New Major Gas Pipeline From Fayetteville Heads North (KMP, ETP, SWN, CHK, BP)

Kinder Morgan Energy Partners (NYSE:KMP) and Energy Transfer Partners (NYSE:ETP) are teaming up again, this time on a joint venture to move up to 2 billion cubic feet of natural gas per day from the Fayetteville Shale to the upper Midwest. The two companies announced the formation of the Fayetteville Express Pipeline LLC (FEP), a 50/50 venture that will carry natural gas 187 miles from Conway county, Arkansas, to an interconnection to the Trunkline Gas Company pipeline that goes north to Chicago and on into Michigan. The projected cost for the FEP is $1.3 billion, and the pipeline is expected to be in service by late 2010 or early 2011.

A subsidiary of Southwestern Energy (NYSE:SWN) has signed up for 1.2billion cubic feet/day for 10 years and a subsidiary of Chesapeake(NYSE:CHK) has signed on for 375 million cubic feet/day with an optionfor another 125 million cubic feet/day. FEP will start a binding openseason next week to determine if there is enough demand for shipping towarrant an increase to the planned pipeline.

Southwestern Energy was the first company to apply the horizontaldrilling techniques developed in the Barnett Shale play to theFayetteville Shale. The company holds leases on more than a 900,000 netacres of the play, of which only about 150,000 have been developed. Inits last annual report, Southwestern estimated its proved reserves inthe Fayettville play at 716 billion cubic feet equivalent, of which 43%is developed. That leaves a lot of room for growth.

Chesapeake has been shedding assets, including a25% stake in its Fayetteville Shale holdings to BP plc (NYSE:BP). Thecompany noted in its 2007 annual report that it planned to sell offabout $3 billion in assets through 2009 in order to avoid having to goto the public markets for cash to fund capex. That may still prove tobe a sound plan, given the fear gripping the credit markets today.

As usual, though, the pipeline companies have probably hit on anotherwinner here. Some estimates of the total Fayetteville Shale resourceare as high as 20 trillion cubic feet of natural gas. It will take morethan 20 years to pump it all out, and both Kinder Morgan and EnergyTransfer will nick off just a little bit of every cubic foot. That’s agood business model.

Paul Ausick
October 1, 2008