Rockies Express to suspend natural gas service to Ultra in shipper contract dispute

Houston — Tallgrass Energy's Rockies Express Pipeline is suspending natural gas service to Ultra Resources, saying the Wyoming producer has defaulted on its shipper obligations, according to a notice to the Federal Energy Regulatory Commission filed Feb. 5.

The dispute involves efforts during parent Ultra Petroleum's latest bankruptcy court proceedings to reject its $169 million firm transportation agreement with REX for up to 200,000 MMBtu/d. The transportation agreement, effective in 2019, was to run through 2026.

Ultra filed for Chapter 11 protection from its creditors in May 2020 and emerged in September 2020, having wiped away about $2 billion in debt and obligations. It changed its name to UP Petroleum and became a private company, based in Englewood, Colo. Among other things, it won a court's approval to reject its contract with REX. The pipeline operator has appealed that decision.

"During the pendency of the appeal, the breach caused by the rejection constitutes a default by Ultra under the Firm Transportation Service Agreement effective as of May 14, 2020. As a result of the breach, the rejection, and resulting default, and consistent with the rejection order, Rockies Express hereby provides notice of its intention to suspend service to Ultra," the operator said in a letter to FERC.

In an email responding to questions, Anthony Odem, senior director of finance for UP, said that as far as UP is concerned there is no practical effect of the service suspension.

"As a matter of law, REX was only entitled to recover the amounts contemplated by Ultra's confirmed plan of reorganization," Odem said.

A Tallgrass spokeswoman declined to comment further, citing the pending litigation.

REX moves gas from southwestern Wyoming to eastern Ohio, and vice versa. Ultra was one of the original anchor shippers on REX when it was built.

The two had an initial transportation agreement that ran from 2009 to 2019. Their new agreement, under which Ultra agreed to pay a fixed monthly reservation charge, was signed in 2017, after Ultra's first trip through bankruptcy court concluded.

According to court filings, by the time the new agreement's term began, commodity prices were materially lower than when the parties entered the agreement. Ultra suspended its drilling program in September 2019 and, as of the time it emerged from its latest bankruptcy, it had never shipped natural gas on REX pursuant to the agreement that was to run through 2026.

Instead, for much of the last year, Ultra had released its REX capacity to other natural gas shippers.

The completion of the REX Cheyenne Hub Enhancement project in June 2020 allows REX to receive up to about 1 Bcf/d of natural gas from the Denver-Julesburg and Powder River production basins through interconnecting pipelines.

Today, UP's production efforts are focused on natural gas reserves in the Pinedale and Jonah Fields of Wyoming's Green River Basin. It controls more than 117,000 acres.