Capstone Energy Services

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Rockies Express Pipeline – A Sign of the Times

May 24th, 2013

OMAHA (Capstone Energy Services) – This last week the Chairman of Rockies Express Pipeline predicted that the pipeline directional flow will be reversed in the next few years. Rockies Express was completed in 2009 and currently moves as much as 1.8 Bcf of natural gas from Wyoming and Colorado to Eastern Ohio. At the time the pipeline was constructed, Rocky Mountain production was extremely congested and generally traded at a hefty discount to the NYMEX. The intent of this new pipeline was to provide an outlet for some of the distressed Rockies gas into Eastern markets where gas was very expensive and dependent on Gulf Coast production. Once the Rockies Express Pipeline began deliveries in 2009, the “basis” or price discount for Rockies production relative to the NYMEX began to decline. Similarly, the Appalachian basis premium to the NYMEX also began to decline.

Now natural gas markets have changed again. The emergence of Marcellus shale production in NY/OH/PA is creating a rapidly increasing source of supply adjacent to the same markets that the Rockies Express pipeline was intended to serve. As a result of this increased competition between pipeline gas and local production, the Appalachian basis has continued to decline such that the price difference or “spread” between Appalachian gas and Rockies gas is now less than the transportation cost to deliver Rockies gas to Appalachia. The table below shows the evolution of the basis and the spread for these two market centers:

 

Rockies

Appalachian

 

 Year

Basis

Basis

Spread

2007

($2.8952)

$0.2557

$3.1508

2008

($2.7989)

$0.3511

$3.1500

2009

($0.9212)

$0.1897

$1.1108

2010

($0.4723)

$0.1452

$0.6175

2011

($0.2541)

$0.0951

$0.3492

2012

($0.2093)

$0.0040

$0.2133

 

The Rockies Express Pipeline is an excellent example of the transformation occurring in North America natural gas markets as a result of all of the new onshore production. The new production has caused price equalization to occur between geographic areas that have historically had wide price discrepancies and has permanently altered the economics of the current pipeline infrastructure. Many pipelines that historically maintained very high capacity utilization are now experiencing periods of significant excess capacity. As a result of the changing economics within the pipelines infrastructure, many announcements have already been made regarding pipeline operational changes. Some of these announced plans are as follows:

  • Transcontinental Gas Pipeline has filed to reverse the flow of one its mainline pipelines from North to South
  • The interconnection between U.S. and Canadian pipelines at Niagara NY is being reversed so that gas will now be delivered to Canada rather than from Canada.
  • Texas Gas Transmission plans to convert one of its mainline pipes to crude oil
  • Trunkline Gas Company plans to convert one of its mainline pipes to crude oil
  • Transcanada (TCPL) plans to convert one of its mainline pipes to crude oil
  • El Paso plans to convert one of its mainline pipes to crude oil

These are probably the beginning of many operational changes as new supply sources and new end use markets emerge (e.g. electric generation). As the infrastructure transforms in response to changing pipeline economics, it will be important for end-users to reassess supply sources, costs and reliability to identify the optimal supply and delivery strategies for the coming years.

_____

By Ed Freeman

Glossary Terms

Glossary Terms

Nominated Volume

The physical quantity of gas requested, typically in MMBtu/day, for a specific contract or for all contracts at a specific point.

Marketing Affiliate

A marketing company that has corporate ties to an interstate pipeline, an intrastate pipeline, or a local distribution company.

Energy Only Providers

Power marketers or other electricity vendors who provide and bill for only the energy component of the electricity consumed by the end-use customer.

Therm

A unit of heating value equivalent to 100,000 British thermal units (Btu).

Real Power

The component of electric power that performs work, typically measured in kilowatts (kW) or megawatts (MW)--sometimes referred to as Active Power.

Injection (Storage)

The process of delivering natural gas into a storage field for future delivery and use.

Price Ceiling

Statutory maximum lawful prices for various categories of natural gas, including gas destined for both the intrastate and interstate markets.

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