Rising costs are accompanying an unprecedented building surge in liquefied natural gas (LNG) and pipeline/storage projects in North America, leaving companies like Sempra Energy that are far along in project development sitting in strong bargaining positions, a panel of industry CEOs and CFOs emphasized last week at the Citi Power, Gas and Utilities Conference in Charleston, SC. Even with ever-higher costs, the panelists think lucrative returns will continue for all three gas sectors — LNG, pipelines and storage.

A record $30 billion of capital investments in play currently for major gas infrastructure projects was the prime reason for assembling a panel to explore the question of “Natural Gas Pipelines & Storage: Managing Record Growth in an Inflationary Environment; Can Returns Remain Steady?” The conference moderator noted that pipeline material costs have risen more than 50% in the last 12-18 months, but amidst this financial and inflationary pressure regulators are very happy with all the infrastructure being built, and so is the investment community.

The Rockies Express Pipeline (REX) was held up as a major infrastructure investment that is going to be a “good, long-term investment,” according to one of its sponsors, Mark Snell, Sempra’s CFO. “We talk to a lot of producers, all of whom want more space [on the pipeline] so we think this makes for a very good, long-term investment that will run a close to its maximum capacity for a long time,” said Snell, adding that REX’s initial capacity is totally sold out almost entirely from producers. Strong basis differentials between the production area and the end-use market will continue to drive development, he said.

“We had wellhead prices in the Rockies last week clearing at 30 cents [per-Mcf], so those producers are anxious to get that product to a market where they can get a better price, so a dollar or a dollar-and-half for pipeline capacity is pretty cheap to make that happen,” Snell said. “As long as you have significant basis differentials and enough demand for the product, the infrastructure is going to get built.”

Key points made by executives from Spectra Energy Transmission, AGL Resources, NiSource, and Sempra were:

“The facilities we have under construction, and others under way, definitely have a cost advantage to any new projects,” said Snell. However, he said on the West Coast the “bigger barrier to competition” rather than cost has been California not allowing an LNG facility to move ahead. “The consensus is coming around, at least for the time being, that there is only going to be one West Coast facility for a while [Sempra’s Costa Azul along North Baja].”

While rising costs have more direct impact on future contracts and fuel prices in terms of domestic pipeline and storage projects, the LNG business is global and the $800 million to $1 billion receiving terminals are a relatively small part of the value chain that involves multi-billion-dollar investments in exploration/production and shipping, Snell said. “It is the tail wagging the dog on the LNG value chain,” Snell said.

“Facilities that are currently under construction are going to fill up over time and continue to be used,” he said. “But you see a lot more customers now who are interested in making sure they have the option to deliver LNG in different areas. They are buying capacity in more than one facility — they want to have deliverable capacity in Europe and in the United States because the arbitrage is far more valuable than the capacity charges they have to pay.”

Even with the inflationary pressures on the more domestically based pipeline and storage projects, “this is still a good environment to invest in whether it is LNG, pipeline or storage facilities,” said to AGL Resources CEO John Somerhalder. “It all seems to balance out even with the higher costs.”

The keys for shippers are “diversity of supply and diversity of access,” so the higher future charges are not dampening interest in marketers and shippers in these projects, according to both Snell and Spectra Energy Transmission CEO Martha Wyrsch.

©Copyright 2007Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.