The growing popularity of the master limited partnership (MLP) business structure is proving beneficial as the natural gas industry struggles to expand infrastructure, but another trend -- a shortage of skilled workers -- could present major problems in the near future, panelists told FERC.

During the Federal Energy Regulatory Commission's (FERC) State of the Natural Gas Industry Conference in Washington, DC, last week the panel warned that a labor shortage in pipeline construction and throughout the natural gas industry is already raising costs and could cause more serious problems in the future. According to Interlance Consulting Inc. president Brad Kamph, the shortage of skilled workers "is a critical issue" and attrition -- much of it employees moving between competing companies -- is costing the industry $575 million annually.

"What we're finding is most of the managers we're talking to, most of the mid-level management of the organizations are feeling that...if it's not already having an impact, [it] will have a major impact on their business operations in the next two years," Kamph said.

According to Kamph, the industry needs to attract as many as 9,000 new workers every year. While trained welders on pipeline projects can make $70 an hour, they often cite opportunities for better compensation elsewhere or boredom as reasons they leave those jobs.

"Skilled workers are in high demand and short supply," said Spectra Energy Transmission CEO Martha Wyrsch. "Pipeline contractors are also experiencing a labor shortage and high demand for their services has resulted in labor construction cost increases ranging from 30-35% over the past three years due in part to lower productivity of the new workers." Lower productivity could lead to missed deadlines and other delays, resulting in fewer projects being completed. And the escalating cost of the projects is resulting in delays as well.

"Today's construction market is extremely tight, from a project developers perspective. The cost of pipe, valves, fittings and other parts has risen by over 20% in the last three years. To assure availability of pipe and compressors, we are placing orders far earlier than we have in the past and certainly prior to obtaining regulatory approvals. In 2005 we could order pipe approximately six months before the desired delivery date. In 2007 the lead time is 12 months," Wyrsch said.

Scott Parker, president of Kinder Morgan's natural gas pipelines sector, said escalating labor and equipment costs have construction contractors refusing to lock in costs or share the risks on construction costs.

According to Wyrsch, employees are looking for more from companies than just a competitive salary.

"They care a lot about whether your company cares about the environment, whether your company is involved in the communities in which they're living and working, whether or not they allow employees to speak their minds freely and be open and not fear retaliation," she said. "It's not terribly sexy to say that you're in the natural gas business, and in fact many think that it's a dirty business..I think that as an industry we owe it to ourselves to get the story out there that we are in fact very clean, we care about the environment, we want to build communities for the long term."

Sam Brothwell, managing director for equity research at Wachovia Securities, said the industry has benefited greatly from the use of MLPs to help finance infrastructure projects.

"I think this, importantly, has given the pipeline industry at a critical juncture a powerful new source of capital at a time when investment is clearly needed," Brothwell told the commissioners.

Parker also praised MLPs, saying they are pursuing much of the new infrastructure now under development.

"The MLP structure provides the developer a level of assurance that they can economically obtain the required capital and significant financial resources needed to develop these projects," Parker said. "MLPs are also doing an excellent job operating much of the existing pipeline infrastructure. The Commission should continue to allow developers the flexibility to choose the corporate structure they need to develop and operate these pipelines and not in some way limit or impact the viability of the MLP structure."

Because natural gas is a domestic resource, continues to be found in abundant supply and is relatively inexpensive it remains attractive to investors, Brothwell said. Investors have been encouraged by the industry's strong growth and risk-adjusted returns on capital, "underpinned by the reasoned, forward-looking and apolitical regulation I think has characterized this agency for many years," he said.

"In that realm I would urge the Commission to stay the course. Capital does need to flow to connect America's consumers with new sources of natural gas, whether we're talking about LNG [liquefied natural gas], Rockies gas, shale gas and so forth, the capital is flowing today and I think it will continue to do so if the current risk-reward relationship is maintained."

Investors do have some concerns, Brothwell said, including election year worries about politics and regulation and a general downward trend in recent state rate orders.

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