With the nation looking to the Rocky Mountain region for future gas supply security, producers there are finally getting the attention they have long desired and are taking advantage of it. A new “producer push” mentality is driving rapid pipeline expansion that will lead to a near doubling of Rockies export capacity over the next three years, Walter “Skip” Simmons of Wood Mackenzie told the Colorado Oil and Gas Association’s (COGA) annual Rocky Mountain Natural Gas Strategy Conference and Investment Forum in Denver.

Today there’s about 6.6 Bcf/d of takeaway pipeline capacity out of the Rockies and it is running close to full, but by 2009 producers can expect that total to nearly double to 12.4 Bcf/d, Simmons said.

There is 8.4 Bcf/d of pipeline capacity proposed currently within the Rockies, including export capacity and intraregional transportation. Multiple expansions are planned on Wyoming Interstate Co., Questar Pipeline, Northwest Pipeline, TransColorado Gas Transmission and, of course, the 1,700-mile Rockies Express project.

During a separate panel presentation at the COGA conference Wednesday, representatives from Northwest Pipeline, Questar, El Paso and Kinder Morgan poured out a flood of details on nearly a dozen planned pipeline and storage expansions.

Hank Henrie of Northwest Pipeline provided details on at least three major projects: the Jackson Prairie storage expansion, which will add 300 MMcf/d of deliverability starting in November 2008; the 38-mile, 450 MMcf/d Parachute Lateral to the Greasewood Hub in Colorado (service in November); and the 33-mile Greasewood lateral from the Greasewood Hub to the Northwest mainline and to Colorado Interstate Gas — a joint venture with Questar (service November 2008).

Questar’s Shelly Wright outlined seven projects, including the Overthrust Pipeline expansions to Opal (27 miles, 500,000 Dth/d) and to Rockies Express from the Rock Springs area (77 miles, 750,000 Dth/d). Rockies Express intends to lease the capacity on Overthrust to form one of its upstream supply legs and to provide shippers with alternative market options via the Opal Hub in southwestern Wyoming, which is the inlet point to Kern River Gas Transmission.

Questar expects to have its South System Expansion II in service in November 2007, adding 170,000 Dth/d through 54 miles of new pipeline looping to increase westbound deliveries to Goshen, UT. Questar’s other expansions include the 540,000 Dth/d Southern System East project from Fidlar Station in the Uinta Basin to the Greasewood Hub in Colorado, the Greasewood lateral joint venture with Northwest, a 200,000 Dth/d Divide Creek-to-Greasewood project and a proposed Wyoming Salt Cavern storage project with 5 Bcf of initial working gas capacity and 500,000 Dth/d of deliverability.

El Paso’s Jay Dickerson told Rockies Express shippers that ANR Pipeline stands ready to add as much as 70 Bcf of working gas capacity and 1 Bcf/d of deliverability to its storage fields in Michigan. That amounts to a 30% increase in ANR’s storage space.

Kinder Morgan’s Jeff Rawls gloated about the success of the 1.8 Bcf/d Rockies Express pipeline from Wyoming and Colorado to Ohio and possibly beyond. He noted that last year at COGA some observers had remarked that the project was just a “pipe dream.” But with EnCana leading a bevy of producers eager to bring their gas to premium markets in the East, Rockies Express quickly became a slam dunk.

“I can’t keep up with it,” said Simmons, regarding all the projects. “It’s just happening every day.”

Despite the significant pipeline capacity additions, Simmons said he expects rapidly growing Rockies production to fill the new space quickly, resulting in a healthy balance between supply and transportation. “That’s not to say that there are not going to be some localized issues,” he said. “There are still going to be some capacity constraints within the region, getting to the points with [export space]. But the overall supply-capacity balance looks very good to us.”

Nevertheless, producers will have a host of other major issues to consider, from basis spreads, access to export space and identifying downstream markets, to competition with their new rivals, Gulf Coast producers, and liquefied natural gas (LNG) imports.

Until Rockies Express fully enters service in 2008 Rockies producers also could face further price weakness, Simmons warned. The Cheyenne Hub in particular could see negative basis spreads double as upstream projects are completed but downstream capacity lags.

Once Rockies Express (REX) becomes fully operational it will significantly free up upstream space at some of the major Rockies hubs. For example, Simmons predicted that the load factor at the Cheyenne Hub in northeastern Colorado, where gas flows into Cheyenne Plains among other pipelines, will plummet from 88% to 54%.

Simmons expects Rockies producers to eventually enjoy much tighter basis differentials to the Henry Hub. “We’re not only bullish on supply, we’re also bullish on price,” he said. While prices in the West will rise with the increased export capacity, Simmons predicts that producers can count on their West-to-East price spreads remaining strong and supporting the $1.30/MMBtu in transportation and fuel costs to the Northeast.

The reason for that is Rockies production probably will displace “one for one” Gulf Coast and Gulf of Mexico supply in the Northeastern market because of high fuel costs (5-8%) on the Gulf Coast to Northeast pipeline systems, he said.

But REX shippers entering new eastern markets should do so cautiously. Remember, REX is the new kid in town, said Simmons. There may be some barriers to entry, and competition undoubtedly will be heated, he said.

Bryan Hassler, executive director of the Wyoming Pipeline Authority, told the COGA audience that Rockies producers will face other hurdles as well. “Just because 1.8 Bcf/d of new pipeline capacity is being built, it doesn’t necessarily mean that Rockies gas is going to flow down that super highway,” said Hassler.

There is currently 1.6 Bcf/d of supply in the Powder River Basin and the Denver Julesberg Basin that won’t have access to Rockies Express because there hasn’t been sufficient construction to move that gas into the eastbound system, he said. “If you are a Powder River Basin or a DJ Basin producer, you need to act accordingly now to subscribe to capacity on any of the other service providers so that you can assure that you will have access to this super highway.”

Hassler also recommended that Rockies Express sponsors build more interconnectivity with the Chicago market to provide shippers with more market options. “Chicago could serve as a nice market for producers but it also could serve as a supply hub area for a little pipeline arbitrage. Once you’ve got a $1.07/MMBtu investment from Southwest Wyoming to eastern Ohio the last thing that you want to do is to put gas in one end and take it out the other. You want to make the most of arbitraging that opportunity so you can get the most value out of that.”

Hassler said there are still some questions about whether pipelines interconnecting with REX will build connections with sufficient meter capacity to satisfy their markets. Producer access to markets could end up more limited than what would be desirable.

Besides managing the significant market changes related to REX, Rockies producers also have LNG imports to consider. About 750 MMcf/d of LNG supply will be arriving at Sempra’s Energy Costa Azul import terminal in Baja California by the summer of 2008. The terminal is under construction and Shell has locked up supply. That LNG will serve markets in Southern California and Mexico on a “must flow” basis. And that means other gas currently flowing will have to be backed out.

In past years when new supply arrived in California, the Permian Basin was the first to suffer the consequences, followed by Canadian gas. Wyoming gas on Kern River and San Juan Basin gas on El Paso and Transwestern were relatively secure. However, with Baja LNG arriving that may change.

“Our model tells us that San Juan for the first time starts to taste a little bit of that forbidden swing,” said Simmons. “Where will that gas go then? We see that production looking east. It’s going to look for markets off of Transwestern [and] El Paso… Capacity on both of those pipes West to East is fully subscribed” at more than 700 MMcf/d. As a result, as much as 300-400 MMcf/d of eastbound expansion capacity may be required.

The result will be more gas in the Midcontinent region where pipeline space already is running full. At that point, projects such as Duke Energy and CenterPoint’s proposed Midcontinent Express Project, which will take West Texas and Midcontinent supply to Northeastern markets, may have some value, said Simmons.

“If LNG starts coming in at Baja in excess of 1 Bcf/d, be prepared,” Simmons told San Juan Basin producers. “There may be some issues that you have to deal with.”

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