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Circumstances Force Producers to be Pickier about New Pipes

Record natural gas pipeline capacity additions in 2007 haven't been enough to prevent infrastructure constraints in several key U.S. basins, but producers likely will be more selective about what pipes they back in the coming year, Barclays Capital analysts said in a report.

Regional pipeline constraints resulting from the huge flow of unconventional gas led to a level of infrastructure development not witnessed in several years, wrote Barclays analysts George Hopley, Biliana Pehlivanova and Michael Zenker.

The United States in 2007 added 14.9 Bcf/d of deliverability and laid 1,700 miles of pipe, and projects scheduled for 2008 would add a record 47 Bcf/d of deliverability and 4,407 more miles of pipe.

By Barclays' estimates, more than 18 Bcf/d and 1,500 miles of the 2008 pipe projects already have been completed. More pipeline projects have been readied for the next several years.

However, with gas prices lower and the credit markets in disarray, Barclays analysts did some digging in an attempt to answer questions about whether the pipelines that need to be built will, in fact, be built.

"Revenues from natural gas production are inherently tied to gas prices, which are in turn linked to fears that a recession will soften demand," wrote Hopley and his colleagues. "Pipeline operations, in contrast, enjoy a more steady income stream backed by firm shipper commitments and are less exposed to the fluctuations in price," which make them a favored investment choice.

Already, said the trio, several integrated energy companies recently have announced shifts in their capital commitments -- away from exploration and production and toward midstream opportunities. "Furthermore, with domestic natural gas supply strongly on the rise while near-term demand trends are nearly flat, the need for new pipeline capacity is clearly greater than the need for incremental production growth."

The need for more pipe infrastructure is "particularly acute" in some of the unconventional production regions, which include East Texas, Louisiana, Arkansas and the Rocky Mountains.

As the Barclays analysts see it, pipeline development may benefit from its "relative safety in a recessionary environment, as integrated energy companies focus on midstream projects." Still, new pipes and expansion developers could face "increasingly tougher times" in securing binding commitments from gas producers because of the credit crunch.

"Although drilling activity will certainly be affected by spending cuts, plans to develop areas with proven success, such as the Barnett and Haynesville shales, are likely to be the last to suffer," said the Barclays team.

However, because some of the proposals are competing to move "the same Btus," not all of the planned pipes will move forward.

Pipes "critical" to preventing bottlenecks in rapidly growing production areas "will, in our view, get built in a timely manner and will not pose a serious constraint to future increases in production," said the analysts. "That is, the current credit environment may delay projects, but will not ultimately prevent needed new infrastructure."

Expansions planned past 2009 face greater risks because their development will depend not only on available credit "but also, and more importantly, on the pace of production growth, which will ultimately determine the magnitude of the capacity additions needed," the analysts noted.

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