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El Paso's Gas Pipelines Ready for Projected Demand Growth

El Paso Corp.'s natural gas pipeline franchise is expected to be front and center in building new infrastructure to accommodate growing gas demand in the coming decades, executives said Tuesday.

The company unveiled plans to spin off the exploration and production unit by the end of the year during an investor conference (see related story). Executives also offered company strategies for the short and the long terms.

"The natural gas pipelines going forward are clearly the core of El Paso Corp.," Jim Yardley, who helms the unit, told analysts. "They provide for economies and efficiencies of scale and balance...and the best platform for future business."

At twice the size of its competitors -- financially, throughout or miles -- the pipeline franchise also happens to cross through some of the most substantial supply basins and in the "best markets," said Yardley.

"Market side," the pipe unit has systems crossing into the Northeast and Southeast markets, which are considered the fastest growing markets. In the Front Range of Colorado, "we're well set up with CIG [Colorado Interstate Gas] and Ruby Pipeline to be well positioned." Ruby is scheduled to ramp up service from the Rockies to West Coast markets in July.

On the "supply side," El Paso pipelines carry unconventional gas from the Marcellus, Haynesville and Eagle Ford shales, as well as the Rockies.

"In a world of flattening gas basis, pipeline connectivity is important," Yardley said.

From the end of 2007 to the end of this year, the pipeline unit will have recorded 75% revenue growth, from $8.5 billion to $14.9 billion, he said. By the end of this year, 19 projects will have ramped up since 2007.

Because of its nationwide gas infrastructure, which cross some of the most prolific gas plays, El Paso happens to be in "fortunate" position, said Yardley. The pipe unit has 28 Bcf/d of capacity, or 13% of total U.S. capacity. Throughput totals 17 Bcf/d, with 26% of the total delivered to U.S. consumers. Average contracts today average more than six years, up from five years only a year ago.

Among the most fortunate of its systems is Tennessee Gas Pipeline (TGP), which traverses northeast Pennsylvania. Today it transports about two-thirds of Pennsylvania's Marcellus Shale gas, Yardley said. As of March, TGP was carrying 2.1 Bcf/d.

El Paso has 33 interconnect receipt points into TGP and 14 more are under construction. From 2012 to 2013, TGP revenues of $50-60 million are expected from Marcellus backhauls. El Paso is spending more than $1 billion on TGP expansions, which are fully subscribed.

"The area is expecting production growth of more than 6 Bcf/d," and "we are in an excellent position in the Utica."

El Paso based some of its projections on preliminary results of a forthcoming study on North American midstream infrastructure projections through 2035 by the INGAA Foundation Inc. The foundation was formed in 1990 by the Interstate Natural Gas Association of America primarily to sponsor research promoting the safe use of natural gas and efficient pipeline construction and operation.

The foundation issued a similar outlook in 2009; the latest updates update shale gas trends, and predict liquids and natural gas liquids (NGL) development.

Catherine Landry, who directs communications for the INGAA and the foundation, told NGI Tuesday that the latest report is expected to be available by the end of June.

The updated report is to include the 2009 projections as well as NGL infrastructure assumptions, high-low price/demand scenarios, regional breakdowns of infrastructure and expenditure needs and critical fact checking. The study was conducted by ICF International on behalf of the INGAA Foundation and other sponsors, including America's Natural Gas Alliance, Landry said.

El Paso's Pat Johnson, vice president of Strategy, said the INGAA projections were used in the company's North American macro gas outlook through 2020. Driving an "infrastructure impetus" to 2020, he said, will include:

Gas demand is forecast to grow from 2010's 81.7 Bcf/d to 98.8 Bcf/d by 2020, Johnson said. The Southeast's growth (3.3%) is highest, followed by Mexico (2.9%), Western Canada (2.8%) and the Northeast (2.4%). Only California is expected to see gas demand fall (down 0.3%) from 6.3 Bcf/d to 6.1 Bcf/d.

Emerging renewable power standards offer "good news and bad news" for natural gas, said Johnson. "Renewables dampen demand for gas but increase demand for infrastructure." About 33 GW of renewable generation would require about 5 Bcf/d of pipeline capacity, and "up to $15 billion of capital."

The supply-demand shifts also will drive investments, according to the study. Altogether expected capital expenditures in North America are expected to be more than $100 billion.

The study offered several forecasts. In its gas infrastructure study to 2020, the INGAA Foundation estimated that:

According to the preliminary forecasts, about 27 Bcf/d of incremental pipeline capacity is to be built between 2011 and 2020. After 2020 another 13 Bcf/d is to be built. "A total of 40 Bcf/d of incremental pipeline is needed to accommodate increasing gas supply that is necessary to satisfy market needs over time," the study said.

With customer relationships established across the country, El Paso should be able to "take a slice" from the estimated $7 billion in annual total industry spending on pipeline infrastructure over the coming nine years, said Yardley.

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