Updated January 11, 2023
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Recent News:
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The chart above displays basis (difference from Henry Hub), rather than outright price. |
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December 29, 2022 - Prices at Opal (NWP) have surged lately as demand in the West has increased due to cooler temperatures. Spot Opal prices neared $51/MMBtu as of Dec. 21 as a cold blast swept through the Lower 48. The extremely elevated pricing at Opal is having a ripple effect down the curve. For example, NWP prices for next winter basis ('23/'24) have climbed to +$1.39/MMbtu as of Dec. 29. This is a whole dollar improvement from the rather stable +$0.40/MMbtu observed from June through October. The nearby price strength due to weather effects could be causing worry about future events and is adding a risk premium further down the curve. As a general rule, gas prices in the Rockies often follow gas prices in the Midwest, as the largest artery (REX pipeline) heading east out of the Rockies reaches the midwest. Besides REX, the other eastbound takeaway pipelines reach midwest demand centers via other interstate pipelines. Summer strips for Rockies basis have moved in the opposite direction compared to the winter months. Over the past 18 months, the Summer '23 and Summer '24 basis CIG strips have fallen by about 30c on average. The summer price decline is likely due to future anticipated competition from the growing Permian-basin-supply and the continued battle between westbound Appalachian-gas in the summer competing for Midwest demand.
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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. Like CIG, NWP-Rox typically trades 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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Rig Count |
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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. |
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Source: Baker Hughes
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Gas Production |
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| Rockies dry gas production has been declining annually since early 2020 as Covid-19 induced price declines that caused operators to scale back activity. Dry gas production is expected to remain relatively flat through 2023, according to data from Enverus. The Denver Julesburg is forecast to be one of the only areas of gas growth in the region. | |||
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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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Major Gas Takeaway Pipelines |
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The Rockies has significant winter-time demand, but there is a pronounced overflow of supply in the other seasons. There are multiple directions for surplus gas to exit the Rockies. 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 market, 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." North - Gas flows headed north on Bison or WBI eventually end up on the Northern Border pipeline near the Bakken oil play (North Dakota). Northbound supply from the Rockies has been minimal for many years as supply competes with Canadian and Bakken gas for space on Northern Border. 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. The decline in production over the past few years has left the Rockies with ample takeaway capacity. This has tamed basis price volatility and more closely tied the Rockies to the downstream and competiting markets.
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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.
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 and the Midwest, the Southwest, the Pacific Northwest, and California. 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 another 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. 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. 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. |
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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. |
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