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Shale Gas Needs Infrastructure Investment, Says KKR Exec

Tapping all of the potential in U.S. shale natural gas isn't a given; it requires changes to, and investment in, basic energy infrastructure, including an expansion of the U.S. pipeline and storage network, according to KKR & Co. LP.

In a white paper issued last week, the investment firm's Marc S. Lipschultz, who is global head of energy and infrastructure, laid out the opportunities for shale gas and the various issues that have to be addressed for its continuing success.

"Tapping the full potential of this resource is not yet a given and requires significant changes to, and investment in, our basic energy infrastructure, including significant expansion of the U.S. natural gas pipeline and storage system, the gas-fired generating fleet and, potentially, development of compressed natural gas fueling and other forms of transportation infrastructure," he wrote. "Transformation at this scale will require significant capital mobilization to finance the recovery of the resource, the expansion of gas delivery, storage infrastructure and investment in the plant, and equipment that will consume the growing gas supply."

KKR has estimated that to do "what is needed to successfully exploit the resource, gas production should increase by 44% from 2011 to 2035." To develop the resource and delivery infrastructure between 2011 and 2035 would require $2 trillion in upstream investments for gas production, including associated volumes of condensate and natural gas liquids, with $1.7 trillion needed for dry gas production. It also would need $205 billion in capital spending to 2035 for gas infrastructure development; and mainline gas transmission expansion by about 35,600 miles and an additional 589 Bcf of working gas storage.

The "boom-bust cycle" in prices, which "undermines consumer and producer confidence" has to be alleviated, Lipschultz wrote. In addition, environmental impacts and risks that "limit social acceptance of the resource opportunity" need to be mitigated. "More broadly, a national dialogue is needed to achieve consensus on the standards that must be met to secure and maintain the social license to develop this critical resource."

On the top of the list, he said industry has to continue to proactively engage with regulators, the community, environmental groups and other stakeholders to develop regulations and best practices. Second, expanding gas-based transportation infrastructure need to be encouraged through a variety of incentives. Procedures to secure permits on federal land "need to be clearer, expeditious, and more consistently applied to provide greater certainty and transparency regarding the rules, criteria and procedures. This clarity should expand access to federal lands where significant oil, gas, liquids and unconventional gas is present and can be responsibly produced."

There also has to be support and action to encourage natural gas export infrastructure development, said the KKR executive.

If the United States makes development of shale gas a "shared national priority," Lipschultz said, "more employment gains" could occur over the long term.

"While the potential economic benefits of increased natural gas are hard to dispute, efficient and effective realization of these tremendous opportunities is not yet a given. Significant technical, market, policy and environmental risks and challenges must be addressed to successfully capture the opportunities presented by the shale gas revolution."

The amount of total underground natural gas storage capacity has failed to keep up with the rapid growth in U.S. Lower 48 natural gas production in recent years. In 2005, U.S. Lower 48 dry gas production was 17.6 Tcf, which was 2.13 times the 8.27 Tcf of total underground storage availability that year, according to Energy Information Administration (EIA) data. That ratio has grown every year since, and it came in at 2.39x in 2010, the last year for which the EIA provides total underground storage capacity data.

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