March 2009 Vol. 236 No. 3

Features

Pipeline Activity May Slow But Wont Be At Crawling

Considering negative reports on the nation’s economic status, pipeline construction in the U.S. is experiencing a healthy market as operators and producers continue stepped-up activity supported by projects to move natural gas to the Midwest and the East Coast from Mid-Continent shale plays and the Rocky Mountains.

While construction is expected to be slightly slower than in recent years, activity remains at a high pace with projects that are either under way or will kick off in 2009. In essence, the industry is not expected to be wandering through pipeline wilderness over the next few years.

Surveys published in P&GJ and sister publication Pipeline News indicate natural gas, crude oil and refined products pipelines under way, or planned for construction in the U.S. through 2012 total more than 27,000 miles. This mileage is anchored by pipeline projects focused on moving Rocky Mountain gas and unconventionally produced shale play natural gas to large customer markets.

Natural gas activity continues to dominate construction and engineering work, accounting for more than 17,000 miles of cross country pipeline projects. Driving this activity is a steady demand for gas-fired electric power generation, and to a lesser extent, industrial, commercial and residential use.

Of the natural gas totals, some 40 projects representing nearly 5,000 miles are scheduled for completion this year, although final regulatory approval dates will affect schedules. This mileage includes projects originally scheduled for 2008 completion that have slipped into 2009. Some operators are still waiting on permits before making firm commitments for 2009 while others are evaluating economic conditions before deciding whether to move forward.

It is interesting to note that the combined natural gas, crude oil and products pipelines now on the books represent 75 separate projects. Of this total, 58 of these cross country pipelines are designed for 30-inch or larger with 42-inch being the diameter of choice to meet capacity requirements. While this indicates a significant level of construction activity, some proposals are competing for the same markets and will fade or become joint efforts.

For comparison, the U.S. Energy Information Administration (EIA) issued a report last year noting some 200 projects, representing more than 10,000 miles of new pipelines and 103 Bcf/d of capacity, are under study, planned or have been approved by federal regulatory agencies. Based on every project reaching completion, these lines would add about 2% of new pipeline miles to the national grid and increase network capacity by 38% at a total cost of $28 billion.

It is important to note the EIA totals represent cross-country lines, as well as short sections, and interconnects, for the period from 2008-2010. The mileage total is 4,407 miles in 2008, 3,696 miles in 2009 and drops to 1,955 in 2010.

Staying On Track

With no official reports of operators deferring projects, it is anticipated that pipeline companies will remain on track with construction plans, particularly those projects set for early 2009 construction starts. However, companies will continue to evaluate the price stability, the tight credit situation and material costs before red-penciling projects.

For another view, data provided by the Department of Energy shows that more than 17,500 miles of natural gas pipelines have been built in the U.S. since 2000. Much of this activity has been driven by the growth of unconventional natural gas production, such as projects in the Barnett Shale near Fort Worth, TX and other shale plays, or coal bed methane formations in the Rocky Mountains.

These production projects were not considered economical until recently when advanced technology and higher oil and gas prices made such efforts profitable.

Lower oil and gas prices are leading some exploration and production companies to reconsider how to move forward with spending. Combined with tight credit markets that make funding capital-intensive projects more difficult, some pipeline construction decisions could be delayed.

After enjoying robust construction over the last three years, some pipeline contractors are cautious about 2009 opportunities while predicting 2010 will be strong. Nevertheless, there is sufficient work remaining from 2008 and potential 2009 construction starts to keep the contracting industry busy.

Still, the unconventional natural gas production areas remain underserved by transportation, although some 20 projects have been built and new lines are under construction, as well as being planned.

One energy analyst noted that the need to add pipeline infrastructure remains despite the expected slower pace of production growth. Projections indicate pipelines designed to alleviate the bottlenecks in growing supply areas such as the shale plays and the Rockies will be built, as key pipeline projects for 2009 are already under construction, and as energy companies divert capital to forthcoming pipeline projects.

Some companies are finding it more attractive to shift dollars from production projects to invest in pipelines. Plus, a 70% decline in steel prices over the first half of 2008 also helps improve the economics of pipeline projects.

Rockies Express Pipeline

While there has been aggressive pipeline construction to move shale-play gas, the long-distance, large-diameter pipelines have been those designed to connect Rockies’ gas production with markets east of the Mississippi River. This includes the far-reaching Rockies Express Pipeline.

Kinder Morgan Energy Partners, Sempra Pipelines & Storage and ConocoPhillips teamed up to build the 1,678-mile Rockies Express (REX) as an infrastructure offering Rocky Mountain producers an opportunity to realize value for their product by being able to deliver the gas to Midwest and eastern markets. The project is supported by long-term, firm transportation contracts with a number of shippers for virtually all of the 1.8 Bcf/d of available capacity.

For efficiency and to meet a time-intensive construction schedule, the project was divided into two lengthy sections — Rockies Express West and Rockies Express East. On completion, the line will represent one of the longest natural gas pipeline construction projects in North America.

Overall, Rockies Express originates at the Meeker Hub and extends to the Clarington Hub in eastern Ohio. Along the way, the route parallels existing utility corridors, which greatly reduced the need to buy additional rights-of-way and minimized potential disruptions in new areas. The line will connect with more than 25 intrastate and interstate pipelines transporting natural gas from the Gulf area as well as the Mid-continent.

The first 136-mile segment from the Meeker Hub in Rio Blanco County, CO to the Wamsutter Hub in Sweetwater County, WY was completed and approved for service in February 2006. Construction on the 191-mile portion from Wamsutter to the Cheyenne Hub in Weld County, CO began in July 2006 with service in February 2007. These two phases were followed by the 713-mile REX West segment, extending from the Cheyenne Hub to Audrain County, Mo. REX West received FERC approval for construction in April 2007 and was placed in service in January 2008.

REX East

Also in April 2007, Rockies Express developers filed a FERC application for authorization to build and operate the REX East portion extending the pipeline another 638 miles to the Clarington Hub in Monroe County, OH. The timetable called for REX East to begin partial service in December 2008 with full service scheduled for June 2009

Further, a westward extension of REX from Wamsutter to the Opal Hub in Lincoln County, WY which will use capacity on the Overthrust Pipeline, owned by a subsidiary of Questar, was also authorized by FERC in April 2007. The extension, which was placed in service in January 2008, eventually will deliver up to 1.5 Bcf/d into REX.

Construction on the 638-mile, 42-inch Rockies Express East got under way late last summer. The line was divided into six construction spreads and awarded to three separate contractors. Welded Construction was awarded the contract to build the spreads designated A-1 and A-2. Spread A-1 is a 71.2-mile segment that runs from Audrain County, MO to Morgan County, IL. Spread A-2 is 72.9 miles and extends from Morgan County to Christian County, IL.

Price Gregory was awarded three spreads: Spread B involves 46.7 miles from Christian County to Douglas County, IL; Spread C is 67.8 miles from Douglas to Edgar County, IL; and Spread F, a 69.1-mile segment from Decatur to Warren County, Ohio.

Spread D was won by Sheehan Pipeline and involves a 68.8-mile segment from Edgar to Morgan County, IN.

The REX-East schedule called for beginning interim service to the Lebanon Hub in Warren County by December 2008 with full operation in summer 2009.

Rockies Alliance Pipeline

Looking ahead to additional Rockies’ pipelines, Alliance Pipeline Inc. and Questar Overthrust Pipeline Co. have proposed a 1,083-mile, 42-inch natural gas pipeline connecting the Rocky Mountain region to the Chicago market hub. The proposed Rockies Alliance Pipeline (RAP) is being developed in response to increasing supply from the Rockies and is expected to be in service by 2012.

Developers claim RAP will enable producers, marketers and end-users to connect the gas supplies in the greater Green River, Piceance, Uinta and Power River basins with one of the largest and fastest-growing markets in North America. The project will take advantage of existing infrastructure with both Overthrust and Alliance to provide a seamless and competitive transportation system.

RAP’s proposed route will take a direct line that begins in Wamsutter, traverses the northeastern corner of Colorado, through Nebraska, Iowa and Illinois, terminating at Alliance’s delivery header system in Joliet, IL which has firm takeaway capacity in excess of 7 Bcf/d. The estimated designed operating pressure is 1,440 psig.

The route was proposed in response to shipper request for a direct route into the Chicago market to provide increased transportation and a low-cost supply option through interconnects with Alliance and other interstate pipeline systems. As proposed, the route optimizes existing system capabilities including easements, minimizing the impact to the environment as well as receipt and delivery-point header systems.

As for compressor stations, the design features seven proposed stations with approximately 28,000 horsepower per station. Final station locations will be determined once the final route has been established. However, the following locations have been preliminarily identified:

• Wyoming (2): Wamsutter and Medicine Bow (near Cheyenne)
• Colorado (1): Sedgewick (near northeast corner of boundary with Nebraska)
• Nebraska (2): Overton (central Nebraska) and Waverly (near Lincoln)
• Iowa (2): Milo (south of Des Moines) and Oak Grove (near Davenport)

The pipeline will require only one new meter station located next to the Wamsutter compressor station site. Beyond Wamsutter, RAP will utilize Questar’s Rockies supply pool and existing pipeline system, as well as Alliance’s existing delivery-header system into the Chicago market area.

The stations will serve interconnects with the Questar Overthrust Pipeline, which includes interconnects with Rockies Express Pipeline, WIC, Cheyenne Plains and various gas plants along the route. The Alliance Pipeline delivery header system allows for deliveries into Vector Pipeline, NGPL, Guardian Pipeline, Peoples, Nicor, Midwestern Pipeline and ANR Pipeline.

Initial designed capacity will be 1.3 Bcf/d firm capacity plus 0.3 Bcf/d interruptible capacity, expandable using additional compression to 1.7 Bcf/d of firm capacity plus 0.3 Bcf/d of interruptible capacity.

Developers have established a timeline that includes a FERC pre-filing in February 2009 and filing the FERC application in 2010. Pending regulatory approvals, construction is anticipated to start in spring 2011 with construction wrapping up in October 2012 followed by final tie-ins and clean-up.

The timeline for key project initiatives in 2009 calls for public meetings and open-house events with stakeholders; environmental field studies; initiating engineering design; commencing land acquisition and agreements, and initiating engagement with regulators.

The 2010 schedule includes public meetings with stakeholders; route refinement; FERC certificate filing; environment and other permit applications with the applicable regulatory bodies; land acquisition and agreements; and continuation of detailed engineering.

In 2011, the developers will hold public meetings with stakeholders, finalize detailed engineering, and start construction activities once regulatory approvals are in hand. In-service date is scheduled for November 2012.

Ruby Pipeline

Another major Rockies pipeline has been proposed by El Paso Corp. The company filed a FERC application for a certificate of public convenience and necessity to construct and operate the Ruby Pipeline in January 2009.

The proposed $3 billion interstate natural gas pipeline will access supply sources from multiple Rockies’ basins and make those supplies available to Nevada, California, and Pacific Northwest markets. Ruby is expected to have initial design capacity of up to 1.5 Bcf/d.

El Paso already has received binding commitments for more than 1.1 Bcf/d from customers under 10 to 15-year contracts. The California Public Utilities Commission approved plans by PG&E Corp.’s Pacific Gas & Electric unit to bring gas to California on the pipeline. El Paso is in discussions to obtain additional commitments.

The company earlier filed a federal rights-of-way application with the U.S. Department of the Interior’s Bureau of Land Management. As planned, Ruby Pipeline will travel 680 miles with 42-inch pipe from the Opal Hub in Wyoming and terminate at the Malin, OR interconnect, near California’s northern border.

The line’s initial designed capacity of 1.3-1.5 Bcf/d, depending on final commitments, will be expandable to 2 Bcf/d. Subject to regulatory approvals, the in-service date is March 2011. El Paso and PG&E have entered into a letter of intent for PG&E to acquire a 25.5% interest in the project.

Conclusion

Although the Rocky Mountain projects represent a large chunk of pipeline mileage under construction and planned, operators elsewhere also have significant initiatives on the books to keep the industry busy near term and beyond.