Updated July 19, 2024
The Rocky Mountain region remains bifurcated, with the western Rockies better positioned to capitalize on winter price spikes due to its proximity to the West Coast and limited capacity in the basin moving east to west. Tame production growth shouldn’t threaten outbound pipeline capacity in the near future.
Price: Price action on both the western and eastern halves of the Rockies rallied this past week. A dramatic move intraday Friday, July 19, has seen NWP Rockies basis trade as high as -$0.03, a gain of $0.145 on the day. Front month CIG Rockies basis has posted a much more modest intraday move of $0.015, trading -$0.540. Week over week, both benchmarks look set to give up small amounts in Winter '24/'25 and trade flat in Summer '25.
Risk: Supply-side risks should be relatively muted as production continues to lag available takeaway capacity. The current winter premium for NWP Rockies has softened following a massive blowout in January 2023. However, the threat remains a low-probability but high-impact event for both producers and consumers.
News: 4/1/24 Kern River Gas Transmission completed the Delta Lateral Project. The project involved the construction of a 36-mile, 24-inch-diameter natural gas pipeline, which will “provide natural gas transportation from Kern River’s mainline near Holden, Utah, to a delivery point near Delta Utah,” according to the company’s website.
Supply/Demand Fundamentals: Tame production growth shouldn’t threaten outbound pipeline capacity in the near future. The basin continues to be split, as gas from the eastern half struggles to move westward. Production on the western half of the Rockies will continue to deal with more volatile pricing as it’s closely tied to western basin pricing.
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The chart above displays basis (difference from Henry Hub), rather than outright price.
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July 19, 2024 - A dramatic move intraday Friday, July 19, has seen Aug24 NWP Rockies basis trade as high as -$0.03, a gain of $0.145 on the day. The Winter '24/'25 strip has been trading within a relatively consistent range going back to February with highs around $2.20 and lows near $1.90. The current price of $1.91 is unchanged from one month ago. Barring a dip in mid-May to $1.80, the current price is near the floor of the range. Summer '25 has been less consistent and is currently trading near -$0.25, off its lows of -$0.36 on June 10. Aug24 CIG Rockies basis has posted a much more modest intraday move Friday, July 19 of $0.015, trading -$0.540. Going back to mid-April, the August contract has only traded this high a handful of days and is 42% better than the low of -$0.94 on June 11. Since the beginning of the year Winter '24/'25 and Summer '25 have traded in lock step with one another. The past few weeks have seen prices stabilize near $0.24 and -$0.67 respectively.
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NWP-CIG Dynamics: Operators who produce in the western part of the Rockies near Opal, Wyoming, are typically exposed to pricing on Northwest Pipeline (NWP); the associated basis location is, known as NWP-Rox. The eastern half of the basin is primarily exposed to CIG/Cheyenne pricing. Both sides of the basin typically trade at a premium in the winter months and a discount in the summer. The major difference between NWP-Rox and CIG is that NWP-Rox can better participate in California and Pacific-Northwest (PacNW). There is a constraint for gas produced on the eastern Rockies to flow westward; therefore, NWP-Rox can trade at a material premium to CIG when there is an acute need for gas in the west and PacNW markets. |
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Rocky Mountain Gas Overview | ||
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Key interstate natural gas pipeline systems that serve the Rocky Mountains Source: IHS
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Supply/Demand Fundamentals |
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Supply/Demand Balance: Since the beginning of the year, the Rocky Mountain region has been oversupplied compared to recent history. Poor demand has been the major driver, as production is slightly higher than a year ago but lower than in both 2021 and 2022. Regional storage levels remain elevated compared to the 5-year and 10-year average, but the rate of injection has slowed recently. Currently storage levels are 47% higher than the 5-year average and 22% above the 5-year maximum. Historically, the supply/demand balance fluctuates throughout the year, with production outpacing demand in Summer (April-October) and flipping into a deficit in Winter (November-March). The seasonal nature of the supply/demand balance is seen in the basis pricing as Winter trades at a premium to Henry Hub and Summers at a discount. |
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Gas Production: Total supply in the region has ticked up since the start of the month, mostly on increased Canadian imports. In-basin production is continuing to fluctuate around the 8 Bcf/d mark. Imports on the other hand have gained 159 MMcf/d since July 1, up to nearly 700 MMcf/d. Overall, Rockies dry gas production had been in decline since early 2020, as COVID-19-induced price declines caused operators to scale back activity. By the end of 2023, production had once again eclipsed 8 Bcf/d and has maintained that level throughout 2024. The Denver Julesburg contributed to the largest growth over the past year, followed by the Uinta. |
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The chart above includes gas production for the following basins in the Rockies: DJ, Green River, Piceance, San Juan (CO), Uinta, and "other" smaller contributors to overall Rockies production) Production is shown above by major producing regions in the Rockies. The increased focus on the DJ in the past few years has led to the shale play accounting for the largest portion of gas production in the region. |
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Rig Count: Active rigs in the Rockies have generally been declining since 2009. The last three oil-price crashes have contributed to lower capital investment and, therefore, rig activity in the Rockies. The investment focus has turned to other basins. |
Source: Baker Hughes |
Gas Demand: Total demand is down on average in July compared to the full month of June. Regional demand, what is consumed in basin, is stronger on average while outflows to neighboring regions is down. During the month of June, regional demand averaged 1.61 Bcf/d compared to 1.748 Bcf/d so far in July. In comparison, regional outflows averaged 5.986 Bcf/d in June compared to 5.573 Bcf/d so far in July. The net impact is total demand is down about 250 MMcf/d this month on average.
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Major Pipelines: |
East - Eastbound capacity headed out of the Rockies is about 4.5 Bcf/d among CIG, REX, Southern Star, Trailblazer, Cheyenne Plains, and Tallgrass Interstate Pipelines. These pipelines typically serve Midwest demand via other Mid-Continent interconnects. REX reaches the furthest east, able to deliver gas as far as eastern Ohio. Gas flows on this eastern corridor are very seasonal. For example, eastbound flows on REX, measured by rates from Colorado to Nebraska, can vary between 1.75 Bcf/d in the spring or early summer but close to zero in the winter as gas stays home in the Rockies for local demand or reaches a more premium Opal and West market.
Colorado Interstate Gas (CIG) - Kinder Morgan's 4,350-mile pipeline system transports gas from supply areas in the D-J, Powder River, and other parts of the Rockies to customers in the Rockies, the Midwest, the Southwest, the Pacific Northwest, and California. Rockies Express (REX) is a 1,679-mile natural gas pipeline system that runs from southwest Wyoming and northwestern Colorado to eastern Ohio. Originally, REX was built to transport up to 1.8 Bcf/d from the Rockies to demand centers in the Midwest and Northeast. After the rise of Appalachian production, REX owner Tallgrass Energy decided to make the eastern part of REX bi-directional to allow westbound (Appalachian) flows into Illinois. REX is segmented into three rate zones.
Trailblazer Pipeline - A Tallgrass pipeline that runs from Cheyenne, Wyoming, to southeastern Nebraska. The pipeline travels 436 miles and provides an outlet for Rockies gas, seeking Midwest and East Coast markets via other pipeline interconnects. Cheyenne Plains Gas Pipeline - A pipeline that transports gas from the Rocky Mountains to the Midwest. The system consists of a 36-inch diameter pipe spanning 410 miles. The Tallgrass Interstate Gas Transmission system - A spiderweb of pipelines that consists of about 4,650 miles of natural gas transport. Most of the system resides in Kansas and Nebraska, with some in central and southeastern Wyoming and northeastern Colorado. Wyoming Interstate Co. - Another Kinder Morgan-owned pipeline that encompasses an 850-mile gas system whose mainline runs from western Wyoming to the REX Cheyenne Hub in northeastern Colorado.
South - Gas headed south competes with growing "associated" gas (produced by oil wells) from in the Permian. A bottleneck exists when looking at the south/southwest corridor, where the Kern River pipeline usually runs near or at capacity. Both El Paso and Transwestern take gas to the Arizona and California markets, but these two are often constrained, full of competing Permian supply. West - The Ruby and Northwest pipeline transport gas from the Opal hub to the Pacific Northwest (PacNW). Demand in the PacNW, including California, has been shrinking and has little prospects for demand growth. Further, the region receives Canadian gas that competes with the Rockies supply. Kern River is typically lumped in with the West market, but it delivers gas into southern California near the terminus of El Paso and Transwestern. However, the Kern pipeline sources gas from Opal at the same hub Northwest pipeline, so it is probably better classified as "westbound." |
Hedging considerations CIG or NWRox basis can be hedged with swaps. Both are usually hedged as part of a complete natural gas hedge. The general recommendation is to hedge NYMEX Henry Hub natural gas and basis in two steps but simultaneously. Contact us at info@aegis-hedging.com if you need to work through the details. |