The 555-mile Sabine River forms part of the boundary between Texas and Louisiana and has sometimes been called the dividing line between the Old South and the New Southwest. But for gas producers in Texas the river represents a hurdle on the way to eastern and northeastern markets, a basis constraint point soon to be eroded by the market forces that are inspiring a bevy of west-to-east pipeline projects in the region.

"There will be an overbuild [of pipeline capacity] across the Sabine River," said Ed Kelly, Wood Mackenzie vice president of North American gas and power. "It makes sense from a producer's standpoint to physically bridge a $1.20 basis differential with 70 cents of pipe [demand charge], so that's resulting in a whole lot of build from Texas through certainly Louisiana and in a few instances Mississippi and Alabama."

What producers shipping gas to the Old South and beyond give up in pipeline charges they will gain on production volumes sold into richer markets. But markets east of the Sabine won't stay quite as green forever, Kelly cautioned attendees at Pipeline & Gas Journal magazine's Pipeline Opportunities Conference in Houston Monday.

An overbuild of capacity will serve to flatten basis to some degree, and the massive Rockies Express project (REX) to the north also will be moving volumes eastward, about 1.8 Bcf/d as planned now and as much as 2-2.5 Bcf/d if Wood Mackenzie's expectations for REX expansions are met. And finally -- although Wood Mackenzie has stepped back from previously bullish estimates for liquefied natural gas (LNG) importation due to liquefaction constraints -- LNG will be hitting U.S. shores in growing quantities in the coming years. And the majority of LNG cargoes will be landing east of the Sabine River on the Gulf and East coasts, Kelly pointed out.

Still, there's plenty to be bullish about. "I have never seen a combination of factors more encouraging for development in the natural gas business, personally," Kelly enthused at the beginning of his presentation. "Never seen it, not even really that close."

For starters, there's plenty of capital available at historically reasonable terms available to just about anyone who wants to lay pipe in the ground. Now that master limited partnerships have been on the midstream scene for a while the environment has gotten more risk-friendly, "a private growth imperative as opposed to a utility-like deal," Kelly said. "I've never seen this much money chasing you [developers] at a reasonable price."

Credit higher and more volatile gas prices. When Henry Hub prices can swing between $6 and $15, a 35-cent demand charge seems almost insignificant.

"Remember the old days when Enron could provide a 10-year forward swap for 20 cents and say, 'Why are you paying 30 cents demand charges?'" Kelly mused. "Some utilities listened to that. Now they don't argue about those 35- to 40-cent demand charges as much as they used to. They don't argue about 75- to 80-cent demand charge. They don't argue about $1.25 demand charges when the gas price itself varies from $6 to $15. The good news is your part of the value chain is less expensive compared to the overall price uncertainty that everyone experiences in this business, even as expensive as it is by historic standards."

Also credit a regulatory environment that has been supportive to infrastructure projects. "This administration, if anything uses the letters LNG in it it gets approved at the federal level fairly quickly in a timely manner," Kelly said, adding that rate design is "a tougher nut to crack" although federal regulators are showing flexibility there as well. But like Sabine River basis spreads, the friendly regulatory environment won't last forever.

"The regulatory environment can shift on you," Kelly warned. "There's a nice window here for energy infrastructure development. It can shut, and it may well shut."

While many talk about natural gas as a "bridge fuel" to get the nation to cleaner power generation technologies such as clean coal and renewables, Kelly said the golden days for gas are numbered, too.

At 12-16 cents per kWh, which is what retail power is going for in Texas, solar and other alternatives become economically attractive. Solar, with tax or other subsidies, can pay for itself in a residential installation over about 10 years at the kind of power prices Texas is seeing, Kelly said.

Elsewhere in the nation, rate freezes are expiring and more consumers are becoming exposed to the "market" price for power and finding it to be quite high. With the cost of traditional energy rising and the cost of alternative technologies declining, some day there will be an intersection.

"I'm not saying these will cross immediately, but I think end-use consumption efficiencies and alternate end-use forms may begin to materially impact who gets to be a bridge fuel and who does not as far as hydrocarbons are concerned," Kelly said.

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