Ruby Pipeline, put on the drawing board when Rockies prices were at rock-bottom levels, goes into service Thursday in a far different environment, going head-to-head with cheap Canadian gas in a race the new pipeline could lose if not for the firm contracts that have locked up the bulk of its capacity.
In another complication, Pacific Gas and Electric, Ruby's anchor shipper, announced earlier this month it would be implementing pressure reductions along portions of its system. One of the areas hit with the pressure cuts is near the interconnection at Malin, Oregon, one of the end-user's major supply hubs and Ruby's termination point.
With less capacity available at Malin, and competitor Gas Transmission Northwest supplying northern California with cheap Canadian gas, Ruby will go into service facing fierce competition that was not envisioned when owner El Paso Corp. announced the 1.5 Bcf/d project in December 2007.
About 14 shippers have signed contracts for as much as 15 years to transport a total of 1.1 Bcf on the 675-mile Ruby, and some analysts said it is because of these contracts that Ruby's viability in the market is secured.
"A lot has changed since Ruby was first thought of, but you have contract supply on Ruby that will incentivize people to use it," said Gordon Pickering, a director at Navigant Consulting. "Ruby is going to change the marketplace, and it will do so right away. It doesn't bode well for GTN."
An analysis of Platts prices shows just how drastically the Western markets have changed since 2007 when PG&E signed on as an anchor shipper.
The price spread between the Rockies and Malin hit a high of $6.30/MMBtu on June 4, 2007, while the margin between AECO-Alberta and Malin stood at 46 cents on the same day, according to Platts prices. These gaping spreads were attributed to cheap, stranded gas in the Rockies before the Rockies Express Pipeline was built.
Since then, however, spreads have contracted considerably. And since early 2010, the Malin-AECO spread has taken over as the more premium of the two.
For the year-to-date, the Malin-Rockies spread averages 17.6 cents, while the Malin-AECO spread comes in at 58.1 cents.
Trader sources said the change has been due to recovering Rockies prices, as well as depressed prices in Alberta that are partly blamed on TransCanada's mainline toll issues.
But analysts said gas demand will continue to rise in both California and Canada, with consumption picking up in the oil sands and for power generation needs.
Greg Hopper, managing director at Black & Veatch, said Ruby provides good optionality for Rockies producers and gives PG&E the flexibility in the future.
"Given that the Canadian producers PG&E buys from may find better markets in the East, PG&E may want optionality," Hopper said. "Options are always good, and PG&E is being smart."
The market, however, is clearly leaning toward western Canada for supplies over the next few years, Platts prices show.
The Malin-AECO differential continues to offer the larger margins, coming in between 27 cents and 47 cents through 2014, Platts forward prices indicate. The Malin-Rockies differential, however, veers between minus 9 cents and 24 cents through 2014.
Ruby, meanwhile, has been girding itself for a utilization rate of less than 60% for the first few months, the pipeline has stated in FERC filings.
"Given the lack of near-term natural gas production growth in the Rocky Mountain supply region and significant gas-on-gas competition from Canadian supply sources, Ruby expects lower levels of pipeline throughput in the near term," the pipeline stated in a June filing.
In the meantime, the market has been readying itself for Ruby's startup.
IntercontinentalExchange on Wednesday launched two trading points: a Ruby receipt pool and Ruby-Malin delivery point for spot price, intraday, balance-of-month and firm physical basis trading.
There has been a significant uptick in liquidity at Malin ahead of the anticipated opening. Traded volumes at the hub hit a 10-year high of 1.3 Bcf July 1 and have remained relatively elevated, coming in at 783,000 Mcf Tuesday, Platts data shows. Last July, traded volumes at Malin never rose above 760,000 Mcf.
Ruby itself, meanwhile, was flowing about 52,000 Mcf/d on Tuesday's gas day for linepack work, the highest level it has flowed ahead of in-service, according to Bentek Energy, a unit of Platts.
