Seasonal factors add to pipeline capacity problem
DUSTIN BLEIZEFFER Star-Tribune energy reporter | Posted: Monday, September 17, 2007 12:00 am
Natural gas at Wyoming's two main trading hubs is selling at 30 percent of national average, cutting off millions of dollars in state revenue.
The daily spot price average on Friday was $1.99 per thousand cubic feet of gas at Opal in southwest Wyoming, and $1.72 at the Cheyenne Hub, according to the Wyoming Pipeline Authority. That compares with $5.82 per thousand cubic feet at the California gate, and $6.04 at Henry Hub in Louisiana.
The severe price differential between the Rockies and the rest of the nation is mostly due to a shortfall in pipeline export capacity out of the region as production here continues its incremental increase of more than 5 percent annually.
Brian Jeffries, executive director of the Wyoming Pipeline Authority, said seasonal factors are at play, too.
"Nobody is running their air conditioner or their furnace right now, so there's no local usage," Jeffries said.
Fall is typically a "shoulder season" for the industry. Without extreme heat or extreme cold, demand softens for natural gas within the Rockies, adding to the volumes that flow outside the region to far-away markets.
When those pathways are full, producers compete with one another to get their gas in the pipe by settling for lower and lower prices.
"All the pipelines in the Rockies, going to Mid-Continent or going West and to the upper Northwest, they are all right at the red line running as full as they can be," Jeffries said.
Jeffries said it's important to note that only about 20 percent of the natural gas produced in Wyoming is sold on the daily index price. The remaining 80 percent is sold on a monthly index, which is about $2.11 per thousand cubic feet now.
Some minor pipeline maintenance has added to the constraint, Jeffries added. Aside from the seasonal glut, the underlying problem of pipeline capacity remains. Pipeline construction simply has not kept pace with the incremental production of natural gas in the Rockies.
The largest construction project, Rockies Express, is expected to complete another phase to Missouri at the beginning of 2008 to expand total export capacity. Kern River Pipeline Co., which owns the main Wyoming-to-California natural gas artery, recently announced plans to study a major expansion.
But the scale of permitting and construction for such projects takes years to complete. Mark Doelger, chairman of the Wyoming Pipeline Authority, said his organization has encouraged the industry to build a major expansion every four years.
Instead, major expansions are added every six years or so.
"So we continue to face the differential," Doelger said. "What is disturbing is the severity of the differential gets worse."
Doelger said coal-bed methane producers in the Powder River Basin are hit especially hard. Many of those producers must pay about $1 per thousand cubic feet just to get their gas to the Cheyenne Hub, where it could sell for $1.72 on the daily index.
Some coal-bed methane producers may face selling gas at a loss because shutting in wells is a difficult proposition. If a coal-bed methane well is shut-in for even a short period, water may migrate back into the production zone. It could take weeks or months to de-water the production zone again.
Doelger said the current price slump, though severe, does not constitute a "bust" in the natural gas industry.
"You have to keep your eye on the long-term energy sector growth that is occurring in this global economy," Doelger said. "But we can't be passive. We have to get real about how to address these problems."
The Pipeline Authority has $3 billion in bonding authority, which it can use to help finance pipeline projects that expand Wyoming's export. But it hasn't been used because it provides no advantage in the current finance market, according to Doelger.
Doelger said his organization is working with Wyoming's congressional delegation to get tax-exempt status for its bonding authority, which would provide a financial advantage.
"We need to get real in this state and look at how we can accelerate pipeline development," Doelger said.
Energy reporter Dustin Bleizeffer can be reached at (307) 577-6069 or dustin.bleizeffer@casperstartribune.net.