ANALYSIS: Rockies gas free to be swing supplier of US East, West

Between the increased capacity the new Ruby Pipeline offers and the price-crushing impact of surging Marcellus Shale gas production in the Northeast, Rockies gas prices have recently been able to chase the best price spreads to either the US East and West, a Platts analysis shows.

"Ruby has been the real tipping point for Rockies gas," a fundamentals analyst with a bank said. "The added flexibility has really paved the way for Rockies to be a true swing supplier to the East and West coasts."

In early November, Appalachian spot prices -- specifically Columbia Gas, Appalachia, and Dominion, South point -- averaged as much as 10 cents below Rockies day-ahead cash, only the second time that Appalachia has been at a discount to the Rockies, Platts historical spot price indexes show.

The last time this traditional price spread flipped was this February when winter deepened in the Rockies and the Rockies Express Pipeline was undergoing severe constraints moving westward.

This time, however, although bone-chilling temperatures raged over the Rockies and a milder climate lingered over the Northeast, Rockies gas was free for the first time to chase -- via Ruby -- better price spreads at Malin, Oregon, and ultimately, to the Pacific Gas & Electric city-gate in Northern California, sources said.

As such, volumes on REX plummeted below its usual 1.7 Bcf/d to as low as around 720,000 Mcf/d -- a level not seen December 2009, when the pipeline brought on its final segment between Lebanon and Clarington, Ohio.

Ruby, meanwhile, reached all-time highs on its flows of upward of 1 Bcf/d beginning November 3 as gas prices of $3.65 awaited at Malin.

"Previously gas was captive in the Rockies many times," a regional trader said. "Ruby has been the pipe that increased export capacity beyond production levels. Now gas can flow to the best price."

An offshoot of this increased connectivity to premium-priced California markets, sources said, is that the bargain-basement 8-cent spot prices seen in late 2007, when voluminous Rockies supplies awaited takeaway, should be a thing of the past.

"Rockies prices now have to compete to some extent with California and the East if the molecules are to remain here" in the Rockies, a Western fundamentals analyst said. "That should definitely lift Rockies prices going forward."

But the advent of Rockies gas becoming a swing supply source and REX increasingly behaving as a swing pipe to the East may only be a seasonal event determined again by regional pricing, market sources said.

"This should be a temporary phenomenon that will occur in the winters," the analyst said. "REX should still be the baseload [pipeline] into Northeast in summer."

An analysis of the Platts-ICE Forward Curve and M2M gas models reiterated this sentiment. Going forward through the end of 2014, assessments show as little as a 5-cent differential between Appalachian and Rockies prices during the peak winter heating months of December and January through 2014.

During the summer periods, however, that differential widens to as much as 26 cents.

Some market sources noted that continued production growth out of Northeast shales could be the wild card that could dampen Appalachian prices in a sustained way and incentivize Rockies gas to seek better-priced markets in the West in summer as well.

Pennsylvania State University estimates Marcellus Shale to produce as much as 13.5 Bcf/d by 2020 compared to its current level of 2.5 Bcf/d. Several analysts estimate the Utica Shale could produce between 1 Bcf/d and 2 Bcf/d by 2014.

"Over time as Marcellus grows and we get into late 2013 and 2014 as Utica comes on, you're going to see REX more and more become a swing pipe to the Northeast," a trader said.

--Samantha Santa Maria, samantha_santa_maria@platts.com

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