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Mining the Ins and Outs of the Rockies

October 29, 2015 | By Warren Waite

The Rocky Mountain region is one of the most interesting regions within the lower-48 to monitor the impact of growing natural gas production in the Northeast, producer resiliency amid the energy price slump, and market competition from surrounding neighbors.

Taken together, one might think oil and gas production from the Rockies ought to be in a state of decline. However, as we will point out in this week’s Get the Point that isn’t necessarily the case.

PointLogic Energy's Rocky Mountain Region

According to PointLogic Energy data, year-to-date dry gas production (after natural gas liquids are removed from processing plants) has averaged 11.14 billion cubic feet per day (Bcf/d) in the Rockies, an increase of 0.09 Bcf/d or one percent from the same period in 2014.  Likewise, crude oil production has increased 0.19 million barrels per day (MMb/d), or 17 percent in 2015 to average 1.89 MMb/d.  Compared to the first ten months in 2014, natural gas prices at Henry Hub have fallen $1.68 per million btu (MMbtu), or 38 percent and West Texas Intermediate crude prices have been cut nearly in half or $47 per barrel. 

Rockies Gas Production

The Rocky Mountains contain copious amounts of oil, NGLs and natural gas among numerous basins and formations.  PointLogic has summarized production from these plays into fifteen different producing areas which are represented in the brown shaded areas in the above map.  Each play has its own set of unique characteristics such as geology makeup, cost to drill, interconnectivity to the market, what type and quality of hydrocarbons can be extracted and the quantity natural gas, NGLs or crude oil that can ultimately be recovered. 

Demand in the region is modest at best, thus the Rockies produces more gas than it can consume. Over the past five years from January to October, the region has been long gas by an average of 9.3 Bcf/d. However, from January to October 2015 the surplus of natural gas has tightened to 8.5 Bcf/d, with less gas available to transport to neighboring regions and put into storage. Compared to the prior five-year period, Rockies production in 2015 has increased 0.09 Bcf/d while regional demand of 2.7 Bcf/d is on par with historical averages. Despite a small uptick in total production, it’s noteworthy to understand where that growth is occurring and why. Another critical piece to the puzzle to understanding the complexities of the Rockies is a comprehension of the market forces in play that affect the dispatch of gas to downstream markets.

Rockies SD Balance

While natural gas production totaled 11.6 Bcf/d back in 2012, in 2013 and 2014, total Rockies production declined and averaged 11.0 Bcf/d.  Thus far in 2015 Rockies production has averaged 11.1 Bcf/d.  All of the various producing areas within the Rockies have been in a state of decline with the exception of two, the Denver Julesburg (DJ) Basin (includes a subsection of the Niobrara Shale) and the Bakken Shale.  Over the last three years, January through October average production has grown annually at an average 210 MMcf/d and 170 MMcf/d respectively, for the DJ and Bakken.  The DJ has added new processing plant capacity within the last 12 months which has encouraged production growth over 2014.  Year-to-date the DJ has averaged 1.5 Bcf/d, an increase of 0.4 Bcf/d over the same period in 2014.  The Bakken has averaged 0.9 Bcf/d in 2015, an uptick of 0.2 Bcf/d from 2014 levels and on par with prior annual growth rates.

Rockies Gas Production

As represented in the graphic above and below, the Rockies rig count averaged about 330 rigs in the first ten months of 2013 and 2014.  Year to date, that rig count average has been cut in half and currently stands below 130 operating rigs.  Details on some of the decisions and actions oil and gas production companies are undertaking in the low price environment have been chronicled in previous blog postings  (See "Escape from the Northeast" and our "Production at a Standstill?" series).

Rockies Oil Production

The target hydrocarbons of the producing areas that have demonstrated growth aren’t natural gas.  They are oil and liquids.  The measured increase in natural gas production from the DJ and Bakken is associated gas-- methane molecules that are extracted as a byproduct from petroleum deposits.  Highlighted in the area graph below, the Bakken and DJ have lifted Rockies oil production from around 1,100 Mb/d back in 2012 to almost 1,900 Mb/d in 2015.  In the two years prior to 2015, the Bakken and DJ grew at an annual rate of roughly 200 Mb/d and 63 Mb/d, respectively.  PointLogic estimates that year to date Bakken crude production has averaged nearly 1,200 Mb/d, about 100 Mb/d more than last year at this time.  Comparatively, the DJ has gained roughly 85 Mb/d to average more than 300 Mb/d in 2015. 

Rockies Oil Production

Several factors have prompted increased Rockies crude oil production including new infrastructure build outs such as increased processing plant capacity, the extension of gathering lines, legislation to curb the flaring of gas and expanded crude oil pipeline takeaway capacity from the Rockies to the Cushing, Oklahoma storage hub as well as to major refinery centers. 

There have also been improvements to the grid, expanding crude-by-rail capacity to PADD 5 as well as ability to deliver refined products to California and into Canada.  In the past, Rockies oil production growth was limited by the amount of capacity that existed to move the product to market.  Going forward, that changes when 400 Mb/d of new oil pipeline capacity goes into service in mid-to-late 2016 that will provide an ample amount of capacity for DJ production to increase in the coming years and likely more than enough takeaway capacity than what near-term production forecasts can handle.  An excellent analysis and overview of these projects by our friends at RBN Energy can be found here

Produce it, burn it, store it, ship it?

At this point we’ve established that despite falling rig counts and depressed oil and gas prices, associated gas production in the Bakken and DJ basin is averaging a combined 2.4 Bcf/d thus far in 2015 which is a 0.5 Bcf/d, or 30 percent increase over the same ten month period in 2014.  The other producing areas within the Rockies are averaging approximately 8.7 Bcf/d, a decline of 0.5 Bcf/d from last year’s levels.  Together, the Rockies have increased natural gas production a mere 0.09 Bcf/d comparing the year-to-date averages.  For context, the recent peak for Rockies dry gas production was in April at 11.4 Bcf/d.  PointLogic production data estimates October production will average 10.9 Bcf/d, a decline of 0.05 Bcf/d in six months. 

On the demand side, Pointlogic data suggests gas consumption within the Rockies region has averaged 2.7 Bcf/d thus far in 2015, a decline of 0.1 Bcf/d compared to last year. The increase of about 0.09 Bcf/d of supply and 0.1 Bcf/d of lower demand yields approximately 0.22 Bcf/d of additional gas molecules in need of a home. How has the increased Marcellus and Utica production plus the in-service of east-to-west transportation in Zone 3 of Rockies Express pipeline affected Rockies outflows? Below, Pointlogic Energy flow data will assist in analyzing these trends. An in-depth analysis of what’s happening on REX in Zone 3 is chronicled in a previous Get the Point, Rockies Express – The Aorta of the Central U.S.

East

The core of the production within the Rockies is located within producing areas in Colorado and Wyoming and accounts for 80 percent of all Rockies production.  Outflows east to the Midcontinent region have been in a multi-year state of decline, averaging 3 Bcf/d back in 2011 and declining to 2.1 Bcf/d thus far in 2015.  Compared to 2014, outflows to the east have increased 0.24 Bcf/d via an uptick in flows on REX and Cheyenne Plains. 

An analysis of throughput data at state borders was compiled for Colorado Interstate Gas Rockies Express Pipeline, Tallgrass Interstate Gas Transmission, Cheyenne Plains Gas Pipeline and Southern Star Central Gas Pipeline.  For a barometer of east-to-west flows on REX Zone 3, the Chandlerville, Ohio compressor station was used. 

Rockies Eastbound Flows

Surprisingly, throughput on REX from the Rockies into the Midcontinent year-to-date has actually increased roughly 0.12 Bcf/d compared to the 1.0 Bcf/d in the first ten months of 2014.  Eastbound volumes to the Midcontinent on REX averaged 1.7 Bcf/d back in 2011 declining about 0.2 Bcf/d in 2013 and 2014.  The incremental 0.12 Bcf/d west-to-east throughput on REX was ultimately delivered to Natural Gas Pipeline of America (NGPL) interconnect in Moultrie, Illinois to help meet increased storage and market area demand around the Chicago Hub. 

While more gas was moved east from the Rockies on REX year-on-year, the main supply sources in Zone 1 have fluctuated a bit.  The Enterprise Products Partners LP owned Meeker, Colorado gas processing plant supplies nearly 90 percent of the gas that REX transported into the Midcon.  However, declining production in the Piceance Basin has resulted in roughly 0.2 Bcf/d fewer supplies into REX from the Meeker Plant located within the White River Hub.   Offsetting that is a greater portion of Green River Basin and Overthrust gas delivered from Overthrust Pipeline to REX at Wamsutter, Wyoming.  The Wamsutter interconnect has increased by 0.3 Bcf/d in the first ten months of 2015 compared to the same period in 2014. 

The other eastbound pipeline to register a notable increase is Cheyenne Plains.  Throughput to the Midcontinent averaged 0.54 Bcf/d in 2011 declining to a low of 0.27 Bcf/d in 2014.  This year, Cheyenne Plains has averaged 0.43 Bcf/d, about 0.17 Bcf/d more than 2014 levels.  The increase is tied back to production gains within the DJ as increased gas from Wyoming Interstate Gas is transferred to Cheyenne Plains and in turn delivered to NGPL in Ford, Kansas –near the NGPL Midcontinent trading hub.

Looking north, the Bakken has been gaining market share in production gas flowing on Northern Border Pipeline.  Production from the Bakken, now accounts for 40 percent of the supply on Northern Border that flows into the Midcontinent.  While the overall throughput has remained relatively steady at 2.3 Bcf/d, production growth and cheap supplies sourced from the Bakken has continually displaced Canadian imports at Port of Morgan, Montana.  Throughput in 2015 has increased 0.15 Bcf/d compared to 2014.  Last year was sort of an anomaly, where a decrease in tolling rates on TransCanada’s Mainline and an inventory deficit at Dawn, Ontario storage incentivized an uptick in gas to move west-to-east across Canada and forgo a portion of export volume to the northern U.S.

Rockies NBorder Flows

The western part of the Rockies is home to producing areas that are in decline as well as a gas pipeline grid with less optionality and more direct competition for market share from its neighboring regions.  Those are the fundamental reasons behind the some of the shifts taking place in the dispatch of Rockies gas. 

The western Rockies are more or less captive to five exit options.  Gas moving east was imbedded in the above discussion in outflows to the Midcontinent.  The other options are Northwest via Northwest Pipeline, South via TransColorado Gas Transmission or through the southern tier of Northwest Pipeline, West via Ruby Pipeline and Southwest via Kern River Gas Transmission.  Each of these routes target different downstream markets and compete with different sets of pipelines and supply sources.  Naturally, the demand and variable charges for each pipeline play a major role in determining the least cost route, but since most market participants do not hold transport capacity on every option we will ignore the cost element and stick to pipeline flows and available capacity.

Northwest

The pipeline name itself says it all.  Northwest Pipeline’s main market is the Pacific Northwest where gas sourced from the Piceance, Green River and Overthrust producing areas competes with imports from western Canada.  Northwest Pipeline is bi-directional in pipeline segments within Oregon and Idaho.  Thus far in 2015, a ramp up in imports from Canada has displaced Rockies sourced gas.  During the first ten months of 2014 the Rockies sent 0.47 Bcf/d of gas into Oregon.  In the current year, that has flipped such that Idaho is receiving 0.15 Bcf/d of gas from Oregon, a year-on-year change of 0.6 Bcf/d.  For more on the dynamics taking place in western Canada see the blog posting, Canada: Stuck between a Rock and a Hard Place

Rockies West Flows

West

Ruby Pipeline traverses from Opal, Wyoming westward to Malin, Oregon where it interconnects to the northern pipeline grid of California’s Pacific Gas & Electric utility.  Malin is also where Gas Transmission Northwest (GTN) pipeline terminates after transporting imported gas from Canada.  Throughput on Ruby averaged roughly 0.84 Bcf/d during 2012-2014, but has averaged only 0.72 Bcf/d thus far in 2015.  It’s not that demand has declined at PG&E, but increases in deliveries to Malin on GTN from Canada have displaced gas from the Rockies. 

Southwest

Kern River Gas Transmission transports numerous sources of Rockies production from southwest Wyoming to southern California.  Kern River connects to southern system of PG&E, Southern California Gas as well as numerous power plants, utilities and industrial sites along the way.  Kern River serves different portions of the utility pipeline grid in southern California than other pipelines that stretch from New Mexico and Texas into California.  That being said, throughput on Kern River from the Rockies has averaged above 2.2 Bcf/d over the last three years, maintaining a 90 percent utilization rate.   During the summer months, Kern River typically runs above 95 percent utilization.  Compared to year-to-date levels in 2014, current year throughput on Kern River has increased 0.17 Bcf/d.  There really isn’t an opportunity to move additional gas from the Rockies via Kern River without an expansion project. 

South

Gas flows from southern Colorado to the San Juan Basin in northern New Mexico are the second best option when it comes to the potential to which outlet can handle additional displacement volumes from the Rockies.  Increasing outflows to the east would be ideal, but displacement pushback from long-term production growth in the Marcellus, Utica, Woodford and the Permian Basin will make that increasingly difficult.  Southbound flows on Northwest Pipeline into New Mexico are marginal.  Throughput on TransColorado Gas Transmission has a prior three year average of 0.22 Bcf/d, in line with this year’s average.  Compared to 2014, this year has increased by 0.05 Bcf/d.  Together, Northwest and TransColorado hold roughly 0.3 Bcf/d of available capacity that could be utilized if necessary. 

The White River Hub connects REX, Northwest Pipeline, Wyoming Interstate, Colorado Interstate, Questar Gas, TransColorado and the Meeker Gas Plant.  Because REX receives the vast majority of the gas it sends east of the Rockies from the Meeker Plant at the White River Hub, as volumes from REX Zone 1 to Zone 3 are pushed back, it’s natural for a portion of that gas to seek an alternative market.  In this case, the likelihood would be to send additional volumes into New Mexico via Northwest Pipeline and TransColorado.  The downside risk is that gas from the Permian Basin via El Paso Natural Gas and Transwestern Pipeline edges out Rockies sourced supplies and declining production within the San Juan New Mexico Basin.  

Rockies Flow Map

Comparing year-on-year January through October production and outflows from the Rockies highlights some interesting notions.  Many of which may seem counter-intuitive on the surface.  Looking into the data, overall Rockies dry gas production has increased approximately 0.09 Bcf/d, while regional demand declined 0.13 Bcf/d.  The Rockies transported nearly 0.4 Bcf/d of incremental gas to the Midcontinent while delivering 0.56 Bcf/d less to the Western region over the comparable time periods.  The net of all the supply and demand components yields roughly 0.12 Bcf/d of gas that has been used for regional storage injections, transportation fuel, line-pack and other balancing items. 

The net effect of the above analysis, though small in volume, does demonstrate the natural gas markets at work over a snap shot of time.  The pushback effect from growing production in the Northeast, the re-plumbing of the nation’s gas grid, and competition from surrounding regions to supply mutual downstream markets is most evident in the Rocky Mountain region.  Utilizing a PointLogic Energy subscription helps any market observer or participant stay abreast on the latest industry fundamental data, trends and news events.  To learn more, click here to check out our suite of products.  We’ll be adding new products in the coming months, so be sure to stay tuned. 

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