Rocky Mountain region producers are enjoying a new golden age in which prices for their production are nearly equal to what producers in neighboring regions are able to bring home. Price differentials have tightened significantly because for the first time in many years there actually appears to be more takeaway pipeline capacity out of the Rockies than there is supply to fill it.

“This is the biggest story coming out of the Rockies in a while,” said John Harpole of Mercator Energy. “We are not filling the pipes going East and not only are we not filling them, it doesn’t even make sense to use them. I’d say we haven’t seen this since Kern River’s construction in 1992.”

Price differentials between the Rockies and the Midcontinent have narrowed considerably with the addition of major new pipeline capacity. For example, the difference between prices at the Cheyenne Hub in Weld County, CO, and prices at Natural Gas Pipeline Company in the Midcontinent zone have gone from an average of about 75 cents/MMBtu from fall of 2000 through 2003 to 19 cents last year and 12 cents on average over the last two months. Cheyenne Hub prices actually were 12 cents higher than NGPL Midcontinent on Wednesday. And the changes in the Opal-NGPL Midcontinent price difference are nearly identical to those at Cheyenne.

“A lot of the folks who own firm transportation on pipelines that go east out of Colorado or Wyoming are stranding it, not using it at all, because the simple variable costs, the fuel component, doesn’t pay for the basis differential,” said Harpole. “If you look at NGPL versus CIG, and you multiply the fuel requirement on some of these pipes, say if it’s 3.4% or 3.5%, times the price of gas, say $6/MMBtu or $5, it doesn’t even pay for the price difference.

“What’s so fascinating is that there is more pipeline capacity coming out of the Rockies than there is production right now.”

In the past, the company that held the firm transportation out of the Rockies held the producer hostage. But now the producer can escape to markets in multiple directions.

“When you add pipeline capacity, you add it in big chunks and production, of course, comes on at a very marginal incremental growth rate,” noted Tom Price of El Paso Corp.’s Colorado Interstate Gas. “Often the value in the marketplace is driven by the fact that pipeline capacity comes in big chunks and reduces the market value for the transport for shorter term periods. But it is all very cyclical. There will be times when transport shippers are very happy because the basis differential will be a dollar and they are paying 30 cents. But for the short term, I do believe it will take a while for the supply to grow into the pipeline capacity that is in place right now.”

One of the major reasons why Rockies prices are much closer to prices in other regions today is the additional pipeline capacity that was put in place by Kern River Gas Transmission (900 MMcf/d) in May 2003 and Cheyenne Plains (560 MMcf/d) earlier this month.

FERC gave Cheyenne Plains Gas Pipeline Co., a subsidiary of El Paso Corp., the go-ahead to begin deliveries in December on its 380-mile mainline from the Cheyenne Hub to connections with six Midcontinent and Midwest pipelines at a hub in Greenberg, KS. The pipeline was expected to reach its full capacity of 560,000 Dth/d later this month, but that now appears unlikely.

Price said Cheyenne Plains is moving a little more than 100,000 Dth/d of gas on a free-flow basis currently without compression. “I don’t anticipate adding compression is going to change that,” he said. “I think that is in tune with current market dynamics.

“We have strong markets regionally in the Rockies and until springtime when the space heating market subsides along the Front Range of Colorado and over in Utah, I don’t anticipate we’ll see real high demand on Cheyenne Plains.” However, he does expect throughput on Cheyenne Plains to pick up by summertime. Price also noted that weather has been mild in the eastern and Midwestern markets, which have backed up gas in the producing basins leading to tighter basin differentials.

Meanwhile, more export pipeline capacity is scheduled for construction this year. Cheyenne Plains plans to add another 170 MMcf/d of capacity by December or in early 2006, bringing the total capacity on the system to 730 MMcf/d. The pipeline is fully contracted on an annual basis and has a contract with EnCana Marketing for the entire 170 MMcf/d of expansion capacity for a 10-year term. But whether all that capacity ever gets fully utilized will depend a lot on what happens upstream with EnCana’s Entrega Gas Pipeline, with the pace of drilling permits in the Powder River Basin of Wyoming and with development of the Pinedale Anticline and other basins in Wyoming.

“We are very bullish about the Rockies,” said Price. “It is really the only major supply basin that is showing appreciable growth, and it’s not just in one area; it’s in multiple areas: the Pinedale Anticline; the Jonah; we’re seeing great strides in the Piceance and Uinta Basin in Utah; in western Colorado; central Wyoming in the Green River Basin there has been considerable growth.

“The Powder River actually has been a little disappointing,” he said. “We’ve seen capacity on our pipe basically declining right now. I do believe it will pick up again. It has had significant permitting [delays at the Bureau of Land Management], but there have been great strides in working that out. I think what you are seeing now is a shift from the WyoDak coals to the deeper Big George coals, which are a little trickier, not as uniform and take a lot longer to de-water, but they are much more prolific wells and produce quite a bit more gas. We’re not giving up on the Powder River but it’s kind of a wait-and-see right now.”

Harpole said he expects the tight regional basis differentials to remain in place until EnCana’s Entrega pipeline is built at the end of the year. That should force Rockies prices down to help justify at least the variable costs, Harpole said. “The big question is whether Entrega can be finished on time in December. The Piceance [Basin] is heavy with gas and the big question is how Entrega will change the dynamics of pipelines that are currently moving the gas out of there.”

EnCana Corp.’s proposed Entrega Gas Pipeline is expected to be under construction by June if all goes as planned. The proposed 1.3 Bcf/d pipeline, which will be constructed in two stages, would begin transporting natural gas from the Piceance Basin in western Colorado to the Cheyenne Hub by the end of the year (see Daily GPI, Oct. 21). Entrega expects to receive a draft environmental impact statement this month from the Federal Energy Regulatory Commission.

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