Updated June 21, 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: Prices on both sides of the region have started to rebound this week. Regional demand has picked up from seasonal lows in May but still lags behind the previous three years. Outflows to regional neighbors have also picked up, making the overall demand picture more in line with seasonal expectations. Meanwhile, supply has been holding relatively steady at around 8.5 Bcf/d so far in June.
The July 24 basis contract for both CIG and NWP Rockies bottomed out on June 10, 2024. In the past 10 trading days the CIG contract has gained 28% to trade -$0.76 intraday June 21 while the NWP contract is up 36% to -$0.53.
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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Source: Bloomberg data The chart above displays basis (difference from Henry Hub), rather than outright price. |
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June 21, 2024 - The July 24 CIG Rockies Basis contract bottomed out at -$1.05 intraday June 10 compared to an intraday print on June 21 of -$0.76. This is a 28% rally in prompt month pricing in 10 trading days. The rally isn’t just contained to the front of the curve, the whole CIG basis forward curve has rallied week over week. The balance of summer (July 24-Oct 24) has gained over 10¢ while next Winter (Nov 24-Mar 25) is up 3¢ to $0.190 since June 14, 2024.
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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. Currently, the Rocky Mountain region's working gas inventories stand 59% above the 5-year average and 25% 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 been holding steady at around 8.5 Bcf/d so far during the month of June. Month over month total production is relatively flat compared to May, however, in basin production is down so far this month 187 MMcf/d. This dip in production is offset by a gain in Canadian imports of 192 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: Regional demand has picked up from seasonal lows in May but still lag the previous three years. Outflows to regional neighbors are masking some of the regional demand weakness as exports rise to some of the highest levels going back to 2021. Weather remains warm for much of the country, with CWG forecasting the Rockies to be the warmest region compared to seasonal norms.
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." 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. |
Major Pipelines: |
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, 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 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. 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. |
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. |