August 11, 2008

NatGas Pipeline Business is Booming and So Are Costs, NGI Reports

The boom in natural gas development in unconventional plays and locations is spurring a corresponding frenzy of new pipeline construction, putting increasing pressure on materials and labor costs, according to Natural Gas Intelligence (NGI), an industry newsletter published by Intelligence Press Inc.

"I think one of the great challenges we and other builders and operators face today is obviously rising construction and material costs," CEO Rich Kinder, of Kinder Morgan Energy Partners LLC (KMP) which is building the Rockies Express Pipeline (REX), the largest new pipeline project in decades.

Estimated costs for the cross-country line are continuing to rise with the eastern leg (REX East) going from an estimated $4.4 billion in February to $5.6 billion today, according to Sempra Energy CEO Donald Felsinger, whose company owns a slice of the project. The new numbers have surfaced in second quarter financial conference calls reported on by NGI.

Part of the problem is the sheer number of new pipeline projects underway across the country to tap the exploding new shale resources cropping up in under-piped locations. The venerable pipeline operator El Paso Corp. is going forward full throttle with $8 billion in pipeline project commitments, "a level that is more than two times larger than any time in our 80-year history," CEO Doug Foshee told investors recently.

El Paso has eight projects on its plate, including two big ones, the Ruby Pipeline to deliver Rockies gas to the West Coast and a major expansion of its Tennessee Gas Pipeline in Pennsylvania to tap the Marcellus Shale.

"Steel for pipe making has doubled since the beginning of the year," said Jim Yardley, president of El Paso's pipeline group, during a conference call. "And the cost of large diameter pipe has increased approximately 60%. For the most part we've minimized the impact of these increases by locking in our pipe at or near the time we committed to go forward with our customers under long-term transportation contracts."

Earlier construction for KMP also benefited from lower prices. "The cost of pipe on some of our earlier projects where we ordered a pipe upfront was in the $1,200 per ton range. Today the same pipe is going for in the range of $2,500 per ton. By locking in early, we save enormous amounts of money..." Going forward transportation rates will be higher to cover the higher cost of construction.

Materials aren't the only problem. Finding enough skilled labor to cope with the construction boom is becoming more difficult. About half of the cost increase for REX East has been labor costs.

For more on these and other pipeline projects and shale gas developments, please sign up for a free trial at Then click on the headline "Gas Pipeline Operators Deal with Labor Shortages, Escalating Costs" and "El Paso's Profits Up 22%; Pipeline Backlog Doubles."

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