Following the Green River and Powder River basins in Wyoming, the Piceance Basin in western Colorado is destined to be the next area of substantial gas production growth in the northern Rockies thanks to EnCana, Williams and other producers, and to plans for additional pipeline infrastructure. However, development never moves quickly in the Rockies; this could take at least two or three years.

The first step in the process began last week with TransColorado’s groundbreaking on some compressor station upgrades. The Kinder Morgan subsidiary is the biggest pipeline exiting the Piceance today, but its 22-inch diameter size provides minimal takeaway capacity. The company received FERC authorization two weeks ago to increase its capacity by 50%, but that still won’t be enough to accommodate the production growth some companies are expecting.

“We’re expecting to have our pipeline expansion up and running by Aug. 1,” said TransColorado General Manager Julian Huzyk. “Until then, the pipe will be running full.” In fact, Huzyk said some Piceance production already is being shut in because of pipeline constraints.

In total, there’s about 500 MMcf/d of gas coming out of the Piceance today. About 250 MMcf/d travels south on TransColorado and the other half flows in various directions. Producers have limited ability to move Piceance gas into Kern River Gas Transmission through Questar Pipeline. They also can move a small amount of production to Northwest Pipeline via Colorado Interstate Gas (CIG) and Questar and some to the Cheyenne Hub via CIG.

Despite these limitations, however, the two largest producers in the basin, Williams and EnCana, are drilling like gangbusters. EnCana has 20 active rigs. Williams is running about 10 rigs. TransColorado’s August expansion will provide some capacity relief, but it will be filled up quickly.

The situation has prompted EnCana to step forward with a major new pipeline project of its own, the 1.3 Bcf/d Entrega pipeline to the Cheyenne Hub in northeastern Colorado.

Western Canadian gas production experienced similar pipeline constraints for years until producers got together to sponsor the 1.3 Bcf/d Alliance project to Chicago.

“I think if you listen to [EnCana’s] first quarter reports and answers to questions from the media in terms of their intent on Entrega, our perception is that EnCana is trying to approach the new pipeline project on a similar basis to the producer-sponsored Alliance Pipeline,” said Huzyk.

One thing is clear. EnCana doesn’t want to sit around and watch yet another Rocky Mountain pipeline project languish in a quagmire of shipper uncertainty. Within the first few weeks of announcing the project, the producer had already made contact with federal regulators in an attempt to establish an accelerated review process. EnCana wants a final FERC certificate by next spring so it can put the pipeline in-service in November 2005 (see NGI, March 1). The company already has awarded a project management and construction contract for the 327-mile pipeline project to Denver-based engineering firm Trigon-Sheehan.

The Rockies gas industry isn’t accustomed to seeing plans for infrastructure to be developed at such a rapid pace. Some say the producer is making hasty decisions that will end up costing it in the long run. Others, however, admire EnCana’s resolve and see wisdom in its desire to diversify its market access.

The bottom line is that this is good news for many Rockies producers. EnCana is extremely bullish on the Piceance Basin and is willing to take the risk on a major new pipeline project, something Rockies producers are famous for avoiding.

The bad news for some of the other pipeline planners is that they may not be involved in the process initially. But in the end, many of them probably will benefit.

“At some point, I think [EnCana’s] game plan is to bow out,” said Huzyk. “They obviously have a tremendous problem to face long term if they are going to be the largest shipper on a pipeline that they are trying to build.”

As has been the case with other pipelines EnCana has started, the company may end up selling its stake in the system or could remain a part owner once the project is off the ground.

“We are in discussions with third parties, and we see amazing opportunities for others to join us,” EnCana’s Bill Oliver, president of midstream and marketing, said when Entrega was first announced. “There is the opportunity for us to increase our production in the Rockies, and we want it on by 2005.”

EnCana’s Rocky Mountain gas production grew 50% in 2003 to 588 MMcf/d, most of which came from the Jonah Field in the Green River basin of Wyoming and the Mamm Creek field in the Piceance. The Mamm Creek produces about 200 MMcf/d and will be one of the primary sources of supply for the new pipeline. EnCana also has about 100,000 net undeveloped acres in the Piceance.

Meanwhile, other large producers in the basin, particularly Williams, also are planning significant expansions and supply growth. Williams has about 175,000 acres in the Piceance and about 2,500 drilling locations and has 800 wells with 10 rigs operating currently. It plans to increase the number of rigs to 12 or possibly 15 this year to make up for lost drilling time in the Powder River Basin, where permits have taken a long time to obtain from the Bureau of Land Management. Unlike the Powder River Basin, however, there is no regulatory risk in the Piceance.

EnCana is committed to taking its gas East rather than South and West, as Rockies producers traditionally have done. That’s spells trouble for TransColorado and some of the other pipelines serving the Piceance.

A major reason Piceance producers are looking for an eastern outlet for their gas production has to do with the 900 MMcf/d Kern River Gas Transmission expansion last year. Spot prices at Opal, WY, are much lower than prices at the Cheyenne Hub because of the introduction of Kern River’s new capacity. Midcontinent prices also have historically been higher than prices for San Juan Basin gas. The Midcontinent market simply looks like it could be the stronger market going forward.

“The reason they want to go East fundamentally is that they have the lion’s share of their gas in the Rockies, whether in Canada or the United States, going to California and they want to diversify away from California,” said Huzyk. “They want to diversify, which I think is a smart move.

“Secondly they also have taken a look at basis differentials, and looking at Midcontinent versus San Juan prices over the last 10 years they know that Midcontinent holds a premium over San Juan.”

Furthermore, El Paso’s Cheyenne Plains project from the Cheyenne Hub to multiple pipelines in Kansas is now a sure thing. The $332 million project received a FERC certificate three weeks ago. Cheyenne Plains will provide about 560,000 Dth/d of new eastbound takeaway capacity from the Rockies.

Kinder Morgan Interstate’s Advantage expansion is another downstream project that could provide a new outlet for Rockies production at the Cheyenne Hub.

But Huzyk believes it would not be wise for EnCana to send all of its Piceance Basin gas in one direction. The Southwest region is expected to experience substantial market growth and the San Juan Basin is in decline.

“I don’t think they have done their homework fully in terms of recognizing what is happening with the long-term decline in the San Juan that’s still continuing. Transport rates also are coming down on El Paso and Transwestern because of competition between them,” said Huzyk. There’s also Kinder Morgan’s proposed Silver Canyon pipeline project, which would bring Rockies gas to the Phoenix area.

Nevertheless, Huzyk is not worried. The optimism among Piceance producers has created a drilling and acquisition frenzy that’s sure to produce enough growth to continue supporting TransColorado as well as Entrega or an alternative.

In addition to Williams and EnCana, many other producers, including Tom Brown, ExxonMobil, Occidental Petroleum, Petroleum Development Corp. and Koch just to name a few, are waiting for further infrastructure to be developed so that the Piceance Basin can reach its full potential.

TransColorado’s Huzyk will be speaking on the 10 a.m. MDT Western Pipeline Roundup panel at GasMart in Denver on May 19. For more information go to https://www.gasmart.com/.

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