September 2009 Vol. 236 No. 9

In The News

September Newsreel: MEP in Service; Worker Killed in MS Explosion; Low Prices Threaten Natural Gas Advantage in Texas

Kinder Morgan/Energy Transfer Partners Place Midcontinent Express Pipeline Into Service
Worker Killed In Mississippi Pipeline Explosion
Low Wellhead Prices Threaten Texas Natural Gas Advantage

New Study Finds Potential Savings Of $1.2 Trillion In Energy Efficiency
Magnum Gas Storage Has Successful Open Season For Proposed Site In Utah
Eugene Island Oil Leak Cleanup Completed
Wärtsilä Opens Workshop In Taranto, Italy
NACE Study Puts Pipeline Replacement/Maintenance Cost At $1.1 Million/Mile
CERI Study Says Canada’s Petroleum Sector On Upswing
McClendon Cites Pressure On Natural Gas Storage
Delphi Midstream Partners Announces Plan To Acquire Companies And Assets
SMU Cox School of Business, API Plan Leadership Program
Global Upstream Oil & Gas M&A Activity Rebounded in 2Q 2009
Correction

Kinder Morgan/Energy Transfer Partners Place Midcontinent Express Pipeline Into Service
Construction of the 500-mile Midcontinent Express Pipeline (MEP) is complete and natural gas transportation service began on Aug. 1, on the pipeline from Delhi, LA to Transcontinental Pipe Line’s Station 85 in Butler, AL. Interim service had begun on the pipeline from Bennington, OK to Delhi in April. MEP is a joint venture of Kinder Morgan Energy Partners, L.P. and Energy Transfer Partners, L.P.
“We are delighted that the final leg of the Midcontinent Express Pipeline is in service,” said Steve Kean, president of Kinder Morgan’s Natural Gas Pipelines group. Kinder Morgan constructed and will operate the pipeline.

“The completion of this final segment of MEP affords shippers and producers in the Barnett Shale, Bossier Sands and other producing regions access to markets in the eastern United States,” said Lee Hanse, senior vice president of Energy Transfer’s Interstate Pipeline group.

MEP has multiple receipt and delivery points along the pipeline system, which originates in southeast Oklahoma, crosses northeast Texas, northern Louisiana and central Mississippi and ends in Alabama. Capacity is currently up to 1.25 Bcf/d in Zone 1, which interconnects with the Columbia Gulf Transmission system in Delhi and up to 0.84 Bcf/d in Zone 2, which interconnects with the Transcontinental Gas Pipe Line system in Butler. An expansion of the pipeline is expected to be completed in 2010, which will boost MEP’s capacity to 1.8 Bcf/d in Zone 1 and 1.2 Bcf/d in Zone 2.

Worker Killed In Mississippi Pipeline Explosion
A gas pipeline explosion in rural Smith County in south Mississippi July 29 left one worker dead and three others critically injured. The explosion was reported near Sylvarena, said Mississippi Emergency Management Agency spokesman Jeff Rent. The blast occurred on part of the Midcontinent Express pipeline.

“There was a pressure test that was being conducted by a third party contractor on the Midcontinent Express pipeline when they had a failure,” said Joe Hollier, a spokesman for Kinder Morgan Inc. He said the contractors conducting the tests were Beckville, TX-based Grand Bluff Construction Co. and Priority Energy.

Low Wellhead Prices Threaten Texas Natural Gas Advantage
Depressed natural gas prices in June, for the first time in more than 13 years, forced the value of natural gas produced in Texas to fall below that of Texas-produced crude oil, according to the midyear 2009 Texas Petro Index (TPI).

“Texas producers have strongly supported increased demand for natural gas since residential and industrial consumers began recognizing its advantages in the 1990s,” said Karr Ingham, Texas economist who created the TPI. “The last time oil produced more value in Texas than natural gas was 1995. Even last year, when oil prices were setting record highs, natural gas accounted for nearly 62% of the $100 billion generated by producer sales of crude oil and natural gas.

“However, the value of Texas-produced natural gas relative to crude oil waned throughout the first half of 2009 when gas prices failed to match the recovery of oil prices and remained at $3-4 per million Btus. That slump ended the 13-year run of natural gas dominance in the Texas economy in June, when the value of oil produced in Texas topped $2 billion, compared to less than $1.9 billion for natural gas.”

Ingham said the reversal of value was a sobering display of the power of the most severe economic recession to strike the U.S. and Texas in three decades. He said natural gas should regain its supremacy in Texas and across the U.S. as the economy begins to recover because natural gas enjoys significant supply and environmental advantages over competing fuels.

New Study Finds Potential Savings Of $1.2 Trillion In Energy Efficiency
The United States has the potential to save more than $1.2 trillion in energy costs and cut consumption by 23% by 2020, according to a study by McKinsey & Co., co-sponsored by Sempra Energy and 11 other organizations.

The energy-efficiency strategy cited in the report could produce savings that exceed California’s total annual energy consumption while removing approximately 1.1 billion tons of greenhouse gas emissions annually – the equivalent of taking the entire U.S. fleet of passenger vehicles and light trucks off the roads.

The study outlines methods required to attain the energy savings, including education, incentive and grant programs, and nationwide standards for energy efficiency. The complete report, entitled “Unlocking Energy Efficiency in the U.S. Economy,” is available online at www.mckinsey.com/USenergyefficiency.

In California, per-customer consumption of natural gas has dropped about 50% since 1970, when the state’s regulators and utilities began their aggressive push in energy efficiency. Similarly, per-customer consumption of electricity has remained relatively flat in California, although increasing significantly in the rest of the country.

Since 1990, Sempra Energy’s utilities – San Diego Gas & Electric (SDG&E) and Southern California Gas (SoCalGas) – have saved enough natural gas to supply more than 800,000 homes and electricity to power nearly 600,000 homes for one year. The utilities’ energy-efficiency programs reduced peak electricity demand by more than 800 MW, the equivalent of two large power plants.

SDG&E and SoCalGas have achieved these savings by providing millions of dollars in incentives and rebates, including $60 million in 2009, to Southern California businesses that upgrade equipment and become more energy-efficient.

Magnum Gas Storage Has Successful Open Season For Proposed Site In Utah
Magnum Gas Storage, LLC, announced Aug. 6 that the non-binding open season for its Magnum Gas Storage Project concluded successfully. The company received responses from 26 bidders requesting more than four times the capacity offered.

The project is the first large-scale, high-deliverability, multi-cycle salt cavern natural gas storage facility to be developed in the western United States. Plans are well under way to initially develop two caverns, each with working gas capacity of 5.6 Bcf in Millard County in central Utah.

“We believe that the success of this open season demonstrates the industry’s growing recognition of the need for high-deliverability natural gas storage in the West,” said Rob Webster, Managing Director. “This facility will provide natural gas-fired electric power generators, gas distribution companies, producers and marketers throughout the West with cost effective, efficient and reliable access to natural gas supplies.”

The project offers customers direct and indirect interconnections with multiple pipelines originating out of the Rockies. The project will connect directly with a new lateral to the Kern River and Questar interstate pipelines at Goshen, Utah, creating a header that will indirectly serve the Opal, Wyoming, area market hub pipeline interconnections through backhaul and displacement.

Eugene Island Oil Leak Cleanup Completed
Workers finished cleaning up 1,500 barrels of crude oil on Aug. 3 that leaked from Eugene Island pipeline, operator Shell Pipeline Co said. Shell said it would repair and announce when it would restart the line. The key Gulf of Mexico supply link was shut down July 25 after the leak was discovered 33 miles off Louisiana near Houma.

Some 80,000 of the 100,000 bpd of crude oil the line was carrying when the leak occurred has been rerouted, Shell has said. Divers found a crack in the line, Shell has said, but the company has given no other details about the damage, what might have caused it or how it might be fixed.

Wärtsilä Opens Workshop In Taranto, Italy
Wärtsilä Corp. said it has increased its range of engineering services in Italy by opening of workshop in Taranto, an important commercial and military hub in southern Italy. The workshop is equipped to perform overhauling services for diesel and gas engines. It is implemented in full compliance with the latest Wärtsilä workshops standards. The size of the previous premises was found to be limited in the type of services it could offer its customers.

“The new 700-square-meter workshop with its five metric tons of lifting capacity is ready to support a variety of customers, and is particularly oriented toward serving bio-fuel power plant installations in the southern and eastern part of Italy as well as the Taranto Italian Naval Base,” said Guido Barbazza, Director, Field Service Workshops, Wärtsilä Services.

NACE Study Puts Pipeline Replacement/Maintenance Cost At $1.1 Million/Mile
A recently completed NACE International Corrosion Technology Gap Analysis notes that with nearly 500,000 miles of pipelines in use in the United States, the cost of replacing and maintaining these systems is estimated at $1.1 million per mile. The costs associated with corrosion-related failures (25% of all accidents), capital investment for repairs, and system maintenance is estimated at $5.4-8.6 billion per year.

Among the technology gaps identified were the need to understand how various factors influence corrosion and integrity, how to better detect the onset and extent of corrosion, and how to improve the overall education, training and public awareness of the influence of corrosion. NACE has published a series of standards on the direct assessment process, a four-step process to study the history and operating conditions of a pipeline and predict where corrosion is most likely to occur. NACE SP0502-2008 on external corrosion direct assessment has been incorporated by the U.S. Pipeline and Hazardous Materials Safety Administration pipeline safety regulations.

CERI Study Says Canada’s Petroleum Sector On Upswing
CERI has released its study of the Economic Impact of Canada’s Petroleum Industry, indicating with cautious optimism the nation’s economy is on the verge of emerging from its lengthy recession. Given the depressing profit reports trickling from the oil and gas sector this is particularly good news for the oil sands because it will initiate the rebound of the industry.

The Economic Impact Study indicates that $218 billion will be invested in new oil sands capacity over the next 25 years – slightly less than Mexico’s plans to invest some US$240 billion over the next 14 years to stimulate its lagging oil industry. The oil sands investment, coupled with the increased production that it will create, will result in $1.7 trillion in incremental GDP growth for Canada – $78.1 billion alone for Ontario and Quebec. This translates into 700,000 jobs being created across the country and additional tax revenues for Canada of over $306 billion.

These numbers result from only 20% of total investment in the petroleum industry through 2030. The other 80% will be in conventional gas which will command the largest share of investments, followed by oil developments in Saskatchewan and shale/tight gas production in British Columbia.

With the oil sands added to the economic impacts of the other parts of the petroleum sector, total economic impact will contribute an incremental increase in Canada’s GDP of $3.6 trillion – $144 billion in Ontario – and will create near 1 million jobs. Associated tax revenues are estimated at $429 billion.

McClendon Cites Pressure On Natural Gas Storage
Aubrey McClendon, CEO of Chesapeake Energy Corp., said natural gas storage would hit capacity this year, forcing producers to shut in production. As storage fills “pipeline pressures are going to increase and that is going to cause involuntary curtailment,” McClendon said during a conference call to discuss earnings. Natural gas in U.S. storage for the week ended July 24 stood at 3.023 Tcf – 23% higher than last year and 19% above the five-year average, according to the U.S. Energy Information Administration.

Delphi Midstream Partners Announces Plan To Acquire Companies And Assets
Delphi Midstream Partners, LLC, a newly formed energy investment company, has received an equity commitment from American Securities (AS) in support of a strategy to invest in and acquire up to $2 billion of midstream energy sector companies and assets. The founding partners of DMP are Thomas F. Karam, president/CEO, and Michael J. Walsh, senior vice president. Karam has more than 20 years of energy sector experience, most recently serving as president/COO of Southern Union Company. Walsh was a partner and founding member of Highstar Capital before establishing DMP, where he was responsible for Highstar’s investments in the midstream energy sector.

DMP said it is interested in midstream energy businesses and assets in North America requiring a minimum equity investment of $50 million. DMP typically seeks control positions, but will consider joint ventures or influential minority interests.

SMU Cox School of Business, API Plan Leadership Program
SMU Cox Executive Education and the American Petroleum Institute will blend the capabilities of both organizations to better prepare next-generation industry leaders for 21st century global energy demands.

The new alliance will make SMU Cox Executive Education’s oil and gas programs immediately available to professionals in API’s more than 400 member companies. These programs include mastery in strategic leadership skills, strategic financial skills and knowledge and management skills required by senior managers to tackle strategic, financial, leadership and operational issues. It will also give SMU’s programs the benefit of the vast industry insight and knowledge resident in the API organization.

Frank Lloyd, Ph.D., associate dean of Executive Education at SMU Cox School of Business, said three new trends have emerged that demand heightened attention in oil and gas industry professional development. “First,” he said, “the demand for training in the ‘soft’ skills of leadership is outpacing that for ‘hard’ business skills like finance and accounting. In addition to delivering business results, managers at all levels are required to motivate and engage others, lead innovation and change, and make strategic decisions themselves.

“Second, developing these ‘harder’ leadership skills has become a strategic imperative that commands attention all the way to the CEO’s office. Finally, the interest is pervasive and extends to companies of all sizes in all parts of the world.”

Global Upstream Oil & Gas M&A Activity Rebounded in 2Q 2009
Global mergers and acquisitions (M&A) upstream deal count nearly doubled in the second quarter 2009 from a ten-year low in the first quarter 2009, spurred by a resurgence in oil prices and a thaw in equity and credit markets, according to research prepared by IHS Herold Inc.

“Both U.S. onshore and international deal counts increased significantly, although North American activity remained well below historical averages,” said Chris Sheehan, IHS Herold director of M&A research. “International pricing for proved plus probable reserves held firm on stronger crude oil prices, but falling gas prices plunged North American asset deal prices to the lowest level since 2005. The upsurge in activity in the second quarter is encouraging, but the market is still extremely volatile.”

Herold reported second-quarter total transaction value increased four-fold outside North America, driven by strong activity in the Africa/Middle East region and upturns in Europe and Asia-Pacific. Total worldwide transaction value was flat at $28.4 billion, as first quarter figures were buttressed by the $20 billion Suncor/Petro-Canada merger. National oil companies represented nearly 40% of global deal value, including Sinopec’s $8.8 billion agreement to acquire Addax Petroleum, the largest overseas upstream transaction by a Chinese company.

Correction
An article in the July issue of P&GJ entitled “In the Gas Pipeline Business, It all Comes Down to Communications” incorrectly stated that Southern Star Central Gas Pipeline Inc. is owned by Loew’s Corp. Southern Star is a locally managed private company owned by GE’s Energy Financial Services business and Caisse de dépôt et placement du Québec.