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Shale Midstream the Focus of El Paso, KKR Partnership

El Paso Midstream Group Inc. and private equity firm Kohlberg Kravis Roberts & Co. (KKR) on Tuesday announced a $1 billion-plus joint venture (JV) that would focus on domestic natural gas midstream projects in some of the big shale plays.

The El Paso Corp. subsidiary and KKR each plan to invest up to $500 million on midstream developments initially to serve the Marcellus and Eagle Ford shale formations. El Paso Midstream would operate the JV.

Projects already on the drawing board for the partners include the proposed Marcellus Ethane Pipeline System (MEPS), which was announced El Paso last August (see Daily GPI, Aug. 10). Since the initial announcement, Spectra Energy Corp. has agreed to work on the MEPS project, El Paso said.

The JV partners also plan to jointly work on El Paso's proposed Camino Real Pipeline in the Eagle Ford Shale. Like its deal with Spectra in the Marcellus, El Paso expects to secure a partner for the Camino Real. At mid-year El Paso held about 165,000 net acres in the Eagle Ford Shale (see Daily GPI, June 23).

"The emergence of unconventional resources is driving a need for significant investment in midstream infrastructure in the U.S., and El Paso's talented team is developing projects that are very well positioned to meet these needs," said KKR's Marc Lipschultz, the global head of Energy and Infrastructure business. "El Paso is a world class pipeline operator and developer, and we are thrilled to be partnering with them to build a leading midstream business."

El Paso Midstream President Mark Leland noted that KKR has had success in investing in energy-related infrastructure "and we believe that the combination of our two companies creates a strong competitor in the midstream space."

Separately KKR agreed to acquire a half stake in El Paso's Altamont gathering and processing system in Utah for $125 million. The Altamont system includes 800 miles of pipelines, 3,800 b/d of fractionation capacity and 40 MMcf/d of gas processing capacity.

Although El Paso is gas-focused, the Altamont field is one of its core oil programs (see Daily GPI, Dec. 14, 2009). The system serves El Paso Exploration & Production Co. and third-party producers. In the coming year El Paso plans to increase its drilling activity in the play from a current two-rig program to three rigs. Six rigs are planned by 2013. The partners expect to see "opportunities to expand the Altamont midstream assets given El Paso's and others' drilling plans."

The combined transactions are expected to be completed by the end of this month.

The latest investment by KKR is just one of many in domestic shale plays. Last month KKR acquired property in Southeast Texas through two related transactions that combined were valued at $40 million (see Daily GPI, Nov. 2). The acquisitions were the first by KKR Natural Resources, which was formed earlier this year with Premier Natural Resources to pursue oil and gas investments in North America. KKR in October also formed a JV with privately held RPM Energy LLC to target opportunities in unconventional plays (see Shale Daily, Oct. 28).

KKR last June partnered with closely held Hilcorp Resources Inc. and agreed to invest up to $400 million in about 100,000 net acres in the Eagle Ford (see Daily GPI, June 15). KKR also had invested $350 million last year in privately held East Resources Inc., a mega Marcellus producer, which was bought in late May by Royal Dutch Shell plc for $4.7 billion (see Daily GPI, June 2; June 10, 2009).

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