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Highlights

The dramatic ramp-up in North American natural gas and oil production, combined with shifting gas flow patterns, such as from LNG exports, signals the need for new investments in pipeline infrastructure, speakers at the Platts Pipeline Development and Expansion conference said Tuesday.

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Along with the need for new infrastructure comes the need to tap traditional sources of financing as well as develop new ones, panelists at the Houston conference said.

Potential investors must weigh the inherent risk that the construction of new pipelines inevitably carries, said Lucien Pugliaresi, president of Energy Policy Research Foundation.

Pipelines that cross federal land must comply with the strict requirements of the National Environmental Policy Act, which can delay the construction of a project by months or years, he said.


"The NEPA process is very cumbersome," he said.

For its part, pipeline construction that runs along private land has its own impediments, with private landowners increasing raising issues over the use by the pipeline companies of eminent domain to secure right of way, even in such industry-friendly states as Texas, Pugliaresi said.

In rapidly developing oil-producing plays such as the Bakken Shale of North Dakota, the lack of pipeline infrastructure to move the commodity to market is giving rise to the use of railroads, with all of the inherent risks that entails.

Pugliaresi commented that while shipping crude oil by rail is a temporary solution to the transportation problem, construction of needed infrastructure has been slow to meet the needs of the market, as many energy producing companies are wary of the long-term commitment a pipeline represents.

"Rail's like dating, while a pipeline is like marriage," he said.

Last month, the world of pipeline financing was shaken up when pipeline giant Kinder Morgan announced plans to abandon the tax-advantaged master limited partnership structure that had allowed it to grow into one of the largest infrastructure companies in the world in favor of becoming a traditional C corporation.

However, panelists at the conference said that Kinder Morgan,s situation was unique to that company and they do not foresee a rush by other pipeline players to jettison the MLP structure that has served the industry well as a financing vehicle for the last dozen or so years.

Gabriel Moreen, senior analyst at Bank of America/Merrill Lynch, said Kinder's decision came about as a result of a "winner's curse," after the company has positioned itself in the top tier or the industry for a decade and a half.

"Distribution rights tend to become a bigger burden to the MLP, raising the cost of capital for the MLP," he said.

Another transaction in which a pipeline company moves away from the MLP space similar to the Kinder Morgan deal is unlikely to occur "over the near or medium term," Moreen said.

Meanwhile, the real estate investment trust, which like the MLP offers tax advantages to investors, is increasingly becoming popular as a financing vehicle for infrastructure companies, Jeff Fulmer, senior vice president CorEnergy, said on the sidelines of the conference.

"It's a pass-through tax entity that, as opposed to an MLP allows an investor a simplified tax experience in the form of a 1099 form at the end of the year, as opposed to a K-1," he said.

Thus, the REIT provides "a means for investors not only in their taxable accounts, but also importantly in their tax- exempt accounts to participate and invest in US energy infrastructure," Fulmer commented.

By using the REIT structure energy infrastructure companies can gain exposure to a broader range of financing options, he said.

"There are institutional investors that for good reason want to participate in the US energy industry, but they may have an unwillingness to invest in other ways, whether it is through private equity or MLPs," he said. In addition, the REIT form of financing allows US pipeline companies to tap overseas sources of capital. "A REIT is something that everyone is comfortable with, not only here but also abroad," Fulmer said.

This gives US infrastructure companies the option of attracting foreign investment without ceding to foreign control of their assets, he said.

"It's not the same as a foreign company coming in and owning and operating wells."

--Jim Magill, jim.magill@platts.com
--Edited by Richard Rubin, richard.rubin@platts.com