Colorado consumers’ long romance with cheap natural gas is about to end, thanks to an interloper by the name of REX.
REX, the energy industry’s nickname for the $4.5 billion Rockies Express pipeline, will take some Rocky Mountain natural gas away from Colorado and deliver it to eager customers in the Midwest and East.
Consumers could see heating bills increase as early as this winter.
But the prospect of higher prices already is encouraging Rockies energy producers to invest more in exploration and drilling, enticed by larger profits.
The pipeline project will upend the current environment where a surplus of gas for several years has kept regional prices lower than in most other parts of the country.
“Right now, consumers are benefiting from lower natural gas prices, but the bad news is that the companies out there producing the gas are getting hurt,” said Porter Bennett, president and chief executive of Golden-based consultant Bentek Energy LLC.
When the first major phase of the Rockies Express pipeline is scheduled to open in January, shipping natural gas from Weld County to Missouri, Rocky Mountain regional gas prices could nearly double, according to some estimates.
Xcel Energy said it can’t yet estimate the precise impact on customer bills, but the utility said consumers should gird for a substantial increase.
“We expect our prices to move up next year,” said Tim Carter, Xcel’s director of gas supply. Colorado regulatory law allows Xcel to pass increases in natural gas prices to consumers dollar for dollar, without taking extra profit.
The problem for natural-gas companies is they’ve been too productive for their own good. Since the gas drilling boom began earlier this decade, energy firms have produced more gas than consumers in the Rockies can use, too much even for pipelines to export all of the surplus gas.
The laws of economics dictate that too much supply equals lower prices.
Low prices also have handicapped local governments in Colorado that depend on natural gas severance taxes for a major part of their revenue, Bennett said. The taxes are based on gas prices.
Rockies gas recently has traded in the range of $3 to $4 per thousand cubic feet, compared to the widely followed New York Mercantile Exchange futures price of $6.45 on Friday.
The gap between Rockies prices and national averages – known as “basis differential” – has plagued energy firms. They’ve been reluctant to launch aggressive exploration and production efforts because low prices have reduced their profit margins compared with gas producers in other parts of the U.S.
Denver-based PRB Energy Inc. said the new pipeline – and the prospect of higher prices – was a key factor in its decision to begin a drilling program in the Denver-Julesburg basin of northeastern Colorado.
“Price improvement is critical if producers are to continue investing in the Rockies,” said Robert Wright, chief executive of PRB Energy. “REX is part of the solution for continued capital spending in the region.”
An initial phase of the pipeline, now complete, connected gas fields in western Colorado and Wyoming to a distribution center in northern Weld County.
The current 722-mile segment goes from Weld to central Missouri. The final phase, to southwestern Ohio, is scheduled for completion in 2009.
Along its entire 1,600-mile length, the pipeline can ship gas into connecting lines for distribution into surrounding states.
The project “is a key part of our nation’s reliance on domestic sources of energy,” said Allen Fore, a spokesman for the pipeline’s partnership which includes Kinder Morgan Inc. of Houston, San Diego- based utility and energy firm Sempra Energy and petroleum giant ConocoPhillips.
The line’s capacity of 1.8 billion cubic feet per day – more than twice Colorado’s entire daily consumption – will add about 30 percent to the Rockies’ existing pipeline export capability.
Kinder Morgan officials said the project is one of the largest pipelines to be built in the U.S. over the past 25 years.
Staff writer Steve Raabe can be reached at 303-954-1948 or sraabe@denverpost.com.
