Topic Report: Rockies Express Pipeline

by Michele Markey
Topic Reports (2007)
9/10/2007

Rockies gas prices have been very volatile in recent months, with price swings from $5.00 per million British thermal units (MMBtu) to as low as $0.23/MMBtu.  Part of the cause for such swings has been transportation bottlenecks that constrain Rockies gas deliveries to markets.  This topic report will examine the Rockies Express Pipeline, which has been promoted as the solution to the problem.

Production Growth:

The Rockies region has seen some of the largest growth in natural gas production in recent years.  According to Wood McKenzie, production has jumped from 10.2 billion cubic feet per day (Bcfd) in 2000 to 13.6 Bcfd in 2006.  Future production volumes are expected to grow to 17.2 Bcfd by 2011.  Although the Rockies region is a major gas consumption area, only 20 percent of the region’s production is used in Utah, Colorado, Wyoming and New Mexico.  The balance is moved to midwestern and southwestern markets.

Basis Differentials and Price Swings
 
Source:  Platts

For most Rockies producers, the netback price that they receive at the wellhead has been extraordinarily volatile.  As seen in the chart above, the price differential between the Rockies’ representative price at Opal, Wyo., versus the Henry Hub price has ranged from flat to as much as $6.00 per thousand cubic feet (Mcf) under the price at Henry Hub.   

The Rockies Express Pipeline Corridor:

Despite expansion in pipeline capacity on Kern River Gas Transmission, which delivers gas to Nevada and California, the overall growth in production has exceeded pipeline takeaway capacity to other major markets such as Chicago and points further east.

Kinder Morgan Energy Partners, Sempra Pipelines & Storage and ConocoPhillips joined together to build the 1,678-mile Rockies Express Pipeline (nicknamed REX), which will move gas from Meeker, Colo., to Cheyenne, Wyo., on to Audrain County, Mo., with the final terminus at the Clarington Hub in Monroe County, Ohio. 

 
Source: Kinder Morgan

A small portion of the pipeline from the Meeker Hub through the Cheyenne Hub is now in service.  A larger section of the pipeline that runs from Cheyenne, Wyo., to Audrain County, Mo., will be in service beginning January 2008.  This section is projected to have a throughput capacity of 1.5 Bcfd.  The remaining section of the pipeline with deliveries to the Clarington Hub terminus will be completed and in full service by June 2009.  Total throughput capacity is projected to be 1.8 Bcfd.

Projected Effect of the Rockies Express Pipeline:

With the completion of all stages of construction, the Rockies Express Pipeline will be the first pipeline to flow gas directly from the Rockies to eastern markets.  There has been speculation that once Rockies gas reaches the eastern markets, existing bottlenecks in that region would prevent additional gas from flowing to end-user markets.  However, Dominion Gas Transmission recently announced that it will develop a new hub called “Dominion Hub I” to provide firm access from the REX pipeline to eastern markets.  Dominion expects to complete the project and begin service in November 2009.  Additionally, Texas Eastern Transmission and Tennessee Gas Pipeline have expansions in progress that will alleviate constraints on their systems and allow gas flows from the REX pipeline.

If moving gas to eastern markets proves to be economically viable, it may have unintended consequences.  Currently, most of the gas that moves out of the Rockies is shipped to either the Chicago markets or the southwestern markets.  A recent Platts article stated that the forward market basis for Chicago was running at a $0.0325/MMBtu to $.1025/MMBtu premium over the current basis.  This is attributed to the fact that midwest markets may have to compete with the Northeast for Rockies gas during the winter.

Competition for gas supply will also be an issue for the Southwest.  The Nevada Public Utilities Commission recently cited its concerns over potential gas shortages in southern Nevada from 2009 forward.  The forecasted annual gas sales growth for Southwest Gas and Nevada Power indicates that additional gas transportation and gas supply will be required beyond 2010.  As with the Midwest, Nevada will have to compete for Rockies production that can flow into the REX pipeline.

Conclusion: 

Although the REX pipeline will prove to be a welcome outlet for producers and should provide a stabilizing influence over prices in the Rockies, it should be noted that only one-half of the forecasted new production volume in the Rockies will flow on REX.  Therefore, additional pipeline capacity will still be required to prevent future transportation bottlenecks for deliveries out of the Rockies production region. 

About the Author

Michele Markey is a contributor to the Weekly Energy Perspective. She retired from Apache in 2009 after nearly 30 years in the energy business with supply and logistics experience in crude oil, refined products, and natural gas trading, transportation and supply. She has held various trading and logistical positions at both gas and electric utilities. She came to Apache in 2002 and held the position of Manager of Special Projects and previously Director of Natural Gas Marketing responsible for marketing Apache’s North American production of approximately 1.2 Bcf per day. She spent four years of her career at Platts, as Director of Energy Trading Information Services where she developed and implemented one of Platt’s most successful databases, GASdat, and managed the Gas Daily and Megawatt Daily Pricing teams that are responsible for collecting and publishing the daily price indexes used throughout the energy industry.

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