REX gas flows drop 33% this month due to Marcellus, spreads West

Houston (Platts)--24Oct2012/353 pm EDT/1953 GMT

Rockies Express Pipeline flows have dropped 33% this month alone as Marcellus Shale supplies continue to displace Rockies gas from Eastern markets and recent wintry weather in the region kept supplies local.

Flows on the 1.8 Bcf/d REX went from 1.6 Bcf October 1 to 1.06 Bcf Wednesday, the most dramatic fall-off in flows this year, data from Platts unit Bentek Energy showed. Average flows for the year to date on the pipeline are 1.51 Bcf/d.

Sources attributed the sudden fall to what one trader called "the perfect storm" of cheaper Marcellus supplies, better-priced markets on the West Coast and recent frigid temperatures in the Denver area that have likely kept supplies in the region.

Platts prices show the spot price differential between Rockies hub Opal and Appalachian market Dominion, South, went from a 6.5-cent discount October 1 to a 6-cent premium Tuesday. Opal prices have held a premium over Dominion, South, since October 9, the longest stretch this year.

"It hasn't really paid to move Rockies gas east all year," a regional trader said. "But now it really, really, really doesn't pay."

Dominion, South, itself has been weighed down by the onslaught of Marcellus Shale production. Overall Northeast production stood at 8.76 Bcf Wednesday, according to Bentek data, with the Marcellus sweet spot of Northeast Pennsylvania accounting for about 4.76 Bcf alone. Northeast Pennsylvania's production growth has marched on rampantly. Its year-to-date average for 2011 was about 2.15 Bcf/d, the data showed.

At the same time REX flows have slid, flows on the 1.5 Bcf/d Ruby Pipeline have sharply increased. Flows on the Westbound pipe have increased 60%, from 860,000 Mcf/d October 1 to nearly 1.38 Bcf Wednesday, Bentek data showed.

During that time, spot prices at the Pacific Gas & Electric city-gate began its run-up past the $4/MMBtu mark, peaking at $4.15/MMBtu -- its highest price this year -- October 19, Platts prices show. For several times this year, PG&E's city-gate has been the highest price in North America, due to increased gas demand for power generation since California's San Onofre nuclear units have been shut down since early January because of an unusual amount of wear in its steam generator tubes.

Adding further upward pressure to prices is the ongoing maintenance on PG&E's system as the operator continues to conduct inspections after the fatal San Bruno explosion in September 2010. Also this month, Western Canada saw the onset of early winter weather, which kept Canadian supplies -- traditionally transported to Northern California markets -- local.

And over the past few days, Rockies supplies have remained in the region, pushing prices upward as well.

"Big storm out here this week," a Rockies trader said.

"Spreads to the Pacific Northwest are incentivizing flows," an analyst with a producer said. "It's gotten somewhat colder here in the Rockies. Temperatures for the next few days are pretty frigid."

Going forward, spreads to the West Coast remain elevated compared with those in Appalachia, meaning flows could continue to head in that direction rather than eastward.

PG&E's winter strip was assessed at plus 31.75 cents/MMBtu by Platts on Tuesday. In contrast, Dominion South's winter package was assessed at minus 2.5 cents, while Northwest, Rockies, winter stood at minus 4.75 cents/MMBtu.

The 2013 calendar strip for PG&E was assessed at 27.25 cents/MMBtu on Tuesday, Dominion 2013 in at minus 4.5 cents/MMBtu and Northwest, Rockies, at minus 11.75 cents/MMBtu.

Sources said even with cheaper Rockies gas going forward, with variable costs to move REX gas east at around 15 cents, there will be a continued lack of incentive to move gas to Northeast markets.

"We're getting a good sense of what could happen this winter," another trader said. "The Northeast has got all the gas it can handle out of the Marcellus and spreads West look pretty good for some time. REX could be seeing some light flows from here on out."

--Samantha Santa Maria, samantha_santa_maria@platts.com
--Edited by Jason Lindquist, jason_lindquist@platts.com