Constricted and expensive capital markets have not stifled natural gas pipeline development, and analysts predict projects generally will move forward, driven by producers' need to get gas to market and supported by investors' appetite for "more reasonable returns and greater certainty."
Although some pipeline developers are high-grading projects and abandoning those that don't offer the highest returns -- just as their producer brethren do -- projects under way will be completed. And capital will be available to those with a compelling story to tell, as evidenced by recent financings completed by El Paso Corp., Enterprise Products Partners, Energy Transfer Partners and Devon Energy.
"The underlying need to build more pipeline infrastructure remains despite a slowing economy and the expected moderation in the pace of production growth," Barclays Capital analysts wrote last month, noting that energy companies would divert capital to forthcoming projects and producers would step up to support new pipes based on widening basis differentials.
However, demand for large-diameter steel pipe is waning, according to IHS Global Insight. "Although steel mills are currently completing previously negotiated pipe contracts, there is minimal new order activity," IHS analyst KC Chang wrote in December. Pipeline developers who bought their steel early thinking they were wise might not feel so prescient today, noted another analyst, as the ragged economy has brought steel prices down.
Smaller pipeline companies could be takeover targets this year, some say.
In November Regency Energy Partners LP, which serves as a platform for GE Energy Financial Services' growth in the midstream sector, slashed its 2009 and 2010 growth plans and sharply reduced its planned pipeline infrastructure project for the emerging Haynesville Shale (see NGI, Nov. 17, 2008). Walter Simmons, a principal with Wood Mackenzie's North American gas and power group, told NGI that Regency "may be struggling with securing financing" for its Haynesville project.
And Enterprise recently pulled out of TransCanada Corp.'s proposed Pathfinder Pipeline, saying it needed to target its capital more carefully on higher returns available from other projects (see NGI, Jan. 5). "I think you will see that there is a much greater emphasis on internal ranking of projects, so you'll see that some companies in the 2007 environment might have committed to three or four projects, in 2009 they may be committing to their top two...," David Bloom, a partner with law firm Mayer Brown in Washington, DC, told NGI.
"We've also heard that several Gulf Coast region storage projects are facing similar capital/financing issues," Simmons said. "This trend of 'uncertainty of capital access' is contradicted, however, by Kinder Morgan indicating it will proceed with the Fayetteville Express project at approximately $1.3 billion and recently securing about $0.9 billion in capital" (see NGI, Oct. 6, 2008).
Bentek Energy LLC tracks well more than 100 pipeline, gas storage and liquefied natural gas (LNG) projects and alerts its shipper and other clients to status and progress changes. The firm's energy director, Rusty Braziel, told NGI most of the changes to projects under way have been related to mechanical issues in the field. "In terms of the kind of delays that we can actually point to and say that this is related to a financial meltdown across any of these projects, it's not very many if any at all," he said. "Most of these pipeline companies when they went to do these projects had firm commitments from their shippers in the first place or they never would have signed on for the darn things."
And those shipper commitments -- backed up by reserves that need to get to market -- are the foundation of what will continue to make the pipeline business a good investment for risk-shy capital, noted Bloom, whose clients are shippers on and lenders to pipelines. Working in pipelines' favor when they seek capital, according to Bloom:
"People these days are willing to settle for more reasonable returns and greater certainty, and natural gas pipelines are a good place for that money to flow," Bloom told NGI. But perhaps the biggest thing going for pipelines and the gas industry in general long term is demand support expected to result from green initiatives.
"We believe that whatever happens in the Obama administration because of the economy, energy will be a key factor, and there will be a desire to promote green energy," Bloom said. "And natural gas is a good, long-term solution to some of those issues."
In recent years the shipper mix on pipelines has migrated to one in which producers and marketers play a bigger role relative to local distribution companies. This has increased credit risk, noted Bloom. "But at the end of the day, these shippers are contracting for capacity because they have natural gas to sell and reserves that are coming on-line," he said.
This is particularly true in the established Barnett Shale play and the emerging shale plays in Arkansas and Pennsylvania, for instance, noted Bloom. And the perennially constrained Rockies will always want for more takeaway capacity, it seems. "There needs to be a pipeline out of the Rockies as soon as it gets built, irrespective of power generation demand," Braziel said.
When it comes to gas storage, Braziel said, "more storage is always better. It's always a good thing for the market in general because the more storage you have, the more flexibility the market has in general." However, latecomers to the storage development game could be pinched in this environment. "If your project is not booked up and you don't expect it to be completed for another two years, unless all of the LNG [liquefied natural gas] boats in the world show up in the Gulf Coast, you'll probably have a problem."
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