Energy Ink

Infrastructure giants a bright spot amid market funk

Kinder Morgan, Enbridge and TransCanada continue spending despite low prices

October 19, 2011

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Has the tide turned for natural gas? If headlines and big announcements are anything to judge by (and often, they are not), then we might cautiously say that the answer is yes. The trick is to look beyond today’s market funk, well ahead in fact, to 2035. By then, the International Energy Agency projects, gas production will have grown by as much as 50 per cent globally. Not exactly positive news, I know. Markets are already swamped.

But therein lies the opportunity. Between now and 2035, the Paris-based agency also puts investments in energy infrastructure needed to bring all that new production (in addition to all the other energy goodies) to consuming markets in the order of US$40 trillion. That’s a staggering figure, all the more so because emerging economies (i.e. non-OECD countries) are projected to account for two-thirds of the spending and 90 per cent of demand growth. Yet North America will not be bypassed completely. We are already seeing some big energy deals move ahead, particularly in the infrastructure space.

Top of mind is the multibillion-dollar Kitimat LNG scheme, which recently won approval to begin shipping up to 10 trillion cubic feet of gas to Pacific markets for no less than 20 years from the National Energy Board (NEB). Anybody who’s not clear on why companies are eager to move tremendous volumes of LNG to Asian markets should read this breakdown by ARC Financial chief economist Peter Tertzakian. He notes:

The latest data shows Japanese customers paying over $US 16.00/MMBtu for liquefied natural gas, while suppliers in western Canada are only getting the equivalent of $US 3.50/MMBtu, and that’s on a day when traders are feeling good.

That particular project is hugely capital intensive, but it is far from the only gas project of note. Almost forgotten amid the raucous debate over Keystone XL is another TransCanada Corp. expansion project, this one in a remote corner of northeastern British Columbia. An application to add a series of “loops” to the Nova pipeline grid is currently before the NEB. Construction on the spur lines needed to bring Horn River gas to market is expected to begin in the fourth quarter of 2012, provided the necessary approvals are obtained.

Perhaps the best sign that brighter days are in the offing for natural gas stocks can be found in the fine print of purchases made in the last two weeks by Calgary-based Enbridge Inc. and Dallas-based Kinder Morgan. Enbridge announced Oct. 7 that it would spend $900 million to acquire a majority stake in the Cabin Gas Plant from Encana Corp., marking the company’s entrance into the Canadian midstream business. Former Enron Corp. president Rich Kinder made a bigger splash this week with the $21.1-billion acquisition of El Paso Corp. Beyond E&P assets that will likely be sold, the deal brings El Paso’s 43,000-mile network of interstate pipelines under Kinder’s control.

Think about this for a moment. These are infrastructure builders accustomed to stable returns – Kinder, a Missouri-educated lawyer known for Warren Buffet-like prudence, has previously compared pipelines to giant toll roads – making big bets on natural gas. As Bill Herbert, an analyst at Simmons & Co. International in Houston, told Bloomberg, “Mr. Kinder is making a bet that the structural positives will eventually prevail and he is, once again, likely making the wise bet.”

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