Kinder Morgan, Partners Commit to New Pipeline

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Kinder Morgan Inc. (NYSE: KMI), DCP Midstream L.P. (NYSE: DCP) and Targa Resources Corp. (NYSE: TRGP) on Thursday announced a final investment decision on the $1.7 billion Gulf Coast Express Pipeline Project (GCX). The new pipeline will transport up to 1.92 billion cubic feet per day of natural gas from the Permian Basin nearly 450 miles to the Texas Gulf Coast.

Kinder Morgan subsidiary Kinder Morgan Texas Pipeline will build, operate, and own a 50% stake in the GCX. DCP Midstream and Targa each holds a 25% equity stake in the project. One of the shippers on the pipeline, Apache Corp. (NYSE: APA), has an option to purchase a stake of up to 15% in the project from Kinder Morgan.

In this morning’s announcement, Kinder Morgan said that approximately 85% of the pipeline capacity is subscribed and committed under long-term binding transportation agreements and that the partners expect the remaining capacity to be subscribed early next year. The remaining capacity may be offered in binding open season scheduled for January. That’s pipeline-speak for a sign-up period where shippers say how much capacity they want and what they’re willing to pay and the pipeline company picks the winners.

Lack of transportation out of the Permian Basin has led to flaring (i.e, burning) excess natural gas produced in association with oil extraction. In 2015 Permian Basin oil producers flared 45.5 billion cubic feet of natural gas, according to a recent report from the Environmental Defense Fund.

In addition to adding to greenhouse gas emissions, this is also like burning money. At $3 per thousand cubic feet, flaring smoked $136.5 million in potential revenues. Part of the reason for flaring is the lack of gas recovery and transportation out of the region to markets on the Gulf Coast.

Another side effect of booming oil production in the Permian Basin and associated natural gas production is depressed prices for natural gas. The GCX project, which is expected to begin operation in late 2019, will alleviate some of the pressure, as will new pipelines that will be coming online in the next year or so to transport natural gas to Mexican markets.

Among the shippers on the new GCX pipeline are DCP Midstream, Targa, Apache and Pioneer Natural Resources Co. (NYSE: PXD). Both DCP Midstream and Targa operate natural gas processing facilities in the Permian Basin and need more takeaway capacity. Apache and Pioneer are major Permian producers and are seeking to monetize ever larger quantities of associated gas as production of oil rises.