U.S. gas pipeline infrastructure: take-away tug of war (from Oil and Gas Investor)

Rising U.S. gas production has producers and pipeline developers
scrambling for new take-away capacity against a backdrop of dicey financial
markets.

“There has been an unprecedented amount of domestic spending on pipeline infrastructure over the last couple of years, by a factor of six,” says Mike Parham, managing director of Costa Mesa, California-based McGladrey Capital LLC, an investment-banking firm.

“The real pipeline growth areas seem to be in Alaska, the Midcontinent and the Rockies,” he says. “But I don’t want to underestimate even West Texas, New Mexico and some of the Permian Basin. Across the board, the industry spent about $12 billion nationwide this year, compared with about $6 billion last year. And only about $2 billion in 2006.”

How will new projects be funded? “That’s the big question. I think the MLPs are a likely source,” says Parham. “They have to put their money into projects like these and I think they will also raise more capital, although the markets aren’t being very friendly right now. Also, in this market, mezzanine funding is going to play a big role.”

In fact, due to the rattled global financial system, Parham sees institutional money making a flight to safety, as well as private-equity capital that historically wouldn’t touch energy, and hedge funds, all turning to energy and infrastructure-related investments.

Also, pension funds are directly investing in infrastructure for long-term income. “In the past, the cyclicality of the industry spooked a lot of these types of investors,” says Parham. “But now, it is the rest of the market that is spooking them.

“They are seeing that the long-term trend for infrastructure is quite positive. We have an archaic grid and a tremendous need for pipelines. We need an extreme makeover. I can’t find another industry where a dollar should be invested, other than in energy.”