Tuesday, October 25, 2011

Shale Gas Craze Gets Bigger - Companies mixing, matching to get ahead

Ken Silverstein | Oct 24, 2011

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.

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