Intrastate Pipelines - A Foregone Conclusion?

Earnings season for pipeline companies is coming to a close, and one of the most exciting new projects has some unusual characteristics. Kinder Morgan's proposed Gulf Coast Express Project (not to be confused with TCO/CPG's Gulf Xpress Project) is one of the company's biggest opportunities to expand its system's reach. Surprisingly, unlike most market impactful projects, Gulf Coast Express is an intrastate, rather than an interstate, pipeline. Does the project signal a shift in the pipeline market more broadly? With fewer projects in the Northeast and more in the Southeast, perhaps it is more than the Gulf Coast Express Project's scope that will be driving growth opportunities for the industry.


Kinder Morgan seems to be relying on strong forecasts for Permian basin production in making its most recent pipeline development decisions. The Gulf Coast Express Project will provide an outlet for increased natural gas production from the Permian Basin to growing markets along the Texas Gulf Coast. The project is designed to transport up to 1.7 Bcf per day of natural gas through approximately 430 miles of 42-inch pipeline from the area near Waha, Texas, to Agua Dulce, Texas. A non-binding open season for firm natural gas transportation service was announced in March.


During its most recent earnings call, Kinder Morgan said that commercial discussions are progressing towards firm commitments. The project is estimated to be in service in the second half of 2019, subject to shipper commitments. While the project is not yet considered part of Kinder Morgan's backlog, Kinder Morgan remains confident, and its executives have stated that they expect to see long term benefits from increased LNG and Mexico exports, both geographically near the proposed project. In particular, the Houston ship channel is now driving demand as it is the site of LNG shipment, power generation, petrochemical development and Mexican natural gas demand.


But Kinder Morgan is not the only developer anxiously spotting growth opportunities on intrastate lines in Texas. Based on the most recent Texas pipeline construction reports, there are 20 natural gas transmission (and 13 crude transmission) projects, including both new systems and extensions/replacements of existing systems, that are currently being constructed in Texas. The market dynamics fueling Kinder Morgan's expansion efforts, as well as these projects, may be the reason that the development of interstate natural gas pipelines -- rather than their intrastate counterparts -- has shifted from one region of the country to another. While the South only saw 25% of project development in 2010, 46% of projects filed with the Federal Energy Regulatory Commission during 2016 were located in the South. Does this mean revenue has increasingly been driven by pipeline systems in the Southeast, as well?


Kinder Morgan's intrastate pipelines involved in interstate service include the Kinder Morgan Texas Pipeline, Kinder Morgan Tejas Pipeline and Kinder Morgan North Texas Pipeline. The revenues seen on these pipes have declined in recent years based both on the revenue number provided by the pipeline and our calculation based on the quarterly rate and flow numbers. But were the losses seen primarily on one pipeline or generally across all three? While the Kinder Morgan Texas and Tejas Pipelines are in southern Texas, the aptly named Kinder Morgan North Texas Pipeline is located in the northern part of Texas, away from the area Kinder Morgan considers a hotbed for growth. As Kinder Morgan's strategy would suggest, many of the shippers on these pipelines -- Calpine, Mex Gas Supply, Sempra and Marathon -- are either producers or power generators and utilities both in the U.S. and in Mexico.


One of the primary issues for those analyzing the quarterly financial performance of companies with intrastate pipelines is the limited window into their operations. And for pipeline company commercial development teams, access to this information could yield new growth opportunities. Next week, however, LawIQ customers will be able to gain insight into whether intrastate pipelines are driving regional or even national natural gas trends. The LawIQ platform will offer quarterly data that details the operations (quarterly flows, rates, and shippers) of over 100 intrastate pipelines that offer interstate service, including the Kinder Morgan pipelines mentioned above.

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