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El Paso Confirms Ruby Pipeline Good to Go

Speculation was put to rest Thursday that El Paso Corp.'s Ruby Pipeline project might not be a go. The 680-mile pipeline project remains on track for completion in 2011 to carry constrained natural gas supplies from the Rockies to the West Coast.

Rumors had circulated in the past few weeks that the project could be facing some financial trouble. At an energy conference in San Francisco last month, a producer told some attendees that rates to design the pipeline had used an 8% cost of capital to debt element, and because of a lack of capital, El Paso might delay construction.

Not so, CEO Doug Foshee said Thursday. He and his management team spoke with energy analysts during a conference call about the company's 4Q2008 performance and plans for the Ruby Pipeline, among other things.

"With the growth out of the shale plays, most of which is headed East, our view is that there is more of a need now for a western exit out of Rockies than there was at the start of this project," Foshee said.

The latest version of the east-to-west pipe proposal was launched in late 2007 by El Paso and then-partner Bear Energy LP, a subsidiary of The Bear Stearns Companies Inc. (see NGI, Dec. 10, 2007). Bear was to be an initial shipper on the pipe, which is proposed to begin at the Opal Hub in Wyoming and to terminate at the Malin, OR, interconnect near California's northern border.

The project suffered fits and starts, not only with Bear's demise, but also after PG&E Corp., which signed on as an initial shipper, dropped out last May because of escalating costs (see NGI, May 12, 2008). By October, however, PG&E utility Pacific Gas & Electric Co. was back on board as an anchor shipper, and it agreed to obtain 375,000 Dth/d of capacity from the pipe for its gas and electric customers (see NGI, Oct. 20, 2008).

The pipe's capacity is still being marketed, said pipeline chief Jim Yardley, but already, precedent agreements have been secured for more than 1.1 Bcf/d in binding 10- to 15-year contract commitments, (see NGI, Nov. 10, 2008).

"Basis in the Rockies is $2.50 or so at the Cheyenne Hub," and no one wants gas to be shipped out more than the producers operating there, said Yardley. "If Ruby were in service today, quite the contrary, people want Ruby to be built."

The company in late January applied with the Federal Energy Regulatory Commission (FERC) to construct and operate the pipeline, which will be the industry's first major natural gas pipeline to incorporate greenhouse gas mitigation efforts in its plans (see NGI, Feb. 2).

With expected regulatory approvals, the project remains on track for a March 2011 ramp-up, Yardley said.

"We've made the FERC filing, and there's still one shipper that's waiting for board approval that has 200 MMcf/d" that it wants to transport, Yardley explained. "We have binding commitments for 12 shippers who have committed for 1.1 Bcf/d of total capacity..." The total capacity secured to date, he said, is "locked and loaded." Certification by FERC is anticipated "in early 2010."

El Paso is negotiating to secure another partner to help finance the $3 billion project, CFO Mark Leland confirmed. "It's a little early to say. We're right in the middle of working through all of that with several different parties," he said. "We expect the partnership to be on a 50-50 basis, and by the time construction starts, it will be all trued up."

El Paso might consider partners for other pipeline projects, or for some of its exploration and production (E&P) projects, Foshee said.

"We are right now in the business of creating maximum flexibility," Foshee said. "We will look at every option that's a viable option. That doesn't mean we'll take every action. But we will consider whatever's appropriate..."

El Paso ended 2008 with a committed pipeline backlog of $8 billion, the CEO said. In its E&P Group, prior to noncash revisions at year-end, El Paso added 595 Bcfe to proved reserves and reduced its reserve replacement costs to $2.87/Mcfe.

"We also acted aggressively to meet the challenges of the current economic environment by adding $1.9 billion of liquidity over the past several months primarily through debt offerings, a new revolving credit facility, and noncore asset sales," he said.

El Paso reported a $1.678 billion loss (minus $2.43/share) from continuing operations in 4Q2008, versus earnings of $160 million (21 cents) in 4Q2007. El Paso also reported losses for the year of $860 million (minus $1.24/share), compared with net income of $1.07 billion ($1.53) in 2007.

The Pipeline Group's earnings for 4Q2008 totaled $319 million, compared with $308 million for the same period in 2007. The group's results benefited from higher reservation revenues from the expansion projects that went into service in late 2007 and 2008 and additional capacity sales. However, earnings in the final quarter were offset by an $18 million charge because of higher maintenance costs caused by hurricanes Ike and Gustav. El Paso expects to incur additional hurricane repair costs in 2009.

The E&P unit lost $2.5 billion in 4Q2008, compared with earnings of $263 million for the same period in 2007. Losses included a $2.7 billion noncash charge for oil and gas reserves and a $125 million noncash impairment related to the company's half interest in affiliate Four Star Oil & Gas. Production volumes in 4Q2008 averaged 752 MMcfe/d, including 73 MMcfe/d of unconsolidated affiliate volumes. Production volumes were negatively impacted by the loss of 53 MMcfe/d because of Hurricane Ike.

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