Natural Gas Price Differential and the Wyoming Natural Gas Pipeline Authority

Title: Natural Gas Price Differential and the Wyoming Natural Gas Pipeline Authority

Author: Mark Doelger

Publication: The Outcrop, December 2002, p. 1, 6-7

There is great concern in Wyoming about the current natural gas price, and the large differential as compared to the other trading hubs in the U.S. Wyoming nets 17% of the value of natural gas produced in the state, based on the distribution of mineral ownership (fee, state and federal) and the collection of ad valorem tax, severance tax, and state and federal royalties. Based on an exported sales volume of 4 Bcf/d, and assuming one-half of Wyoming gas is sold at spot, the loss to the state in direct revenue is $850,000 per day when the price differential is $2.50 per Mcf. The unrealized income to producers is approximately four times that amount, and is money not available for investment in drilling and infrastructure. Clearly, the price differential has a profound impact on the state and the economic viability of the natural gas producers in Wyoming.

The price differential problem has several causes, including: 1) seasonal market fluctuation in the Salt Lake area and the Colorado Front Range, 2) capacity constraints to higher-value markets, 3) financial constraints as a result of rate stacking on multiple pipelines, a result of there being several pipelines of different ownership from wellhead to market each with a tariff, and 4) the trend in ownership of firm, contracted capacity shifting from producers to marketers and end users, such that interruptible capacity is not available and firm capacity becomes a commodity producers compete for, thereby driving down the wellhead price.

Background

The Wyoming Natural Gas Pipeline Authority (WPA) was established by the legislature in 1973 over the concern for natural gas pipeline capacity and assured gas supply by industrial end users in Wyoming.

The WPA was most active in the late 1980’s when it was involved with development of the growing California natural gas market. A supporter of a natural gas pipeline to California, the WPA intervened with the Federal Energy Regulatory Commission (FERC) with important data and testimony regarding the volume and reliability of the Wyoming gas supply. The WPA’s efforts with FERC, the California Public Utilities Commission (CPOC), the California Energy Commission (CEC), and end users in California contributed to the selection of the Kern River Pipeline over competing projects from Canada and the Texas, mid-continent area. The Kern River Pipeline was put into service in 1990, and has operated at 800 MMcfd capacity. An expansion to 1,735 MMcfd capacity will be completed in May 2003; the Kern River Pipeline has been a financial windfall to Wyoming.

Purpose and Powers

Because of the price differential there has been a renewed interest in the WPA, and use of its statutory powers to offer solutions. The purpose and powers of the WPA, stated in the 1973 legislation includes:

  • “The purpose for which the WPA is created is to plan, finance, construct, develop, acquire, maintain and operate a natural gas pipeline system or systems within or without the state of Wyoming to facilitate the production, transportation, distribution and delivery of natural gas … ” This system is inclusive of any and all facilities from points of production to points of consumption.
  • “Do any and all things necessary or proper for the development, regulation, and accomplishment of the purposes of the WPA…”
  • “Acquire by condemnation any properties necessary or useful for its purposes. “
  • Issue and sell revenue bonds

Goals and Objectives

The WPA acts as a bridge between natural gas producers (supply) and pipeline operators (capacity) to smooth out the development process of natural gas in Wyoming, relieve physical and financial bottlenecks between producers and end users, and minimize stranded investment in order to ensure that Wyoming and its producers receive a value for its natural gas resource that reflects the price paid at major U.S. hubs.

The WPA undertakes the following:

  • Conduct hearings with producers, pipelines, and gas marketers to determine the physical and financial constraints on pipeline systems within and outside the state that affect the development of natural gas in Wyoming.
  • Identify markets and growth opportunities for Wyoming natural gas in order to facilitate the development process of additional pipeline capacity and development of supply deliverability by producers.
  • Quantify the amount of gas sold at spot, and how the spot price has affected longer-term contract prices.
  • Review opportunities to be an advocate at FERC to expedite new pipeline projects.
  • Identify opportunities to aggregate supply in the form of producer cooperatives.
  • Determine the need for a clearinghouse for trades between end users and Wyoming producers.
  • Identify the economic benefits of issuing revenue bonds to contract firm capacity on pipelines and storage, and to make the capacity available (at a rate determined in consideration of other benefits) to Wyoming producers as a buffer to reduce the price differential, or to ship Wyoming’s royalty gas.
  • Work with industry to establish a market-trading hub(s) within the state to add value and more clearly establish a market value for Wyoming natural gas that reflects the value of natural gas at other U.S. trading hubs. 
  • Review Wyoming’s role relative to the credit crisis of small producers, and its effect on contracting firm capacity.

    The WPA is pursuing the work (outlined above) in a combined effort with the Governor, the Wyoming Energy Commission, state and federal legislators.

    Editors’ note: Mark J. Doelger is a geologist with Barlow & Haun, Inc. and was appointed to the WPA by Governor Geringer in 2001, where he is currently chairman. Mark can be contacted at his office by phone (307) 234-1574, or by email: bhgeolwy@attbi.com. 

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