Marcellus shale gas revolution deals blow to Rockies’ producers



NEW YORK (Bloomberg) -- Eight years ago, a group of companies led by Kinder Morgan Energy Partners began building a $6.8 billion pipeline to carry natural gas from America’s Rocky Mountains to fuel-hungry markets in the East.

Then came the shale gas revolution. The eastern U.S. is now home to the country’s most productive formation, the Marcellus, and the 1,698-mile Rockies Express is carrying lower-cost gas in the opposite direction. On Aug. 1, the pipeline was partially reversed, shrinking the market for Colorado and Wyoming drillers who’ve seen their share prices fall as much as 93% from 2008 highs.

The burgeoning supply from Pennsylvania and West Virginia has transformed the U.S. gas market, redirecting pipeline flows and sending prices plummeting. Output from the Niobrara shale formation in Colorado and Wyoming has dropped 12% from an all-time high in 2012 as production from the region competes with the Marcellus, where output is near record levels.

“There has been a lot less demand for western gas because of an abundance of supply in the Marcellus and the Rockies Express reversal is exaggerating that effect,” Aaron Calder, an analyst at Gelber & Associates in Houston, said Aug. 19 by phone. “Marcellus gas is very cheap to produce and it’s been a very prolific play.”

Rockies Pipeline

The Rockies Express pipeline was built in three segments by Kinder Morgan, ConocoPhillips and Sempra Energy, with the final leg becoming operational in 2009. Tallgrass Energy Partners bought Kinder’s 50% stake in 2012 and operates the line. When construction began in 2007, gas production in the West had been isolated from eastern markets for decades, and Northeast output was negligible.

Circumstances have changed dramatically. Supplies from the Marcellus have surged 14-fold since 2007, and production from there and the neighboring Utica formation has accounted for 85% of shale supply growth since the start of 2012, government data show.

The bounty has been bad news for Rockies producers, who have struggled to compete with the lower-cost output. Gas at the Dominion South-Leidy hub in Pennsylvania has averaged $1.44 per million British thermal units this year, compared with $2.59 at the Opal hub in Wyoming. The price gap isn’t going away any time soon, according to Macquarie Capital.

“More competition is certainly not helpful for Rockies producers,” Paul Grigel, an analyst at Macquarie Capital in Denver, said in an Aug. 13 phone interview. “The Marcellus is truly a world-class asset, and even with transportation costs factored in, it can unseat Rockies gas.”

Drillers Adapt

Western drillers, including Encana Corp. and Bill Barrett Corp., have tried to adapt by boosting output from wells that yield oil and so-called natural gas liquids, such as ethane and propane. Natural gas accounted for 18% of Bill Barrett’s production in the second quarter, compared with 93% in the same period in 2010.

“While we still have substantial exposure to natural gas, the majority of our capital over the past two years is being invested in growing our total liquids production from the Eagle Ford, Permian and Duvernay plays,” Jay Averill, a spokesman for Encana in Calgary, said by email Aug. 17.

Larry Busnardo, a spokesman for Bill Barrett in Denver, said the company is focused on oil production in Colorado’s Denver-Julesburg basin. The company has cut capital spending, lowering drilling and well completion costs by 25% this year, compared with the fourth quarter of 2014, according to an Aug. 17 investor presentation.

Falling Prices

The oil-focused strategy worked better when West Texas Intermediate crude oil futures traded at $100/bbl, compared with $40.55 at 12:10 p.m. Singapore time on Thursday. Gas liquids, or NGLs, have also tumbled, with propane at the Mont Belvieu hub in Texas down 64% from a year earlier.

“Anybody who has shifted to oil and NGLs is coming under pressure,” Macquarie’s Grigel said.

Western producers have one gas-hungry market for their supply: California. Transporting Marcellus gas to the West Coast is costly, so the Rockies area will retain its position as the major supplier for the region, Grigel said. Demand from industrial users in the Golden State, the second-biggest consumer of the fuel after Texas, climbed 18% in the five years through 2014.

That may be little consolation for investors in drillers like Bill Barrett, which slumped to a record low of $4.27 a share on Aug. 6.

“Rockies producers are in a tough spot,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy, said by phone Aug. 13. “They’re now isolated geographically, and it’s hard to compete with the economics of the Marcellus.”

Related News ///


Comments ///

comments powered by Disqus