After sub-zero cold set back construction several weeks, the second segment of the first leg of the Rockies Express Pipeline (REX) project finally entered service last Wednesday, providing significant new transportation capacity within the region, operator Kinder Morgan Energy Partners (KMP) said. However, until the eastern extension of the massive REX system enters service, Rockies production could face the age-old problem of finding a regional exit door.

The second segment extends the system 192 miles from the Wamsutter Hub in Wyoming to the Cheyenne Hub in Colorado. The entire 328-mile First Leg pipeline system will be at 500,000 Dth/d of capacity until a new gas processing plant being built by Enterprise at the Meeker Hub in Colorado enters service later this year, KMP said. Once the processing plant comes online, capacity will increase to 750,000 Dth/d. The first segment of Rockies Express — a 136-mile, 36-inch diameter pipeline from the Meeker Hub to the Wamsutter Hub — began interim service in February 2006.

“We are pleased to complete the first leg of REX, which was about six weeks behind schedule due to inclement weather in the Rocky Mountains,” said Scott Parker, president of KMP’s natural gas pipelines division. “We expect to receive the FERC certificate for REX-West this spring and commence construction shortly thereafter.”

FERC’s authorization of service on REX’s first leg came only weeks after the Commission admonished the pipeline for a “poor compliance record” during construction. At one point, the Commission even said it might issue a “stop work order”on the project because of “unapproved activities,” inadequate inspections during inactive construction and other environmental concerns. Nevertheless, FERC gave the project a green light on Feb. 9.

The next segment of the $4.4 billion REX system will be the REX-West line, which will consist of 713 miles of 42-inch diameter pipeline from Weld County, CO, to Audrain County, MO. It has a targeted in-service date of December 2007. REX West will include interconnections with five other interstated pipelines, including Kinder Morgan Interstate Gas, Natural Gas Pipeline Co., Northern Natural, ANR and Panhandle Eastern. REX-East, a 622-mile segment from eastern Missouri to the Clarington Hub in Ohio, is expected to be in interim service as early as Jan. 1, 2009, and could be fully completed by June 2009. This last segment of the system will provide nearly two dozen interconnections with interstate pipelines, local distribution companies, electric utilities and other customers.

Until the two eastern segments of REX are built, however, there is the potential threat of significant capacity constraints exiting the Rockies that could back-up gas in the region, creating gas-on-gas competition and driving down prices, particularly in the summer, according to Porter Bennett, president of Denver-based consulting firm Bentek Energy.

“If production trends continue as they did in 2006 and we have summer weather patterns similar to those of 2006, then Rockies supplies will exceed export and local consumption capacities by summer,” said Bennett. He said the result will be lower prices at Cheyenne Hub, Opal and other regional pricing points as basis widens. “Unless production slows and/or demand strengthens, Rockies producers will face yet another period where their netback prices are substantially below prices paid in other production regions of the country.”

Mainly because of growing gas production in the Rockies and inadequate takeaway pipeline capacity, daily prices at the Cheyenne Hub dipped to $2.48 last fall (Sept. 18, 2006), and CIG prices tumbled to $1.78/MMBtu on Sept. 15, 2006 and $1.31 on Nov. 13, 2006. But those price declines were short-lived. With additional production coming on-line to fill up REX Phase 1, producers could face an even worse situation this summer and fall.

Bennett said incremental production growth in the Rockies last year was about 584 MMcf/d. Demand growth in the region and in other accessible markets was able to soak up that new supply, but it’s doubtful that there will be enough demand growth in 2007 and available pipeline space if production grows by a similar amount this year. Bennett said although there appears to be a total of 879 MMcf/d of unused takeaway pipeline space, the practical available capacity will be much less.

He estimates that there could be 300-400 MMcf/d of available takeaway space. As a result, if REX ramps up to 500,000 Dth/d of supply, about 200,000 Dth/d of that gas could have trouble finding a market and a route to get there. With 750,000 Dth/d of space on REX once Enterprise’s Meeker plant enters service, the situation could be much worse.

Once the entire 1,663-mile REX pipeline, which is owned by KMP (51%), Sempra (25%) and ConocoPhillips (24%), is completed, however, Rockies producers could enjoy much higher netbacks by tapping higher-priced eastern markets. REX will be one of the largest gas pipelines ever constructed in North America and will transport gas from the prolific producing basins in Wyoming and Colorado to the Upper Midwest and eastern United States. The $4.4 billion project will have the capability to transport 1.8 Bcf/d.

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