Of all the bets on natural gas so far, nothing tops that of Kinder Morgan. It has bid $21.1 billion on El Paso Corp. in what would become the biggest pipeline operator and the fourth biggest energy company in North America.

The thinking there is that the newfound shale gas supplies will lead to more development and cause the demand for natural gas to escalate. Several factors have inhibited that gas from getting to markets, two of which have been the scarcity of pipelines and the fragmentation of the industry itself. Not only does consolidation give Kinder more resources to expand its network but merging also helps the company provide more seamless coverage. 

“We believe that natural gas is going to play an increasingly integral role in North America,” says Richard Kinder, the company’s chief executive in a public statement. “With the recent development of shale resources, there are now abundant domestic supplies of natural gas, which are being used increasingly to generate electricity and are environmentally friendly.”

According to the U.S. Energy Information Administration, about 24 trillion cubic feet of natural gas was burned in 2010. And while the associated carbon emissions are more than those tied to alternative energy forms, as well as nuclear, they are still about half those of coal. Coal now supplies about half of the country’s electric generation while natural gas provides about 24 percent. The combination of new shale deposits and stricter environmental controls means that the former is expected to decline while the latter will rise.

Kinder Morgan now operates 37,000 miles but through the acquisition, it would increase that to about 67,000 miles. Kinder and El Paso, generally, operate in disparate areas and Richard Kinder said during a conference call that he did not expect U.S. regulators to object because the two networks were complementary. If they do raise concerns, the company would oblige by selling off properties.

To pay for the proposed cash-and-stock deal that could close by mid 2012, Kinder will borrow about $11.5 billion. To offset that cost, however, Kinder will sell El Paso’s exploration and production business -- a trend that began prior to the announcement of this deal. A combined company would be worth $94 billion.

Power Race

While concerns exist that a larger company would reduce competition and push up natural gas prices, more analysts tend to think such scale would benefit consumers. That’s because the stranded shale in North Dakota’s Bakken field and in Texas’s Eagle Ford, as well as through the 10-state Marcellus region, could likely get new routes to reach hungry power markets. The added supply would then cut home heating prices.

ICF International has reviewed what the country will need in terms of pipeline infrastructure, all in a world where shale gas is expected to make up two-thirds of the total natural gas mix by 2035. The firm is assuming a price range of $4-$7 per million Btus as well as an increase of 1.3 percent in the expected electricity demand per year for at least a decade.

To get there, the United States and Canada will require an average yearly investment of $8.2 billion, or $205 billion over the next quarter century. The industry has invested $8 billion during a three year period from 2006 to 2010 -- a "strong indication" that it will continue to make the necessary capital allocations if the regulatory environment permits, says ICF.

By 2030, the U.S. and Canada will need approximately 29,000 to 62,000 miles of additional natural gas pipelines as well as 370 billion to 600 billion cubic feet of additional storage capacity, says the study. If the country does not to rise to the challenge, it would create supply disruptions and price volatility would increase.

“The good news is that the natural gas industry has a proven track record of constructing and financing this level of infrastructure,” says Don Santa, chief executive of the Interstate Natural Gas Association of America.

Companies will seek to expand their networks by acquiring their competitors, as Kinder is trying with El Paso and as Energy Transfer is doing with Southern Union. And, they will also have to lay more pipe, especially if they hope to capitalize on the shale-gas craze. Merging, in fact, is expected to give companies the financial muscle to get ahead, which is why so many have occurred recently in the utility and energy worlds.

Kinder’s foray embodies the view that natural gas will lead the power race. Regulatory approval is expected and would expedite that dynamic. The momentum will therefore continue and prompt the marriage of similar companies.


EnergyBiz Insider has been been nominated in 2010 and 2011 for Best Online Column by Media Industry News, MIN. Ken Silverstein has also been named one of the Top Economics Journalists by Wall Street Economists.

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energybizinsider@energycentral.com