El Paso Corp. is considering additional Rocky Mountain natural gas pipeline projects, but instead of the west-to-east route, it may well consider additional capacity to California markets, the company’s pipeline chief said last week. To that end, the company launched an initial public offering for a master limited partnership (MLP) to hold some of its pipe interests.

Jim Yardley, chairman of the company’s Pipeline Group, told energy analysts during a quarterly earnings conference call that it was “safe to say that we’ve been looking at Rockies takeaway projects for some time, back at least a year…It’s common knowledge now where the projection is headed” with the Rockies Express Pipeline LLC (REX), which will carry supplies from the Rockies to East Coast markets.

“We are looking beyond REX, in the 2011 to 2012 time frame,” said Yardley. “We’ve had a number of thoughts about where additional pipeline capacity should head. What struck us for a while, in addition to takeaway capacity, is the California market, the macro there. They probably need additional capacity over the course of the next 10 years, with expansions and with Canadian gas falling off a bit. We’re clearly in the hunt, and I expect we’ll have some news over the next several weeks.”

Yardley said opportunities are beginning to present themselves to export more gas into California. “The picture in California is that it’s a 6 Bcf/d market. Half of that gas comes from EPG [El Paso Natural Gas]…across the Southwest, another quarter comes from Kern [River Transmission] and a quarter is from Canada. Canada is likely to decline in volumes, making further opportunities for EPG… At the same time across EPG, growth in California markets will be substantial, even without a lot of demand growth. The value of EPG capacity is increasing over time, and there needs to be further increases on top of that. We think they need additional capacity beyond that.”

The Pipeline Group’s Western Region now consists of five pipeline companies. The largest is EPG, which extends more than 10,900 miles. The others are Colorado Interstate Gas (CIG), Wyoming Interstate Co. (WIC), Cheyenne Plains and Mojave Pipeline.

If El Paso decides to move on a Rockies-to-California pipe, it would enter a competitive race. Earlier this month Kern River Transmission launched an open season through Jan. 11 to gauge shipper interest in expanded firm transportation to Utah, Nevada or California on its pipeline system, and Spectra Energy proposed plans to build a new Bronco Pipeline out of the Rockies to serve western markets (see NGI, Nov. 5). While Kern River delivers to Southern California, the proposed $3 billion Bronco Pipeline, with initial capacity of 1 Bcf/d, would travel more than 650 miles to a terminus on the California-Oregon border near Malin, OR.

El Paso CEO Doug Foshee said on the conference call that the company was continuing “to deliver on our growth projects, and we continue to replace and grow projects.” El Paso, he said, has about $2 billion worth of pipe projects on the drawing board, and more projects are being considered beyond that.

“The pipelines continue to grow and grow sustainably,” said Foshee. “One point I’d like to make is that not all backlogs are created equally. We report projects for which we have commitments, but there are other projects that we’re working on that haven’t hit this list yet.”

El Paso late Thursday launched an offering for its pipeline MLP, El Paso Pipeline Partners LP, which Foshee said will open up more opportunities for expansion. Initially, the MLP will own WIC and a 10% interest in each of the CIG and Southern Natural Gas Co. (SNG) pipelines. El Paso Corp. will continue to own the other 90% of CIG and SNG.

On the earnings front, El Paso’s profit jumped 33% from a year ago, with net income reaching $146 million (20 cents/share) from $126 million (18 cents) for the same period a year ago. The Pipeline Group’s earnings before interest expense and taxes (EBIT) jumped 9%, to $275 million from $253 million; throughput grew 4% from 3Q2006. The E&P [exploration and production] Group reported a 65% gain in EBIT from a year ago, to $232 million from $141 million. Oil and gas production gained 5% from a year earlier to reach 848 MMcfe/d.

For the Pipeline Group, total throughput rose to 18,512 billion Btu/d from 17,770 billion Btu/d in 3Q2006. The gains in the Pipeline Group’s earnings and throughput followed incremental revenues from several expansion projects that went into service during 2006; the Cypress Pipeline, which went into service in May 2007; higher transportation revenues due to increased sales and utilization of capacity; and higher throughput, primarily in the Rocky Mountains and southern regions.

“Our business growth was varied and diverse,” Yardley said. “Some of it was driven by supply, such as growth in the Rockies and the Gulf of Mexico.” But he said there was a “commonality across all of the projects” because “all of them are straightforward expansions for existing infrastructure. We were busy on projects, and we will remain very busy throughout 2008 and into 2009 and beyond.”

Yardley explained that one “typical” El Paso expansion is Tennessee Gas Pipeline Co.’s (TGP) Louisiana Deepwater Link, which was completed earlier this year (see NGI, Oct. 2, 2006). The deepwater link is TGP’s shallow water connection from Independence Trail Pipeline, which in turn carries gas from to the deepwater Independence Hub. The hub’s production is expected to reach 1 Bcf/d by the end of the year.

Independence Trail is “connected solely” to TGP, Yardley said, and it provides “a lot of gas supply for the TGP system. It also strategically positions us to capitalize further on the deepwater Gulf.” At the other end of the Tennessee system is the Northeast ConneXion, which it placed into service late last year (see NGI, Dec. 11, 2006). Additional compression was placed into service Nov. 1 at seven compression stations.

The E&P Group “has improved substantially” from a year ago,” said President Brent Smolik. “In just four quarters we have improved our consistency. We are on track to meet our goals. We’ve seen a unit cash cost improvement, and our portfolio high grading is on track.” He added that “every metric has improved versus a year ago.”

In the quarter, El Paso completed its acquisition of Peoples Energy, and the company was able to secure about 75% of Peoples’ workforce, said Foshee (see NGI, Aug. 20).

Oil and gas output in the quarter averaged 787 MMcfe/d, excluding 61 MMcfe/d of unconsolidated affiliate volumes from Four Star, compared with 3Q2006 volumes of 744 MMcfe/d, excluding 66 MMcfe/d of unconsolidated affiliate volumes. Natural gas sales volumes rose to 660 MMcf/d from 617 MMcf/d. Four Star is an equity investment, and the amounts disclosed represent El Paso’s proportionate share.

“The increase reflects successful drilling programs and acquisitions,” Smolik said. “Despite industry inflation, total per-unit cash operating costs decreased to an average of $1.77/Mcfe in the third quarter, compared with $1.95/Mcfe for the same 2006 period. The improvement is primarily a result of reduced production costs resulting from lower workover activity levels, partially offset by higher general and administrative costs.”

Going into 2008, Smolik said, the company has expanded its hedge position, and it now has an average floor price of $7.92/MMBtu and an average ceiling price of $10.06/MMBtu for 137 trillion Btu of anticipated 2008 gas production. The current 2008 natural gas position covers about 61% of volumes that El Paso hedged for 2007.

“I expect a fast and furious finish to 2007,” said Foshee. He noted that the management team “talked a lot internally” about how the company had turned itself upright in the past five years. “During that five-year period, $16.5 billion worth of assets have been sold; we’ve closed an average of five transactions a month for 60 months. That’s a stunning statistic.” Now, he said, “management has time to think about growth that is real…We’ve built what I think is the best quality backlog in the industry, and we’re not finished.”

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