In order to make a living in the shale gas world, Rockies Express Pipeline LLC (REX) wants to offer westbound capacity from the Marcellus/Utica region, but legacy shippers are balking at its plan to offer lower rates for customers headed west on a portion of the pipeline.

In early June, REX sought a declaratory order from FERC that “most favored nations” (MFN) provisions of its negotiated contracts with foundation/anchor shippers would not be triggered by future agreements to ship gas westward on the eastern end of its system.

The contemplated transactions would have a different and shorter path than those of foundation and anchor shipper contracts, REX said, “…and because they will utilize only one zone on the system, they will not use all of the facilities used to provide service to the foundation and anchor shippers and will be at lower rates.”

MFN provisions should not be triggered by future firm transportation agreements at lower rates that “…have an east-to-west primary path; are for a term of one year or longer; and are limited to service in one rate zone and therefore do not utilize all of the same facilities or rate zones as” service for foundation/anchor shippers, the pipeline told the Federal Energy Regulatory Commission (FERC) [RP13-969].

However, foundation and anchor shippers on the express line designed to send Rockies gas to the Midwest and East feel jilted by the pipeline that they helped underwrite with their business not all that many years ago. Among those filing motions to intervene were Indicated Shippers, which said the Commission should not “absolve” REX from its contractual obligations.

“…Foundation and anchor shippers made substantial long-term capacity commitments,” Indicated Shippers said. “Yet, by virtue of this petition, Rockies Express is attempting to eliminate that value by proposing an interpretation of the MFN clauses that is so narrow, they would cease to have any meaningful applicability.” Potential firm transactions on the eastern portion of REX, “which are vaguely described, speculative and occurring only in Zone 3,” would indeed constitute “service on the project,” contrary to the argument of REX.

Also filing to intervene was Ultra Resources Inc. The producer invoked the language of its MFN agreement with REX and said each of the pipeline’s original anchor shippers has the same MFN language in its agreement with the pipeline: “‘[s]hippers rate shall be no higher than the lowest rate applicable to any other shipper under a firm transportation service agreement for service on the project, excluding rates applicable to foundation shippers, short-term transactions (i.e., 12 or fewer consecutive months) or seasonal transactions.'”

REX was conceived and constructed to rescue gas stranded in the Rockies and take it to higher-value eastern markets. The pipeline was in the ground before the industry had awakened to the fact that shale gas plays scattered around the country, and particularly in the East, would change everything (see NGI, May 20). In May 2011, REX revised its tariff to offer a new displacement-only backhaul service, which was approved by the Commission the following month.

However, this is no longer enough to meet demand to move gas westward from the Marcellus/Utica, REX said in its latest petition. “Given the declining demand to move Rocky Mountain gas east, it is not clear that sufficient displacement volumes will be available throughout Rockies Express’ expected service life to support [backhaul] service,” the pipeline said. “Shippers interested in service on the east end of the pipeline, not surprisingly, are interested in long-term firm services that they know will always be available.”

REX said that because it is proposing to move gas east-to-west only within Zone 3, the MFN provisions do not apply. Further, it said the fact that REX was not originally constructed for bidirectional flow also precludes application of MFN provisions to contracts for westbound service within Zone 3. “Had the [original contracting] parties contemplated bidirectional flow — which is an essential prerequisite for concluding that the MFN could be triggered by the potential transactions — it stands to reason that bidirectional compressors would have been installed at the time of construction to make such flows possible,” REX said.

The pipeline said it would not go forward with provision of the east-to-west service if the MFN provisions are triggered in its existing contracts as “…reservation charge revenue flow from the foundation and anchor shippers supports Rockies Express’ debt payments. Rockies Express will not take any actions that will threaten this revenue stream.”

And if REX can’t contract to provide the Zone 3 east-to-west service, it will be bad news for just about everyone, the pipeline said. Without the new contracts, “…Rockies Express likely will miss a valuable opportunity to maintain the continued subscription of its system beyond 2019,” it said.

“Moreover, Rockies Express, because of its many interconnections in Zone 3, is one of the most attractive outlets for Marcellus and Utica production, so an over-inclusive interpretation of the MFN triggering events may have the effect of ultimately depressing Appalachian netbacks and reducing incentives to maximize such production in the public interest. This will have negative consequences to Rockies Express’ owners and ratepayers and will deny access to existing infrastructure that can provide additional liquidity and optionality to the marketplace.”

Encana Marketing (USA) Inc. in its filing laid claim to being REX’s sole foundation shipper and said the matter is one for the courts rather than FERC. Further, Encana Marketing noted the REX public interest arguments for provision of the Zone 3 service and said these are merely “red herrings…This is a contract interpretation issue, plain and simple.” Such arguments are not relevant to an analysis of the intent of the original contracting parties, it said.

Separately last week, REX said it had struck a binding precedent agreement with “a large Utica Shale producer” to transport up to 200,000 Dth/d of processed Utica gas westward through the pipeline to markets in the Midcontinent. “Pending satisfaction of certain conditions in the agreement, the processed gas would enter into REX through a newly constructed 14-mile residue header being installed by REX at the tailgate of MarkWest’s Seneca Processing Complex in Noble County, OH,” the pipeline said. “The new facilities, which are expected to be in service in late 2013, will add significant natural gas supply to the east end of REX for transport to points west or east.”

REX is a joint venture of a subsidiary of Tallgrass Development LP (50%); Sempra U.S. Gas & Power (25%), a subsidiary of Sempra Energy; and a subsidiary of Phillips 66 (25%). A wholly owned subsidiary of Tallgrass Development operates the pipeline.

“Tallgrass, as the 50% owner and operator of REX, believes that we and our shipper have a common understanding of the future for transporting gas out of the Appalachian Basin,” said REX Chairman Bill Moler. “REX is a high-capacity, long-haul transmission pipeline that spans from Colorado/Wyoming to Ohio and can act as the nation’s northern-most east-to-west and west-to-east corridor for natural gas distribution. We believe that making REX truly bi-directional is the next wave of takeaway capacity from the Utica Shale play.”

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