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El Paso 'Encouraged' by Ethane Expansions on Gulf Coast

Recent announcements by Dow Chemical Co. and others to expand chemical facilities to take advantage of shale gas supplies gives new impetus to El Paso Corp.'s proposed pipeline from the Marcellus Shale to the Gulf Coast, CEO Doug Foshee said Thursday.

Dow last month launched a plan to increase ethylene and propylene production, as well as integrate U.S. operations into feedstock "opportunities" now available from the increasing gas supplies (see Daily GPI, April 25). In addition, Westlake Chemical Corp. wants to expand ethylene crackers in Louisiana (see Shale Daily, April 7). And Chevron Phillips Chemical Co. LP is evaluating plans to site a "world-class" ethane cracker and ethylene derivatives facility in the Gulf Coast region (see Shale Daily, March 29).

"We are encouraged by the recent announcements...on an estimated additional demand of over 250,000 b/d of ethane," Foshee told financial analysts during a conference call. "The Gulf Coast will continue to be the demand center."

If the Gulf Coast remains the target for expansion, it bodes well for El Paso's proposed Marcellus Ethane Pipeline System (MEPS), said the CEO. El Paso Midstream Group Inc. last summer held a nonbinding open season for MEPS, which is designed to transport up to 60,000 b/d of ethane to third-party ethane pipelines and storage facilities in the Baton Rouge, LA, area (see Daily GPI, Aug. 10, 2010).

Because ethane offtake has become a challenge in the Marcellus, several proposals were put on the table or were being explored last year (see Daily GPI, Sept. 13, 2010).

Foshee said the "MEPS process to move from the Marcellus is continuing, and we will work with customers to get over the finish line."

Jim Yardley, who helms the pipeline segment, said five pipeline expansions are scheduled to be completed in the United States this year. For the latest quarter, he said the company's pipe systems had seen "ups and downs but overall flattish throughput" year/year.

"We have a big slate of expansions this year," he told analysts. The first was Florida Gas Transmission Phase VIII, which ramped up April 1 to provide an additional 800 MMcf/d into Florida markets; the expansion increased throughput into the state by more than one-third.

"Next is the second phase of SNG [Phase II of South System II expansion] for Southern Company, which is scheduled to be in service June 1 on time and likely under budget." The expansion will serve a converted coal plant with 120 MW of capacity.

Ruby Pipeline, which will carry gas from the Rockies to West Coast markets, is "nearly 90% welded out, with about 80 miles left to complete, all on the western end of the route...half in Nevada and half in Oregon," said Yardley. The pipeline crew is waiting out sage grouse mating season, which ends May 15, to begin on restricted areas, and wet weather in Oregon slowed progress in April. "In the interim we completed most of the critical stream crossings, which is a significant accomplishment."

Ruby, said Yardley, "is very nearly complete. We will begin to purge and pack in May...The compressor stations are 90% complete and commissioning is well under way at Opal...The finish line is in sight."

El Paso also expects to finish by year's end an expansion at Gulf LNG, and the TGP [Tennessee Gas Pipeline] 300 line in western New Jersey.

"By the end of the year essentially all of the original $8 billion backlog will be complete," said Yardley.

The TGP system, which serves the Northeast, "continues to benefit from Marcellus production, and is now at 1.3 Bcf/d...up from half a B at this time last year...Nearly two-thirds of Pennsylvania Marcellus [production] is flowing into TGP." Another 1 Bcf/d of expansion is under way to "keep up with Marcellus production growth."

Yardley also cited "another trend" that the pipeline group has seen: "despite more 'normal' weather, power generation loads are up" more than 10% on the SNG pipeline system, continuing "a trend we've seen in the last couple of years."

The exploration and production (E&P) segment reported quarterly production volumes rose 5% year/year to 821 MMcfe/d. There was an 18% jump in oil and condensate production. Results from the Eagle Ford Shale and initial results from the Wolfcamp Shale are proving to be above expectations, said E&P chief Brent Smolik.

Total per-unit cash operating costs decreased to an average of $1.85/Mcfe in the first quarter, down from $1.88 for the same period a year ago, primarily because of higher production volumes.

El Paso, which reported its quarterly earnings, said profits in the first three months of this year dropped 84% to $62 million (8 cents/share) from $388 million (51 cents) a year ago. Excluding one-time items earnings fell to 30 cents/share, which exceeded Wall Street's consensus estimate by 2 cents.

During the latest quarter El Paso entered into additional natural gas hedges for the remainder of 2011. After adding these positions, about 80% of the company's remaining 2011 domestic natural gas production is hedged at an average floor price of $5.78/MMBtu. About 85% of remaining 2011 oil production is hedged with a floor of $85.99/bbl and a ceiling of $91.88.

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