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FERC rejects effort to stop Rockies Express-West tests

After a brief skirmish involving several gas shippers on the Rockies Express Pipeline, FERC on September 2 denied a petition to stop Kinder Morgan from conducting hydrostatic tests on the pipeline. Spot prices at key Rockies points plunged as much as $4/MMBtu after the pipeline began the tests the first week of September.

The dramatic price moves conjured up memories of last autumn's market collapse, when some gas in the Rockies traded for less than a nickel.

The testing on the eastern-most segment of REX-West is scheduled to run through September 26 and will restrict deliveries at REX's interconnections with ANR Pipeline in Brown County, Kansas, and Panhandle Eastern Pipe Line in Audrain, Missouri. Analysts have said they expect between 500,000 Mcf/d and 800,000 Mcf/d to be strained in the region. (See chart: Prompt month prices for October 2008, as of Sep. 24.)

Hydrostatic testing assesses the pressure at which a pipeline can transport gas and requires filling the pipe with water. The operator said the test is necessary on the 26-mile segment of REX-West between Gage County, Nebraska, and Clinton County, Missouri, to ensure the pipe can operate at higher pressures once REX-East starts operating from Missouri to eastern Ohio.

In mid-August, ConocoPhillips, Shell Energy North America and Yates Petroleum petitioned the commission to stop the pipeline from conducting its tests in September, a shoulder period during which Rockies shippers typically struggle to find markets. The REX-West mainline capacity will be cut in half, asserted the shippers, and the lack of demand will hurt efforts to redirect their gas to local markets on the Rockies Front Range.

Significant reservoir damage and the permanent loss of recoverable oil and gas could be the result of shutting in gas deliveries for a period, the shippers argued. Further, they said the testing dates coincide with the Gulf of Mexico hurricane season and the storage injection season for local distribution companies.

FERC rejected these arguments in its order denying the petition to enjoin the testing (CP08-460). FERC pointed out that Department of Transportation pipeline safety regulations require hydrostatic testing to verify the integrity of the pipeline and to validate the pressure to maximize throughput.

FERC reacted strongly to the assertion that testing will result in "irreparable injury to the market," saying gas users face a greater risk of harm if the pipeline were to delay testing until November or December, the high-demand winter heating season. Beyond that, the order supports the commission's stated position that pipeline operators need "reasonable discretion to manage their systems."

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"Here, Rockies Express provided over seven weeks of notice to allow the market to adjust to the planned outage," the order said. Shippers were offered the chance to re-designate primary delivery point rights, and Rockies Express will grant reservation credits to shippers impacted by the outage, it added.

The testing will impact the gas market, FERC acknowledged. "However, we concur with Rockies Express' assertion that the timely completion of the required testing would be at a much greater risk if it were delayed, such that it might have to be performed under winter conditions since test water could freeze in the lower temperatures and access to the right-of-way could be encumbered by snow and inclement weather," said the order. (Listen to a podcast on how capacity reduction on Rockies Express pipeline impacts supply/demand.)

Gas on Kern River Gas Transmission at the Opal, Wyoming, pricing point traded between a low of 45 cents and a high of $1.65 to average around 70 cents. Northwest Pipeline's Wyoming pool and Colorado Interstate Gas also dropped to 10-month lows as they averaged 55 cents and about 90 cents, respectively.

Prices moved steadily higher throughout the session, however, as players got caught short. "You don't want to be short when it's that low of a price," one Rockies trader said. "Every spread out of dodge is so deep in the money there's no way a shipper is going to want to be stranded there trying to buy gas. Not at these prices." (See chart: Transco, zone 3: Key packages, last 30 days.)

Spot prices were "around $5 on Friday for Monday [flow] because of a bit of cold weather, but all of a sudden it's down to 50 cents?" another regional trader said, noting that most exit routes out of the Rockies were at or near capacity and "there's not a lot of room to stick gas. If [testing] had been postponed, it wouldn't have this much of a bloodbath."

Kim Ward, director of energy analysis with Bentek Energy, concurred, noting that "it would have been a lot more beneficial to the shippers themselves if [Kinder Morgan] had chosen a month other than a shoulder month to have maintenance. Prices get depressed at this time anyway, so they just made it worse."

Ward said some of the stranded gas could likely be injected into storage, which should alleviate some of the downward price pressure. Moreover, "I think a little bit will be absorbed by filling what's left of transport -- gas going into Kinder that wasn't being utilized."

In addition, "I do think storage will take some of the slack and as the producers align themselves with what's going on ... prices will stabilize," Ward said. "They may not be as high as they were for August, but I don't think we'll see 50-cent gas for the rest of the month."

Ward also noted producers would likely begin reducing their output so as not to exacerbate the gas glut. "They're going to have to; there's just no home [for gas]. When you maximize your injections into storage facilities and maximize transport out of the region, you've got to do something," she said.

The Rockies trader, meanwhile, argued that a pipeline must take several different things into consideration when scheduling maintenance, but at the end of the day, "who has ponied up in the first place? Who are the shippers on REX? They're the producers."

Next page: Smaller post-REX projects take lead

Created: September 24, 2008

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