Rockies pipeline reverses flow for Marcellus shale gas and wins FERC ruling

Rockies Express pipeline, built to bring Rocky Mountain gas east to the Midwest, is scrambling to accommodate new demand from eastern shale producers to send gas west.

Only four years after it began flowing natural gas from the Rocky Mountain region east to the Midwest, thereby helping Rockies producers offset negative price differentials, Rockies Express Pipeline LLC is scrambling to accommodate growing demand from producers in Pennsylvania's Marcellus Shale and Ohio's Utica Shale to send gas west to Midwest markets.

The effort by the 1,700-mile pipeline to reverse its eastern section reflects the huge shift in the U.S. natural gas market brought on by the booming eastern shale gas fields. However, Rockies Express (REX) first had to get a critical regulatory ruling from the Federal Energy Regulatory Commission (FERC) to clear the way for its new "backhaul" service for Marcellus and Utica producers.

In a June 6 request to FERC, the pipeline asked for a declaratory order that its new service would not trigger "most favored nations" provisions in contracts held by anchor and foundational shippers who provided the initial capacity commitments that were critical to financing construction of the line, which runs from Wyoming and Colorado to Ohio.

REX said the east-to-west backhaul service was different than the west-to-east service that was signed up for by its anchor and foundational shippers and thus they were not entitled to favorable rate treatment under the most favored nations provision, which guaranteed those shippers rates equal to or less than the lowest rate agreed to between REX and any party.

REX said the FERC declaratory ruling on its backhaul service was vital to its economic future because booming production in the Marcellus and Utica has greatly reduced demand in the Midwest for Rocky Mountain gas, resulting in dwindling flow on the line-especially in its easternmost "zone 3" section, which runs from Missouri to Ohio. The problem is that REX was completed in 2009 just as the shale boom was taking off, eventually saturating its target Midwest market with cheap shale gas-and drying up REX's business.

"During 2013, Rockies Express has operated at a 66 percent load factor and the load factor in zone 3 has been 62 percent," REX said in its petition to FERC. "This shift in U.S. natural gas supply and demand and accompanying reduction in Rockies Express' usage has forced Rockies Express to re-evaluate its services so it can effectively respond to and compete in the market on a long-term basis." In particular, REX said it is seeing fast-growing interest from Marcellus and Utica producers to use the eastern zone of its line to ship gas west to Midwest markets.

"Shippers increasingly desire a firm primary transportation path that is in the opposite direction of the west to east path that Rockies Express was constructed to provide," REX said. "Shippers now want to move gas from east to west in order to transport gas from the Marcellus and Utica formations, which are located in close proximity to the eastern terminus of Rockies Express, to markets further west such as Chicago and St. Louis.

"If Rockies Express cannot accommodate potential shippers' timing, Rockies Express likely will miss a valuable opportunity to ensure the continued subscription of its system beyond 2019 when the foundation and anchor shippers' contracts expire," the company said. However, REX said it would not enter into contracts with shale producers unless FERC made clear that those deals would not trigger the most favored nations provisions of its anchor and foundational shippers.

Not surprisingly, REX's request drew strong protests from five of the pipeline's anchor and foundational shippers-Encana Marketing (USA) Inc., Ultra Resources Inc., BP Energy Co., ConocoPhillips Co. and WPX Energy Marketing LLC. They contended that the language in their contracts with REX clearly entitled them to most favored nations status in relation to any other shipping contracts signed by the pipeline-including those for east-to-west service.

Beyond the fight over the correct interpretation of contractual language and REX's tariff in regard to the most favored nations provisions, both REX and the complaining shippers sought to raise broader public policy and fairness issues in their arguments to FERC.

REX said if FERC failed to grant its petition, Marcellus and Utica producers would lose the most cost-effective east-to-west gas transport service now available to them, ultimately resulting in higher costs for consumers.

However, the protesting shippers said granting REX's petition would be unfair to them because their large initial commitments to the pipeline provided the financial underpinning that made its construction possible.

The shippers also contended that their dispute with REX was a contractual matter that was more appropriately decided in the courts and that FERC had no need to assert jurisdiction over the matter.

In a November 26 ruling in favor of REX, FERC said the case touched directly on its regulatory responsibilities and that it had special expertise to interpret the terms of REX's FERC-approved tariff.

But while asserting its jurisdiction over the matter, FERC did not address any of the public policy or fairness issues raised by the combatants in the fight.

Rather, FERC stuck to analyzing the contractual language in making its decision in favor of REX. While acknowledging that there was some conflicting and ambiguous language in the contract over the most favored nations issue, FERC said it was not enough to obscure the main thrust of the key provisions, which indicated that the anchor and foundational shippers were only entitled to favorable rate treatment for the service initially contemplated for REX-long-haul west-to-east service that covered at least two of the pipeline's three zones-and not the single zone, east-to-west backhaul service now being pursued by REX.

REX is a joint venture of a subsidiary of Tallgrass Development LP, which owns a 50 percent share, and Sempra U.S. Gas & Power and Phillips 66, which each own 25 percent.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.