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Natural Gas Pipelines May Increase Prices

Posted on: Saturday, 15 March 2008, 12:00 CDT

In the Rocky Mountains, the energy crisis has mostly been a crisis for natural gas producers and a boon for consumers.

Last fall, gas suppliers competing to stuff excess production into constrained pipeline systems drove spot prices to a laughably low 5 cents for 1,000 cubic feet of gas. That's the equivalent of a nickel to heat a typical house for two winter days.

"A lot of producers didn't think it was funny," said Porter Bennett, president and chief executive for energy analysts Bentek Energy LLC, in Golden, Colo. "They were actually paying somebody to take it." Storing gas or turning off wells isn't always practical.

Yet for consumers across much of the West, where natural gas historically has been cheap and plentiful, the party is almost over, and it may have ended with that final discount splurge. The first of a handful of major new pipelines originating in the Rocky Mountains is starting to siphon away the bounty, promising lower prices for other regions.

Gas suppliers say that if they can't maximize profits, fewer companies would bother drilling for natural gas in the West, which could lead to shortages and higher prices. They say gas production will continue to soar, keeping prices around here under control.

The new pipelines will take the Rockies' landlocked supply to major markets in California, the Phoenix area and flood the Midwest, where it can free up other supplies for the gas-starved Northeast.

The so-called big dog of these new pipelines -- the 1,678-mile Rockies Express from Meeker, Colo., to Clarington, Ohio -- is largely built and partly operational. It's the biggest pipeline project in the continental United States in the past quarter- century, said Joe Hollier, a spokesman for builder Kinder Morgan Energy Partners.

Nearing full capacity, the Rockies Express will move 1.6 billion cubic feet of natural gas a day -- a third more gas than the daily consumption of Denver and other cities along Colorado's Rocky Mountain Front.

Besides making more money for gas suppliers here, analysts say the new pipelines will even out national supplies and lop off price spikes in other regions, especially the East, but at the expense of Rocky Mountain states.

"We have felt the impact," said Mark Stutz, a spokesman for Colorado's Xcel Energy, which has been forced to raise rates by 36 percent this heating season and blames the new Rockies Express pipeline for the competition.

"The concern is that we are going to be paying prices that are more analogous to what we're seeing in the Midwest or California," he said. That could mean a doubling of rates, though analysts see more moderate, gradual increases.

Consumers generally are buffered from the highs and lows of market prices for natural gas, but their regulated rates follow general trends.

In Utah, which has the lowest average natural-gas prices outside Alaska, Salt Lake City-based Questar Corp. delivers gas for $8.17 a decatherm, plus taxes.

Questar's Utah customers have special protection from price hikes. Under a court ruling 32 years ago, Questar was forced to sell gas from its Wyoming fields at no more than the cost of production to its Utah ratepayers, who helped pay for the drilling. Utah consumers get 40 percent of their heating gas through this arrangement, which will continue to buffer them from market upswings.

"The ratepayers totally won," said Daniel Berman, a Salt Lake City attorney who handled the case.

For now, relatively low prices persist in the entire Rocky Mountain region because gas production is soaring with the price of oil, and new pipelines can quickly get leased to capacity, leaving some competition among producers.

A survey by The Associated Press found that households across the Rocky Mountains buying natural gas from major utilities pay as little as $6.36 a decatherm, a heat value roughly equal to 1,000 cubic feet of gas, depending on the quality.

As long as gas production continues to ramp up in the Rocky Mountains, producers argue, local prices should stay under control.

The outlook for gas production is strong, says Keith Rattie, chairman and chief executive of Questar, which has been beefing up its own pipeline systems in parts of Colorado, Utah and Wyoming and has huge reserves of gas.

Largely because of the new pipelines, Questar, among other Rocky Mountain producers, is planning to hold back no gas in storage this year. Questar hooked up to the Rockies Express in December.

"We're off to a good start," Rattie told investors in a conference call Feb. 13 on the company's performance. "Rockies prices should be much higher this year."

Not every gas driller is convinced.

"I'm personally very skeptical about getting in the Rockies for gas production, because the market is so volatile and weak at times," said Sidney J. Jansma Jr., president and chief executive of Wolverine Gas & Oil Corp., based in Grand Rapids, Mich., which is producing 10 percent of Utah's crude oil after making a wildcat discovery in 2004.

Source: Deseret News

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