Experts: Rockies natural gas faces hurdle in getting the product to market

GRAND JUNCTION, Colo. ” Natural gas from western Colorado’s Piceance Basin sells for less than gas from other areas does because of a lack of pipeline capacity, according to a new state report.

That means less money flowing into the state treasury, according to a study by the Colorado Energy Research Institute at the Colorado School of Mines in Golden.

Royalty payments and severance taxes paid to the state are based on the sale price of gas.

The problem is getting the gas from the Rockies to national markets. Gas producers in Wyoming face the same dilemma because of lack of pipeline capacity.

“It’s a real issue,” said Dag Nummedal, director of the energy-research institute. “Rocky Mountain gas is always valued less” than gas from other domestic sources.

The institute found that the oil and gas industry generated $22.9 billion in direct and indirect economic benefits to the state in 2005. The study also concluded that state and local governments collected roughly $640.5 million in taxes and $117.5 million in income taxes linked to the energy industry.

Those figures could have been higher if the gas could have made it to market easier, experts said.

The gas from the Piceance Basin and much of that drawn from Wyoming “is fundamentally competing to get through the same pipeline grid,” said Brian Jeffries, executive director of the Wyoming Pipeline Authority, who works out of Longmont.

Owners of natural gas sell it to pipeline companies, which deliver it to the industry or other consumers.

Jeffries said competition for space in the pipeline results in a glut of supply, forcing producers to reduce prices to get the gas shipped.

“There is more supply than capacity, and that’s what drops the price,” Nummedal said.

In some cases, producers have to sell gas at below-market prices because they must meet commitments or risk fines, said Tom Castleman, senior markets editor for Gas Daily, an industry publication.

The difference between gas sold at the Cheyenne hub in northeast Colorado and the Henry Hub, a pipeline head in Louisiana, where it was selling for $7.70 per thousand cubic feet late last month, was $4.70.

Western Colorado gas faced an additional obstacle in June when two major pipelines, the Trailblazer and Northwest, were shut down for routine maintenance. Gas from western Colorado and Wyoming sold for about one-third the national average.

State and industry officials hope extension of pipelines, including a leg of the Rockies Express Pipeline to the Midwest and East, will narrow the difference in gas prices. The Rockies Express, starting in Rio Blanco County in western Colorado, eventually will stretch 1,679 miles, carrying 1.8 billion cubic feet per day as far as Monroe County in Ohio.

The lower prices of Rocky Mountain gas will lower severance taxes this year, said John Harpole of Mercator Energy in Denver. “But the sky is not falling,” he said.

“I don’t know of anyone that slowed their drilling program for this year,” Harpole added. “Most people understand the price will be better come ’08.”