?The Rockies Express Pipeline (REX), with a capacity to transport 1.5 billion cubic feet per day of gas, will be shutdown for three weeks this month for hydrostatic testing, the pipeline company reports.
The shutdown, or outage, has caused a spike in the price differential, or the discount that Rocky Mountain producers receive compared with producers in other producing regions. The forward price curve for September gas shows a price differential of $5 per thousand cubic feet compared to Nymex pricing, says Rusty Braziel, managing director of energy-research and -consulting firm Bentek Energy.
By comparison, the price differential—caused by pipeline constraints or insufficient pipeline capacity—this summer has varied from about $3- to $5 per thousand cubic feet. The differential prior to the shutdown announcement was about $3 per thousand cubic feet, Braziel says. That means that, as a result of the shutdown, the price differential jumped by $2 per thousand cubic feet. The price differential had closed to about even when REX first became fully operational in May.
The shutdown has caught producers off guard.
Rather than take that price hit for more than three weeks, some producers, where physically practical, plan to slow or curtail production, says Mark Chung, Rocky Mountain analyst with Bentek Energy. Chung estimates the shutdown could cause production from the Rockies to decrease by up to 0.5 billion cubic feet per day.
The shutdown comes as Rockies producers have learned to become more adept at managing their aggregate production at just beneath pipeline capacity, Braziel says. That timing skill is something that producers have had to learn over the years to minimize the adverse impact of the price differential, even as Rockies production grew from about 7 billion cubic feet per day in January 2005 to the current rate of about 9.7 billion cubic feet per day.
Mercator Energy president John Harpole says the announcement comes as a “shock” to unhedged Rockies producers, who will be faced with the likelihood of having to sell gas, for a short time, at sub-$2 per thousand cubic feet or shut in some of the production. Harpole adds that producers had thought, with the opening of REX, they would enjoy a 14- to 18-month “equilibrium” of production and pipeline capacity, but even before the announced shutdown, it has become apparent that production growth was outpacing pipeline expansions.
Several pipeline projects have been proposed, but they won’t come online for at least a couple more years, Harpole says.
REX first notified shippers of the planned testing on July 14 via its interactive website, and almost immediately, Bentek passed on that word to its clients. Since then, word of the shutdown and its potential impact has been spreading ?Prompted by the response it received from concerned producers, REX conducted a conference call the following day. The company reports: “REX has an approximate 26.6 miles of pipe that did not get tested to a high enough pressure to allow for the maximum allowable operating pressure of the affected pipeline segment to be set at 1,480 psig. REX will need to operate at these higher pressures when the pipeline is placed in service to Lebanon, Ohio.”
The test section straddles the ANR Pipeline interconnect. “Pre-tested pipe does not make sense for a section of pipe that is 20-plus miles long,” the company reports.
The plan allows for the “minimum outage period” and was scheduled for September because “REX did not want to get too far into the fall/winter period due to the risks that are presented by weather, especially with regard to water issues and right-of-way access.”
Water, rather than gas, is used in the testing. It would be more difficult to identify leaks if using a compressible gas, and the temperature of water is more stable than a compressible gas.
REX will remain operational to the following interconnects: Kinder Morgan Interstate Gas Transmission, Natural Gas Pipeline Company of America, and Northern Natural Gas. The other two interconnects that are downstream (ANR Pipeline and Panhandle Eastern Pipe Line) are within the area that will be shut down for testing, Chung says. As a result, roughly 800 million of the 1.5 billion cubic feet of capacity will be unavailable, he says.
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