Pipelines push value of Rockies gas

Jim Zadvorny remembers a time a little more than a year ago when it was difficult to basically even give away natural gas produced in the Rockies.

“There were Rockies trades for 1 cent (per million British thermal units) one day in 2008,” said Zadvorny, group leader for gas marketing at EnCana Oil & Gas (USA), a major producer of gas in western Colorado’s Piceance Basin.

It wasn’t for lack of demand that Rockies-produced gas often traded for significantly less than elsewhere in the country in recent years. Thanks to pipeline constraints, there was simply no way to move all the gas from here to regions wanting to buy it, Zadvorny said.

“The regions out of the Rockies, they could have priced it at $200 and they couldn’t have gotten any more gas out of the Rockies,” he said.

Those days are over. When the Rockies Express Pipeline (REX) from the Piceance Basin went into service to western Ohio this summer, it marked the end of a major obstacle to natural gas production in the Rockies.

“That’s when we really saw the flows free up a little bit,” said Sam Duran, an energy analyst with the Denver-based Bentek Energy consulting and information firm.

The other big factor in the equation that has largely closed the regional price disparity has been the oil and gas producers themselves. When companies cut back on and in some cases ceased drilling, that caused Rockies production to level off and helped ease demand for pipelines.

Meanwhile, Williams Northwest Pipeline, which is affiliated with local energy producer Williams Production RMT, recently completed a short pipeline connection project that will enhance transportation of local gas to western U.S. markets. In addition, a major pipeline project, El Paso Corp.‘s Ruby Pipeline, is in the works to ship Rockies gas to West Coast markets.

Even more Rockies pipeline proposals exist on paper but have been put on hold, given depressed energy prices and the region’s drilling slowdown.

Between all those proposals, it’s unlikely there will be another pipeline shortage such as the one that bedeviled the region for much of this decade, Duran said.

“The way we stand now, we’ll have plenty of pipelines planned right now that are ready to meet the needs of the Rockies,” he said.

With pipeline capacity no longer a hindrance, the question now is the degree to which factors such as low natural prices at the national level and growing competition from new U.S. gas fields will hinder the industry’s recovery in the Rockies.

“Those seem to have favorable economics compared to the Rockies, and so I don’t think we’ll see the same kind of (regional drilling) growth we saw in front of REX,” Duran said.

The last leg of REX was opened just this month, as it reached the eastern Ohio border. The 42-inch-diameter pipeline began serving the Missouri area last year, but Duran said the major milestone for the pipeline was when it first reached Ohio-area markets this summer, while at the same time adding additional gas compression that boosted its daily delivery capacity from 1.5 billion cubic feet per day to 1.8 billion cubic feet.

The pipeline is crucial to the Rockies because the region consumes less than 25 percent of the gas it produces, Zadvorny said. Lack of adequate interstate pipeline capacity created a surplus of Rockies gas, reducing its price compared to gas produced elsewhere.

Still, with energy costs high before the recession, even Rockies gas was fetching decent prices, particularly in the winter when heating needs in the Rockies and elsewhere further increased demand and prices. With developable reserves abundant in the region and natural gas badly needed elsewhere, energy companies were happy to keep drilling, particularly given the knowledge that REX was about to ease the pipeline problem.

Then gas prices plummeted nationally and fell even further in the Rockies. At the worst point, Zadvorny said, a maintenance problem shut down an existing pipeline, and the price for Rockies gas one day essentially fell to nil. That may have been an anomaly, but the national drop in energy prices wasn’t.

Also not anomalies are what Zadvorny calls the new shale gas “mega-plays” that have attracted energy companies’ drilling dollars away from the Rockies. The Rockies became less important to the industry and for meeting energy needs.

That shift was reflected by a study earlier this year by the Potential Gas Committee nonprofit industry group. Its estimate of the nation’s gas supply had soared by 35 percent over the past two years, with most of that attributable to shale gas.

Some of that gas is in the Northeast, which gives it the cost advantage of being “on top of” the high-demand market there, Zadvorny notes.

Between the Rockies pipeline constraints and the high cost of drilling in places such as the Piceance Basin compared to the return on investment, companies reined back local operations, which helped area production levels and pipeline capacities better align. It was the energy producers’ way of being able to respond to a problem that isn’t quickly addressed through pipeline construction.

That same edge in nimbleness that energy developers hold over pipeline builders helped create the shortage to begin with, as drilling got ahead of pipeline building.

“It’s much easier to bring in a rig than it is to build an entire pipeline, for sure,” Duran said.

“As you can imagine, pipelines are enormously expensive to build,” said Michele Swaner, spokeswoman for Williams Northwest Pipeline.

Northwest Pipeline’s new 26.4-mile, 24-inch-diameter Colorado Hub Connection Pipeline links a Meeker production area hub with Northwest Pipeline’s mainline system south of Rangely. That allows delivery to points as far south as Ignacio, where Northwest reaches the El Paso Natural Gas and Trans- western Pipeline Co.

Those 26 miles of connecting pipeline cost $60 million.

The REX pipeline cost $6.7 billion.

Pipeline permitting alone involves lots of regulatory agencies, Swaner said, adding, “To build a pipeline takes several years from the inception to the completion.”

Now the pipeline tortoise has caught up with the drilling hare in the Rockies, thanks partly to the hare slowing down to let it catch up.

While the end of the pipeline problem is a plus for Rockies gas production, EnCana’s Zadvorny says pipelines have better connected other areas in the country as well.

For example, pipelines originally laid to the Gulf of Mexico area to transport offshore production to the Northeast instead are shipping gas from onshore areas of natural gas development in shale formations.

“You’ve had rampant pipe build-out,” he said. “That in conjunction with the (pre-recession) heavy drilling and rapid recession-related decrease in demand have all contributed to change the whole North American dynamic.”

Although such changes have diminished the significance of the Rockies’ growing pipeline capacity, the added capacity still will help foster production in the region.

And companies will continue to drill here, in some cases because it’s where all their holdings are, Zadvorny said.

“There will always be production in the Rockies. The resource is huge,” he said.


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