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Kinder Bullish on Shale Gas, Midstream Opportunities

Rich Kinder, who helms one of the largest pipeline transportation and energy storage companies in North America, agrees with a host of energy pundits that North America's extraordinary shale discoveries have pressured U.S. gas prices and contributed to near-capacity storage levels. However, to the savvy business leader, the new shale supplies are "sort of like nirvana."

Kinder, who chairs Houston-based Kinder Morgan Energy Partners LP and privately held Knight Inc., said the midstream opportunities that have resulted from the shale discoveries will open a lot of new doors for his companies. He spoke last week at the Reuters 2009 Global Energy Summit in Houston.

There's no question, he said, that North America's new shale supplies have had a "severe" impact on prices. And he agrees that gas prices probably won't edge forward until the economy is back on track and gas demand is in balance with supply once again.

"What the upstream sector has done in the natural gas field, strictly with the shale plays, is just a dramatic improvement. The common accepted knowledge just a couple of years ago was [that] we were depleting our resources in the Lower 48, the imports from Canada were not what they used to be, and we needed all the LNG [liquefied natural gas] we could get."

The shale discoveries, coupled with huge improvements in horizontal drilling techniques, created more access to gas production, which also impacted prices, Kinder added.

Gas demand today "is pretty sluggish for a number of reasons. Industrial demand has gone down, and you can't grow a lot of manufacturing with the [problems in the] auto industry, which has led to a deterioration in natural gas use. Also electricity demand, which historically has grown 1-1.5% a year...actually, we think it will shrink a bit in 2009...

"Overall, demand for natural gas will be very strong in the long term. One big reason is all of the emphasis on carbon emissions. Natural gas emits about half of the CO2 [carbon dioxide] of a comparable-sized coal plant. We will see a lot of additional electric heating demand from natural gas based on electric generating, and we'll see more and more of that as time goes by..."

And when gas demand is stronger, Kinder Morgan will be ready to step in, said the CEO.

"I would look at the overall shale situation as very bullish for the industry, very bullish for a midstream company like Kinder Morgan...Upstream folks will tell you we have 100 years of natural gas supply that we know we can access in the Lower 48 without importing any LNG...

"When you look at a way to solve the CO2 problem, natural gas has got to be an enormous part of that solution, and now we know we have the supply to do that."

The gas market "is extremely important if you're a midstream player like us," said Kinder. "We were seeing an increase in the need for natural gas...but we're in a recession right now and demand has not picked up as much as in the past. But we think in the long term the need for gas is tremendous, particularly for electric generation..."

Where do renewables fit into the domestic energy mix?

"Wind and solar are not the answer," said Kinder. "I don't have anything against wind or solar, but it's so insignificant from the amount of energy it produces that I don't think it will be 'the' solution...We use about 47.5 million boe/d in this country, from all uses and kinds of energy...

"Of that, 76,000 boe/d is coming from wind and solar...Even if we double wind and can think of a pie chart, and it's not even a piece of pie yet. I have nothing against that, but we should be emphasizing, in my judgment, more natural gas use, should be emphasizing more conservation, should be emphasizing clean coal technology, and we should be emphasizing more nuclear...

"Compare that 76,000 barrels with about 11.5 million [MMcf], almost 12 million produced by natural gas...Nuclear is several million a day. These are the things we should be looking at that can make a meaningful difference."

Kinder, who was heir apparent at Enron Corp. until 1996, when he resigned after then-Chairman Kenneth Lay said he would lead the company for another five years, was asked what types of energy investments would be a good bet going forward.

"We've got no interest in nukes, but I'd be putting my money in nuclear technology...devoting it to creating a cookie-cutter style technology to implement the next nuclear plants," keeping in mind the lengthy permitting decisions. "I'd also be looking at every way I could to encourage natural gas use, in particular to generate more electricity...In the short to intermediate term, I think natural gas is the best answer."

As far as acquisitions, Kinder doesn't seen any opportunities today because there's "still somewhat of a disconnect between sellers and buyers...particularly so now, if you're a company that had its stock go from $20 to $5, and you still think of yourself as a $20 stock...That's oversimplification, but that's the kind of reality we face."

More opportunities are expected "later in the year," he said. "Warren Buffett said you can undo 10 years of good, hard work with one really bad acquisition. You have to be very careful. We have a lot of internal growth opportunities, and we're going to be very careful about what we do."

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