... Rockies Express Pipeline Gets a Second Chance


Rockies Express Pipeline Gets a Second Chance

Finished in 2009, the cross-country Rockies Express Pipeline represented one of the biggest pipeline construction projects in North America. Just five years later, the pipeline owners are looking to give it new life.

Rockies Express Pipeline Gets a Second Chance

Just five years ago, it was heralded as an engineering marvel. The almost 1,700-mile long Rockies Express Pipeline began operations in November 2009 to bring natural gas from the Powder River Basin in the Rocky Mountains to Clarington, Ohio. At the time, it was one of the biggest pipelines ever built in North America, a 42-in. system estimated to cost $3 billion, with a total capacity of 1.8 billion cubic feet (bcf) per day. Two years later, industry experts were wondering if the project was a mistake.

What happened?
Rockies Express, or more commonly REX, was conceived as a joint venture between Kinder Morgan (50 percent ownership), Sempra Pipelines & Storage (25 percent) and Phillips 66 (25 percent). The pipeline was designed as a producer-driven project to alleviate the glut of resources in the Rockies, where natural gas prices were about $2 less than Gulf Coast supplies. REX would solve low prices by providing a long-haul shipping option to high demand markets in the Northeast, where the low prices would provide strong competition for the region’s traditional natural gas sources.

“In the beginning, the project looked incredible,” wrote Belinda Petty in an April 18, 2011, blog post for Enerdynamics Corp., a provider of energy business training. “The ability to move almost 2 bcf/day of supply out of the Rockies to the higher-priced East Coast market was extremely appealing. The size of the project, the forecast timing of project completion, the targeted markets, and even the cost (which avoided significant rate stacking) all seemed highly desirable and well-supported. Rockies producers needed to move and sell gas. The prospect of higher netback encouraged them to continue drilling.”

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Tallgrass Energy

Tallgrass Energy purchased Kinder Morgan’s 50 percent stake in the Rockies Express (REX) Pipeline in 2012. The company plans to reverse direction on the Zone 3 portion of the pipeline (highlighted above) to ship natural gas in two directions to supply the Midwest market with resources from the Rockies and Appalachian basins.

What happened was that REX worked exactly as intended, according to Matt Sheehy, vice president of Tallgrass Energy LP and president of the Rockies Express Pipeline. Tallgrass Energy formed in 2012 to purchase Kinder Morgan’s 50 percent stake in REX in 2012, following Kinder Morgan’s acquisition of El Paso Corp., which led to the company divesting certain overlapping assets. Tallgrass Energy also acquired the Pony Express Pipeline, Trailblazer Pipeline and Kinder Morgan Interstate Gas Transmission system — now called the Tallgrass Interstate Gas Transmission (TIGT).

When REX went into service, natural gas prices in the Rockies started to rise, Sheehy says, but then the unexpected happened.

“What was unforeseen was the finding of natural gas in the Marcellus and Utica shale,” he says. “The prolific nature of those basins had the opposite effect. Natural gas began to flow out of that basin. The REX path didn’t have same profit associated with it.”

In a matter of a couple years of being in service, REX was rendered almost obsolete. However, as a newer pipeline, Tallgrass Energy saw tremendous opportunity for the system. By shipping natural gas in two directions, REX could provide access to multiple attractive markets.

Tallgrass Energy

The Federal Energy Regulatory Commission ruled in favor of the REX stakeholders to begin shipping natural gas from the Utica shale to the Midcontinent markets.

A New Lease on Life
While the Northeast has found ample natural gas supplies in the Marcellus and Utica shale formations, the Midwest and Midcontinent regions remain strong markets in need of competitive resources. Access to such major markets as Chicago, Detroit, Cleveland, Cincinnati, St. Louis, Kansas City and Indianapolis poses an attractive prospect for natural gas suppliers.

REX originates in Colorado and Wyoming, crosses eights states and serves three rate zones (Zones 1, 2 and 3). Zone 1 rates apply to movements between the Opal Hub and the Wamsutter Hub in Wyoming and the Cheyenne Hub in Wyoming. Zone 2 rates apply to movements between the Cheyenne Hub and an interconnection with Panhandle Eastern Pipe Line Co. in Audrain, Mo. Zone 3 rates apply to movements between the Panhandle interconnection and Clarington, Ohio.

In June 2013, Tallgrass Energy and the other owners of REX filed a Petition for Declaratory Order with the Federal Energy Regulatory Commission (FERC) to clarify certain contractual issues related the pipeline’s western shippers. FERC ruled in favor of the pipeline owners on Nov. 26, 2013 (see Docket No. RP13-969-000). In short, the ruling allows REX to ship from east to west within Zone 3 without violating the agreements with western shippers that contracted to ship natural gas west to east across multiple rate zones.

Since the FERC ruling, REX has signed its first agreement to ship Utica gas to the Midcontinent, Sheehy says, the first step in the pipeline becoming a bidirectional system. Sheehy asserts that Utica gas will be shipped only within Zone 3, and not to Zones 1 and 2.

Zone 3 covers Missouri, Illinois, Indiana and Ohio. By moving gas from the Appalachian Basin to this region, REX is able to serve high-demand markets in the North, like Chicago and Detroit, and points south, such as Memphis and Nashville, areas that Sheehy says have traditionally been served by Gulf Coast supplies.

As REX begins moving natural gas westward within Zone 3, the pipeline will still be bringing Rockies gas to the Midcontinent. This bidirectional supply is the foundation of what Sheehy calls the “shale to shining shale” concept.

“It’s a corny phrase, but it’s pretty interesting,” he says. “REX has the unique capability of being in the West to hit the major Rockies shale plays and in the East with access to all the major shale plays there. REX can move gas from the major shale plays to large Midwest demand zones. Historically, production was based in the South and moved northward where the demand is. Now, shale gas is produced in the demand zones.”

With REX running in two directions, the major demand areas in the middle of the country will have a choice between supplies from the Rockies or the Marcellus-Utica region, as well as their traditional Gulf Coast suppliers, Sheehy explains. Instead of being forced to pay the same rates from one source, REX will be able to provide supply diversity for local distribution companies (LDC).

“You can pick your supply point day in and day out,” he says. “You can buy from REX in Rockies or the Appalachians. If I’m an LDC, and it’s cold in Denver and warm in Ohio, I’m going to want to buy from Ohio. If it’s cold in Ohio and warm in Denver, I’ll want to buy from Denver. We hope the supply diversity of the shale to shining shale concept will become the main driver for LDCs to look to REX as a supply point. It helps producers get their product to market.”

Seneca Lateral

The Seneca Lateral is a 14-mile pipeline in Noble and Monroe counties in eastern Ohio that connects REX to a processing facility.

Expanding Connections
The REX pipeline is newer, with high-pressure pipe that’s less than 10 years old, making it more efficient and flexible than older systems, Sheehy says. The pipeline also offers interconnections to various third-party pipelines and LDC systems to reach multiple markets in the Midcontinent and Midwest, as well as the Gulf Coast and Southeast. Whether the choice is Rockies vs. Marcellus-Utica, REX provides 2 bcf in each direction. However, Tallgrass Energy continues to seek new avenues to increase access and capacity on the system.

After a successful open season last year, the REX owners contracted and began to build the 14-mile, 24-in. Seneca Lateral in eastern Ohio, in Noble and Monroe counties, to connect to the Seneca Processing Complex. The pipeline went into service in February.

Tallgrass Energy announced an open season from Jan. 29 to Feb. 12 to secure shippers for its East-to-West Project, which would provide capacity up to 2.5 bcf per day within Zone 3.

According to a Sheehy, the East-to-West Project could potentially consist of modifications to existing compressor stations, new greenfield compressor stations, new receipt points and expansion of existing delivery point capacity along REX in Zone 3. The open season will help the pipeline’s stakeholders to determine the appropriate design capacity of the proposed project. REX may seek FERC approval of the East-to-West Project, as needed, if REX commercializes and then confirms the appropriate design capacity. The REX stakeholders anticipate an in-service date of March 2016, pending any further open season.

If you don’t believe in second chances, take a look at the REX pipeline. Through the efforts of Tallgrass Energy, Sempra and Phillips 66, the 1,698-mile pipeline is gaining renewed life as a major natural gas transmission system in the United States.

Bradley Kramer is managing editor of North American Oil & Gas Pipelines. Contact him at bkramer@benjaminmedia.com.