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Updated September 10, 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 fell this past week. The western half, priced at NWP Rockies, was more volatile with each of the next four seasons falling more than 10% week over week. CIG Rockies basis on the eastern half of the region fell across the curve as well although most of the losses were contained to the winter strips. While cash prices have recovered some W-o-W and M-o-M, first of month pricing continues to be hampered by a lose supply-demand balance and unusually high storage.
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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September 10, 2024 - The prompt month Oct24 NWP Rockies basis contract has recently found support in the -$0.55 to -$0.60 range after trading as high as -$0.25 in late July. The upcoming winter strip, Nov24-Mar25 has been consistently selling off since July 1, 2024, when it traded $2.135. The contract is now down to $1.20, the lowest in over 12 months. The whole forward curve has been trending lower with Apr25-Oct25 back down to yearly lows near -$0.355. Winter 2025/2026 has also lost some of its premium having fallen to $1.30 from $1.86 on July 1st. Forward pricing on the eastern half of the basin, CIG Rockies Basis, has been less volatile than NWP Rockies although prices did slip week over week. The silver lining is prices are well above their yearly lows. The prompt Oct24 contract hit as low as -$1.05 in mid-June, having since rallied to -$0.695. Winter 2024/2025 is up to $0.22 from lows of $0.12 on June 11th.
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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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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 41% higher than the 5-year average and 23% 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 Mountain region continues to fluctuate around the 8.5 Bcf/d mark. Imports from Canada have ticked higher the past month but remain lower than levels earlier this decade. Dry gas production the first week of September averaged just over 8.0 Bcf/d, if this were to hold, it’d be the highest monthly average of the Summer. 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 continues near that level throughout 2024. The Denver Julesburg contributed to the largest growth over the past year, followed by the Uinta. |
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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. |
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Source: Baker Hughes |
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Gas Demand: Demand for the first week of September is near 1.1 Bcf/d, down from the peak summer demand levels throughout July and August of 1.24 Bcf/d and 1.16 Bcf/d, respectively. Regional outflows are tracking near 2023 levels, down to roughly 5.5 Bcf/d to start the month. Overall, regional demand has tracked near last year’s level throughout summer but started at a significant deficit following an unseasonably warm first quarter.
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| Major Pipelines: |
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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."
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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. |
