers to solve the significant supply-demand conundrum that awaits.

Other expansions that will help serve Southwest power demand growth include the 800 MMcf/d Desert Crossing project (see NGI, Jan. 14) and the Southern Trails pipeline. However most of the other pipeline expansions out of the Rockies, including Western Frontier, Coastal Connection, Ruby, Bison and others, are designed to serve markets in the Midwest or Midcontinent regions.

Although they are suffering now under depressed prices, Rockies producers have help on the way. Independent producers and majors alike already are searching for the next elephant-sized field to satisfy growing demand. This has led to a large increase in Rockies activity and a sharp spike in acreage prices. The National Petroleum Council estimates ultimate gas recovery in the Rocky Mountain region of 388 Tcf, and only 17% has been produced so far.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.