UPDATE: US Shale Gas Boom Prompts Shifts In Pipeline Strategy

djones






(Adds quote from Kinder Morgan executive in 13th paragraph.)



--New shale forces pipeline companies to rethink most profitable way to move
natural gas


--Markets and energy companies still trying to comprehend glut unleashed by
hydraulic fracturing


--Canadian companies that export to U.S. could be biggest losers in U.S. boom



By Ben Lefebvre



Of DOW JONES NEWSWIRES



HOUSTON (Dow Jones)--With the geography of U.S. natural-gas production
changing, pipeline operators are finding tried-and-true supply routes shifting
beneath their feet.


New drilling technology has unlocked natural gas from shale rock in massive
quantities--sometimes in areas where there had been no significant natural-gas
production before, such as Pennsylvania. Large quantities of natural gas are
also clogging pipeline infrastructure in traditional natural gas-producing
regions such as Texas, where declining conventional natural-gas production is
being supplemented by a shale-gas bounty.


Pipeline companies that once focused on bringing natural gas from the U.S.
mid-continent to Northeast, West Coast and Chicago markets now have to rethink
the most profitable way to transport natural gas, said Dan Spears, a partner at
Swank Capital LLC, a mutual fund that invests in pipeline companies.


"Whatever the pipe was originally meant for, you have to re-evaluate it in the
light of these new shale plays," Spears said.


The shale boom was one of the drivers behind pipeline company Energy Transfer
Equity LP's (ETE) $4.2 billion purchase of competitor Southern Union Co. (SUG).
Energy Transfer found itself awash in natural gas from newly productive shale
formations in Texas and needed Southern's access to markets in Florida and the
Midwest to relieve supply pressure, Energy Transfer Chief Executive Kelcy Warren
said.


"Gas is being produced in places that the pipeline industry never thought it
would before," Warren said in a recent interview with The Wall Street Journal.


The pipeline operators' dilemma underscores the radical transformation wrought
by hydraulic fracturing in the U.S. energy industry. When companies such as
Chesapeake Energy Corp. (CHK) and Devon Energy Corp. (DVN) developed ways to
liberate the oil and natural gas trapped in tight rock formations by fracturing
them with high-pressure jets of water, they unleashed a glut that markets and
energy companies are still trying to comprehend.


After peaking above $13 per million British thermal units in 2008, U.S.
natural-gas prices have fallen significantly as fuel culled from shale
formations flooded the market. In the last year, natural gas has generally
traded in the range of $4 and $5/MMBtu. Natural gas for July delivery settled
8.7 cents, or 1.97%, lower at $4.325/MMBtu Friday on the New York Mercantile
Exchange.


The Marcellus shale in the northeastern U.S. has the potential to be
particularly disruptive, because it is located right at the door of the largest
U.S. market for natural gas, the Northeast. The area is currently served by
long-distance pipelines owned by companies such as Kinder Morgan Energy Partners
LP (KMP).


Some analysts forecast the Marcellus shale's production to more than double
from its current 2.0 billion cubic feet a day in the next few years, eliminating
the need for at least some of the natural gas that the Northeast now imports
from other parts of the country.


Kinder Morgan currently collects natural gas from the Colorado region and
ships it to Ohio via its 1.8 billion-cubic-feet-a-day Rockies Express pipeline.
But as Marcellus production grows, Kinder may prefer to sell the natural gas in
the Chicago market, said Rodney Waller, senior vice president at independent gas
and oil producer Range Resources Corp. (RRC), a major producer in the Marcellus
shale. Kinder could even be forced to reverse the eastern part of the pipeline
to bring natural gas to Chicago from Pennsylvania, Waller said.


"Your Marcellus market is clearly going to go to the northeast, it's clearly
going to go into Canada, it's clearly going to backlog to Chicago," Waller said
during a recent natural-gas conference in Houston.


The Rockies pipeline "stands ready to backhaul gas to markets west of
Clarington [Ohio], including Chicago and California," said Mark Kissel, Kinder
Morgan's western region president.


The biggest losers in the U.S. shale boom could be Canadian pipeline companies
that export to the U.S. Natural gas produced in the western U.S.--a region that
is also producing more shale gas--would no longer need to be shipped east,
eventually replacing the need for Canadian natural gas to the U.S. West Coast.
Combine that with fewer imports needed in the Marcellus region and Canadian
natural gas will increasingly stay at home, said Avi Feinberg, an equities
analyst at Morningstar Inc.



"Pipelines that serve those markets out of western Canada will get backed up,"
Feinberg said. "There will definitely be winners and losers."



-By Ben Lefebvre, Dow Jones Newswires; 713-547-9201; ben.lefebvre@dowjones.com



--Ben Casselman and Ryan Dezember contributed to this article.



(END) Dow Jones Newswires
06-17-11 1810ET