Driven in recent years by a surge of electric power plant construction that is only now subsiding, the accompanying boom in new natural gas pipeline projects and expansions is showing signs of exhaustion, according to a new report from Standard & Poor’s Ratings Services (S&P).

“The party’s over, at least for the time being, and the pipelines are participating in the hangover, although not nearly as much as the hard-partying merchant power developers,” S&P credit analyst Todd Shipman said in the report titled “U.S. Pipeline Companies Share in That ‘Morning After’ Feeling”.

The analyst noted that various regulatory and environmental hoops that pipeline companies must jump through to gain approval for new or expansion projects help to keep in check the natural building frenzy that goes into effect when a boom is in progress. Because pipeline projects take a long time to plan, develop and build, and the sponsor is required to show that the capacity is really needed, most new pipeline investment is profitable for the companies and solidly credit-accretive for bondholders, the credit rating agency said.

Even with the current slowdown the segment is experiencing, S&P said new pipeline projects are being approved and many are still being pursued. “The Gulf of Mexico supply wants to get to the growing markets in the southern U.S.; the large and ever-growing Northeast markets are pulling Canadian supplies from the east and the west; and the West Coast is drawing gas from Canada, the Rocky Mountains, and the Southwest,” Shipman said in the report. “Eventually, Alaskan and other Arctic gas will feed into the Canada-based system for transport to the U.S.”

Looking at currently proposed projects in the different regions of the country, Shipman found some pipelines that are likely to go all the way, while others might get left on the drawing board.

According to the report, the Northeast has several big projects in the works, but S&P believes that in the near term only the expansion of the Maritimes and Northeast pipeline that brings eastern Canadian gas into New England is likely to get done. The agency said that expansion will occur as offshore development in the Sable Island area progresses, possibly tripling the capacity from one-half bcf/d to 1.5 bcf/d. As for major pipe proposals such as Blue Atlantic and Grand Banks, Shipman said a lot will depend on the prospects for further development of the offshore basins. “Activity on projects bringing natural gas from the other direction has slowed to a virtual standstill after a lot of action in the previous few years,” he said.

Pipeline expansions in the Southeast have been propped up until now on the backs of new gas-fired power plants. The analyst noted that “almost every pipeline going to and through the region has expansion projects in process, and they have had to react quickly to the rapidly changing power market as power plants that provided the anchor for the expansion have gotten cancelled or delayed.” New pipeline proposals are not prominent in the Southeast, except for various proposed LNG pipes such as Calypso, Seafarer, and Ocean Express.

The report found that one of the few production areas that is not experiencing a decline is the Rocky Mountain region, and it appears that most of that gas is headed westward, ultimately to California. Shipman said two large Rockies-sourced projects — an almost 1,000 Bcf/d expansion of the Kern River Gas Transmission Co. pipeline system and El Paso Corp.’s 750 Bcf/d Ruby Pipeline project — are expected in 2003 and 2004, respectively, along with numerous other smaller expansion projects.

“The credit implications of these and other pipeline proposals will vary from project to project and from company to company,” Shipman said. “What remains clear to Standard & Poor’s is that market forces are increasingly driving the gas industry, and the influence of regulators over the pipeline companies’ operations and financial performance, while still important, continues to wane.”

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