Then there is Richard D. Kinder, chief executive of Kinder Morgan, who has personally made billions of dollars operating the industry’s equivalent of a toll road: pipelines.
Now, with Kinder Morgan’s $21 billion deal to buy a leading rival, the El Paso Corporation, he is doubling down.
Hydraulic fracturing techniques — despite causing a growing controversy — are creating a once-in-a-generation boom in oil and gas drilling in the United States, and the opportunity to build many more pipelines to carry new supplies to market.
Public concerns about the environmental risks posed by hydraulic fracturing, or fracking, raise the possibility of tough new restrictions, higher costs and even outright bans on new wells in some areas. But companies like Kinder Morgan and its competitors think the need for new energy sources means pipelines are a relatively low-risk way to play the boom.
If they are right, Kinder Morgan will collect new tolls for decades, along with the ones it is already pocketing.
The nation’s 450,000 miles of transport pipelines provide a steady flow of profits, and big players like Kinder Morgan are geographically diversified, diluting the impact of a drilling slowdown in any one region. Transmission rates are set by the Federal Energy Regulatory Commission and do not vary with fluctuating oil and gas prices. A special federal tax break unavailable to most industries bolsters investors’ returns. And before a single mile of a new pipeline is built, the operator typically lines up contracts with oil and gas companies that commit them to use it, guaranteeing revenue in advance.
Fed by such advantages, Kinder Morgan’s pipeline partnership yielded investors a 17.7 percent compound annual return from 2007 to 2010, compared with 3.5 percent for an index of large integrated oil companies, says IHS Herold, a consulting firm.
“Kinder has made a low-return, humdrum business into a river of money,” said Robin West, chief executive of the consulting firm PFC Energy. “The North American energy scene is being transformed, and this company reflects the colossal scale of the emerging industry.”
Kinder Morgan’s proposed purchase of El Paso, announced in October, is so big that it faces months of antitrust scrutiny. The deal would create the largest pipeline owner in the country, with 80,000 miles of pipelines crossing 35 states and linking new oil and gas fields from Texas to Pennsylvania to most major markets. Although regulators would still set transport prices, the company would have more power to direct what flows through its pipes and where.
“By restricting supplies or not expanding pipelines in the future, they are potentially going to keep natural gas from going to consumer markets where gas is needed, and that could impact prices indirectly,” said Ed Hirs, an economist at the University of Houston.
Analysts say antitrust regulators may require Kinder to divest itself of some pipelines, particularly in and around Colorado, though most expect the deal to be approved eventually.
Mr. Kinder and other Kinder officials declined interview requests. But Larry S. Pierce, a company vice president, denied in an e-mail that his company would restrict gas flows. “Pipelines make money by providing transportation service, not by deciding where the gas goes,” he said.
The increased scale would certainly put Kinder Morgan in a prime position to benefit from a coming wave of pipeline construction. Thousands of miles of new pipelines will be needed to serve wells in fast-growing shale fields like the Bakken in North Dakota, the Eagle Ford in south Texas and the Niobrara in Colorado. In some states, pipeline capacity is so scarce that much of the natural gas coming from wells is simply burned as waste.
All told, spending on new pipelines in the United States could reach more than $200 billion by 2035 (in 2010 dollars), according to the Interstate Natural Gas Association of America Foundation.
“Rich Kinder likes to identify tsunamis,” said Yves Siegel, a senior energy analyst at Credit Suisse, “and this is a tsunami that he believes in.”
If the El Paso deal was approved, analysts say, other big pipeline companies, like Williams Partners and Oneok, would need to scramble to keep up with the supersize Kinder Morgan, which would have easier access to capital and a far larger cash stream to buy or build the new networks.
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