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S&P: Shale, More Than Regulation, Impacts Pipeline Sector

While emphasis on safety is being monitored, the continuing shale gas boom is having a more direct impact on the natural gas pipeline sector, according to a Standard & Poor's Ratings Services (S&P) analyst who spoke Tuesday with NGI. S&P's Bill Ferara said the pipeline sector is in a period of transformation from emphasis on long-haul pipes to shorter increments tied to shale basins.

Ferara agreed that the San Bruno pipeline rupture last September in Northern California and several subsequent pipeline incidents have put a spotlight on the regulatory part of the pipeline business, but the real impact has not been felt yet compared to shale developments, which have already manifested themselves in pipeline financial outlooks.

"Certainly the radar is up regarding this [pipeline safety] issue, but we don't believe at this stage that it is going to have any meaningful impact on the credit quality," Ferara said. "We haven't seen any specific regulations put in place, although we feel confident there will be tighter safety measures and further operating oversight, but we still expect the added costs to be recovered in the regulatory process.

"There could be some regulatory lag that could pressure financial profiles. At this stage we don't see any severe restraints in terms of the amounts of pipe that needs to be replaced. We certainly expect more pipeline to be replaced, but it doesn't seem as if it is going to be pulled up this year and replaced in a matter of months. It will probably be more of a long-lived program over many years with work being prioritized accordingly. I don't think it will be a quick fix; it could run five to 10 years."

On the other hand, shale gas is actually impacting the way S&P and other rating agencies and financial analysts assess the pipes, he said. "The increased supply of the shale is certainly having an influence on gas supplies, and the corresponding greater or less needs for certain pipelines," Ferara said.

S&P is picking up on the increased recontracting for pipeline services driven by the upswing of the various shale plays in the Northeast, for example. Some of the long-haul pipelines from Texas and the Southeast to the North are not as much in demand as they were prior to the shale boom, he said. "There have also been additional pipes built in the Southeast, so what we're really seeing for the pipeline sector are lower recontracting rates, or much shorter durations, and a lot of marketing/trading companies are not recontracting capacity because of the weak price environment and low basis spread. So there is generally weakness regarding recontracting."

Ferara said this is less of a factor in what he called the "pull pipelines" in which the local utilities are "pulling" the new gas supplies to their service territories, compared to the so-called "push pipeline" that are pushing hard to get the supplies out of their respective basins.

"We have had a few ratings downgrades [among the major pipelines] in the last 12 months," he said, citing Kinder Morgan's Rockies Express, Midcontinent Express and NGPL pipelines, "so we have seen some weakening of credit quality in the sector." Ferara stressed that there are still some positives, such as low counterparty risk, average contract life that is still five to six years, and the overall among of revenues collected are typically about 90% firm take-or-pay contractual arrangements.

"There are definitely some positives that remain, but there are some negative pressures, too. We don't see a lot of interest in building long-haul pipelines, but certainly laterals built to new or converted gas-fired generation plants are becoming real topical."

The push for laterals and related gas storage tied to gas-fired generation has been the focus, but it has now hit a lull, according to Ferara, as everyone waits for commodity prices and basis spreads to pick up, especially if there is a more definite upturn in the national economy. "We'll see if reserve margins fall and gas demand increases, or alternatively, if we just stay in this weakened environment for a few more years."

Ferara said S&P counts El Paso Corp.'s Ruby Pipeline as a long-haul. He said the new westerly Rockies pipeline's start up has been delayed until July or August, and it has had some cost overruns, but it is expected to "dump meaningful supplies" in Oregon and Northern California, likely displacing some gas now coming from Western Canada. The trend will be more 100- or 200-mile shale-based pipelines, he said.

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