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New gas pipelines likely to shake up Western winter market, flow patterns, analysts say

By Leticia Vasquez, Eunice Bridges

November 17 - Although the US Northwest and western Canada are expected to see prolonged cold spells this winter, a Canadian vs. Rockies gas contest appears unlikely.

Gas supplies should stay local, allowing the new Ruby Pipeline to fulfill the bulk of the premium-priced Northern California market's needs, according to industry sources.

Among the primary game-changers in the West this winter will be El Paso's 680-mile Ruby system, which went into service in late July and connects gas supplies in Opal, Wyoming, with interconnections near Malin, Oregon.

In its first three months of service, Ruby has already seen higher volumes than many expected, effectively displacing gas from TransCanada PipeLines' Gas Transmission Northwest, which carries Canadian supplies into Malin, said Gordon Pickering, director of energy at Navigant Consulting.

Shippers have opted to use Ruby, as the pipeline has secured firm contracts to transport gas and as demand is on the rise in western Canada.

That trend is expected to continue this winter, with outlooks showing varying weather patterns in the region and increased Canadian demand continuing to put the squeeze on imports into the US, sources say.

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Those fundamentals will "continue to favor ongoing difficulties for GTN volumes moving into California against new Rockies gas competition," Pickering said.

A trader active in the West added that with the growth of the Bakken Shale in North Dakota and the pushback of Rockies Express Pipeline gas into the Midcontinent, "there aren't many places where it will make sense for Canadian gas imports."

Ziff Energy Director of Gas Consulting Ed Kallio, meanwhile, said competition between Rockies and Canadian gas will also lead to changing flow patterns in the region. The trend could mirror last year's market, when shippers sending gas east to Ontario opted to ship gas down through the Pacific Northwest and over to Michigan before sending it up to Dawn, rather than on TransCanada's Mainline, which had been mired in heated disputes with its shippers over tolls.

"With gas being backed out of Alberta and British Columbia by both Ruby and Bison [Pipeline], shippers are looking at different routes out, and folks can be pretty creative," Kallio said. "Things are only going to get worse for TransCanada."

Ziff's Cameron Gingrich agreed, saying, "With all this extra pipe being built, someone's not going to eat."

Others, however, do not see Ruby having much of an impact this winter. Allison Bridges, vice president of Williams' West pipeline division, said much of Ruby remains unsubscribed, and less-attractive reservation rates may deter shippers from signing long-term contracts.

"Northwest Pipeline reservation rates are significantly lower than Ruby's," Bridges said during the company's analyst call in late September. "On Northwest, the maximum rate is 38 cents, and Ruby's recourse rate is $1.14. This is a pretty significant differential when people are considering making long-term commitments."

Meanwhile, Bridges said she is seeing that Canadian gas can price to compete with Rockies supplies, which "underscores the benefit of our system of having access to multiple supply basins," she said.

Kallio said a price war between the two supply basins could possibly bring Rockies prices to the second-lowest level in North American, bested only by AECO.

At least one market source, however, disagreed, saying Ruby's impact has already been priced into the market. "Perhaps some cold weather could push Opal cash above Henry [Hub] on certain days," a trader said.

Another trader agreed that Opal prices will continue to rise, saying he expected the strength at Opal to continue through the winter and potentially become more pronounced.

Moreover, increasing production from British Columbia shales, including the Montney, could offset the decline in Canadian imports by exerting "significant downward price pressures in Alberta," therefore softening prices at AECO and allowing GTN to compete with Ruby gas, Pickering said.

As if Ruby does not stand to crush Rockies prices enough, Kinder Morgan's REX pipeline could deal another blow to the market this winter, as REX's supply areas face possible pushback due to increasing competition from Marcellus shale production, Pickering noted. "This all foretells of a very interesting upcoming winter for Ruby Pipeline and for Western gas markets at Malin and elsewhere in the region." (See a related chart of REX and Ruby pipeline flows.)

Traded volumes at Opal have been unusually high during the past few months in part because of Ruby, market sources said. Volumes for spot trades on IntercontinentalExchange reached their highest level in more than four years on September 22, as some 985,000 Mcf changed hands at the point.

A regional trader said the increase in Opal volumes will likely continue as Marcellus gas pushes REX volumes back, leaving more gas supplies in the Rockies, a trader said.

In northern California, meanwhile, PG&E continues to operate at reduced pressure along several segments of its gas transmission system, creating some uncertainty about the utility's ability to meet demand this winter.

PG&E in late September received approval from the California Public Utilities Commission to resume normal operating pressure at the Topock station on its backbone system, but some 29 segments of the line continue to operate at 20% lower pressure than normal.

The restrictions were put in place by the CPUC following a deadly explosion of a 30-inch diameter gas transmission line in San Bruno last fall.

PG&E has warned that operating at the reduced pressure could cause potential curtailments to its customers this winter. PG&E's Topock line is of key concern since it is part of the utility's backbone intrastate line that serves as gateway for supplies from Southwest basins.

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