The Rockies Express Pipeline, built to deliver natural gas nearly 1,700 miles eastward from Colorado and Wyoming as far as Ohio, has been clobbered by the emergence of a vast shale gas play in Ohio's Appalachian backyard.
Now owners of the REX pipeline are trying to recoup by moving gas from the Marcellus and Utica formations the other way -- westward to nearby midcontinent markets. But they face a heated protest from original shippers in the Rockies in a dispute before the Federal Energy Regulatory Commission.
REX -- owned by Tallgrass Development, based in Overland Park, Kan., and its venture partners -- has asked FERC to give advance approval to a plan to offer gas transmission service to Marcellus and Utica play producers at rates substantially below what REX pipeline's anchor shippers in the Rockies are obligated to pay under their long-term contracts. Tallgrass Development LP owns 50 percent of REX, acquired from Kinder Morgan Energy Partners last year in a $3.3 billion transaction with subsidiaries of Sempra Energy and ConocoPhillips each holding a one-quarter share (EnergyWire, Aug. 21, 2012).
REX announced July 15 that it had signed a contingent agreement with an unnamed gas developer willing to move about 200 million cubic feet of gas a day through the eastern segment of the REX line, from Ohio's Utica Shale play as far as Chicago and St. Louis. The project requires construction of a 14-mile pipeline link to MarkWest's Seneca Processing Complex in Ohio's Noble County. The Akron Beacon Journal's Bob Downing cited speculation that the REX shipper is likely Antero Resources of Colorado, a Utica developer. Tallgrass and Antero declined to comment.
But REX says the deal won't get done unless the unidentified Utica gas producer gets a competitive pipeline rate into Midwest markets. And it says it cannot afford to give that same lower rate to its anchor shippers in the Rockies, because it needs that revenue to meet the debt payments on the pipeline.
The shippers say "most favored nation" clauses in their contracts give them the right to any lower rates that REX charges to other customers. REX wants FERC, in effect, to say the clauses don't apply to the new east-to-west shipments.
According to REX's FERC petition, giving its plan a green light will accelerate Appalachian shale gas production, still largely locked in for now by the need for more takeaway pipeline capacity.
"If Rockies Express cannot effectuate such transactions, the market will be denied a significant -- and now obvious -- path utilizing existing infrastructure to provide firm transportation out of the Marcellus and Utica shale formations to additional retail, industrial and power generation markets," REX said.
Not a 'Chicken Little' story
The ability to move gas both ways is crucial to REX's future, said David Dehaemers, president and CEO of Tallgrass Energy Partners, speaking to securities analysts last month. Tallgrass Energy Partners is a publicly traded limited partnership owned by Tallgrass inside and public investors.
Dehaemers said, "we are working extremely hard on showing everybody, like we have continually talked about, that REX is not going to be the Chicken Little -- the sky is falling -- pipeline in 2019, but rather REX is going to move gas many different ways for a long, long period of time and is extremely critical to the infrastructure of this country going forward."
Three of the anchor shippers, BP Energy Co., ConocoPhillips Co. (a REX pipeline minority owner) and Ultra Petroleum Corp., joined by a fourth shipper, WPX Energy Marketing LLC, have protested to FERC that REX cannot be allowed to renege on its transportation contracts.
The shippers' commitment to move gas over the pipeline at the established rates, which binds them until 2019, were "part of the quid pro quo" that enabled the pipeline to be built, said Larry Bryan, Ultra's senior director of marketing, in a statement to FERC.
The anchor shippers "would not have signed these long-term agreements without assurance that the pipeline was not going to sell transportation service to others on these newly constructed pipeline facilities at a rate lower than what the anchor shippers had agreed to pay," they said. BP and ConocoPhillips say their combined pipeline charge obligations to Rockies Express exceed $2.7 billion over the 10-year contract term.
"This is not a question of Rockies Express not being allowed to contract for new service to serve developing new markets, which is the story Rockies Express is attempting to spin," BP, ConocoPhillips and WPX Energy declared in their FERC protest. "This Petition, at its essence, is nothing more than Rockies Express attempting to be relieved of a valid contractual commitment, which it apparently now views as 'improvident.' Both the Commission and the courts have been clear that this is no basis for relief."
REX asserts that the long-term contracts cover west-to-east shipments across the entire pipeline, not to the proposed flows the other way through only the eastern leg. That's not what the contracts say, respond the Rockies shippers.
REX has asked FERC to make an expedited ruling, citing the financial pressures posed by the Marcellus and Utica shale boom, which caught Kinder Morgan and the shippers by surprise.
The REX line began shipments in 2009 at near its 1.8 billion cubic feet in daily capacity. This year, REX has operated at a 66 percent load factor and only 62 percent in the pipeline's eastern zone, from Missouri to Ohio, the pipeline company said.
Utica shippers are eager to line up pipeline takeaway contracts now, REX officials said, so speed is of the essence. Without this new business, "Rockies Express likely will miss a valuable opportunity to maintain the continued subscription of its system beyond 2019," when the contracts with the Rockies shippers run out, the pipeline company said. REX wants to begin east-to-west gas shipment this year to stay ahead of competing pipeline projects linked to the Appalachian gas plays.
The pipeline's prospects after 2019 have been questioned by bond ratings agencies, which downgraded REX senior notes in January, following the pipeline sale to Tallgrass. (Kinder Morgan was required to divest the pipeline to win Federal Trade Commission approval of its takeover of El Paso Corp.). According to Moody's, the sale to Tallgrass "indicated that REX's current fair value is less than its cost to build."
"The ratings downgrade reflects Rockies Express' continued high financial leverage and the uncertainties regarding its earnings power when most of its current customer contracts expire in 2019," said Pete Speer, vice president of Moody's, in a statement in January.