Starting less than 20 years ago with a little over 2,000 miles of pipeline, Richard D. Kinder built Kinder Morgan into the U.S.’ third most valuable energy company. Today, operating approximately 84,000 miles of pipeline — enough to circumnavigate the globe three times — the company moves no less than one-third of the country’s natural gas supplies, among other energy sources.
Discussing his company and the changing landscape of infrastructure at IHS CERAWeek 2015, held recently in Houston, Kinder likened Kinder Morgan’s pipeline operation to a “toll road.” On a toll road you really don’t care what car runs down it, whether it’s a Mercedes or a Chevrolet. You don’t care how many people are in the car. What you care about is that you get as many cars and trucks on your toll road as possible, and they pay their tolls.
“I’m a conservative person,” Kinder, the company’s chairman and CEO, continued. “I don’t like a lot of risk. To me, these toll roads in the form of pipelines and terminals that are overwhelmingly fee-based give you a lot of comfort the cash is going to be there.”
“Traffic,” so to speak, on the Kinder Morgan toll road has increased dramatically in the recent years with the shale revolution in oil and gas unconventionals — a surge Kinder didn’t necessarily see coming.
“I’m reminded of that old saying, ‘Victory has a thousand fathers, but defeat is an orphan,’” he said. “A lot of people claim today, ‘Oh, I saw that coming.’ I’m here to admit, I didn’t.”
According to Kinder, the first glimpse of that revolution occurred as a result of the Barnett Shale formation. Since then, building infrastructure to move product has been a game of catch-up.
“I think the infrastructure almost always moves behind discoveries,” Kinder said. “It’s very difficult to expect the midstream infrastructure to keep pace.”
Addressing the need for more infrastructure, Kinder Morgan’s crude and condensate line was introduced in Texas approximately three-and-a-half years ago. What began as a $200 million project is now a billion-dollar project.
“We’re moving a little over 200,000 barrels a day now,” Kinder said. “All that has grown up, really, over the past 24 months. So you just have to catch up and serve your customers. If you can’t serve your customers, you won’t be in business very long.”
The collapse in crude prices has landed the energy sector in uncharted territory, Kinder said, but there are still specific areas of growth that are of special interest to Kinder Morgan.
“Certainly, in the Eagle Ford, we’re still finding opportunities,” he said, “and the Permian has a long way to go to be developed.”
Kinder also cited the Marcellus-Utica as an inviting point of interest.
“The Marcellus-Utica today is producing as much natural gas as the country of Iran does, which has the second-largest natural gas reserves in the world,” he said.
That exorbitant measure of energy already has changed the U.S.’ supply-and-demand “pipeline map,” and will continue to, particularly in the northeastern quadrant of the country, he said.
“We and others are trying to build more capacity to New England, which has the highest natural gas prices and the highest electricity prices in the nation,” Kinder said.
Recognizing the benefit of rail
Despite Kinder Morgan’s role as a central figure in the infrastructure business, Kinder recognizes dramatic growth of rail in moving product. Only a few years ago, no more than 20,000 barrels of crude per day were transported by rail; today, that figure is closer to 1 million barrels per day.
Kinder Morgan has several crude-by-rail terminals, including one in Edmonton, Alberta, coming on line in May that can handle 250,000 barrels a day, Kinder said.
“Rail has its place,” he elaborated. “I used to not think that. I thought, ‘Well, rail is an interim step; as soon as you can pipe something up, rail goes away.’ But when you have the kind of volatility on crude prices you have in North America today, I think you’re going to see a preference on both the supply and the demand side for having part of their supply move out by rail. I don’t know what that is — 10 or 20 percent — but I even think there’s no question pipelines are the cheapest and safest way to move any of these commodities.”
One advantage of moving product by rail, Kinder admitted, is that mode does not require the long-term commitment pipeline requires.
“If one day you want to move it to Baton Rouge and the next day to Los Angeles, you can do that,” he said.
Ultimately, while rail plays its part in the big picture of moving product, he also believes “pipelines are and will be the preferred method of moving crude” in the long run.
Expanding infrastructure, permitting and beyond
To the surprise of few, Kinder believes U.S. policy limitations on crude oil exports should be lifted.
“I don’t think there’s any question about that, given the kind of production we have and are likely to continue to have for years to come,” Kinder said, adding he considers the status of upstream infrastructure to be “pretty good,” though attention should be paid to completing more “last mile” projects.
“We need to build more docks on the Ship Channel, for example, and elsewhere along the Gulf Coast,” he advised. “And there will be some connectivity issues close to those docks. But I think the mainline infrastructure is capable of moving crude exports.”
Though Kinder Morgan conducts business in North, South and Central America, Kinder believes much more could be done to integrate North America from an energy standpoint, starting with the permitting of the Keystone XL pipeline.
“The Keystone should have been approved years ago, and I think we’ve gotten ourselves in a bind by not moving expeditiously enough to connect all of our infrastructure,” he said. “For example, there’s increasing demand in Mexico. We see that doubling over the next seven or eight years from about 2 Bcf a day to about maybe 4, even 5 Bcf a day. Mexico, much like other countries, like us, wants more of its power generation, more of its industrial demand to come from natural gas. There are real opportunities there, and I think from a permitting standpoint we ought to do everything we can.”
Kinder Morgan is currently attempting to gain full permitting for its Trans Mountain Pipeline to extend to the west coast of Canada.
“It’s the only pipeline that runs over to the coast today,” Kinder said. “We move about 300,000 barrels a day to our dock in Vancouver, then we drop down to a sister pipeline into three refineries in Washington state. It’s full every day, and we’ve applied to triple that to 890,000 barrels a day.”
The National Energy Board has already approved contracts for 710,000 barrels a day, Kinder said, with most customers signing 20-year agreements.
Though Kinder Morgan has obtained agreements with communities that span as much as 87 percent of the right-of-way for the pipeline, or “about 800 miles,” he estimates, Kinder admits significant opposition from environmentalists is interfering with the pipeline’s completion, particularly affecting the last 20 or 30 miles that goes through suburban Vancouver to the dock.
“We’ve had a lot of issues with protesters and people who are opposed for various reasons — primarily for reasons I’m not sure have a lot to do with the pipeline,” Kinder said.
In a broader sense, he believes there’s a group of people all across North America, “and they’re pretty smart people,” he said, who view pipeline permitting as a “choke point” to slow or stop pipeline projects.
“It’s difficult to go up and shut down the oil sands. It’s difficult to shut down the Eagle Ford or the Bakken or the Permian,” Kinder explained. “But if you can stop pipelines from moving natural gas or crude oil or condensate, the theory is then you can put so much pressure on the upstream part of the business they’ll have to quit drilling or slow down.”
Despite the “chokepoint,” Kinder believes the National Energy Board will approve full permitting of the pipeline when it convenes in January.
“We intend to get it built and see its service in the third quarter of 2018,” he said.
While Kinder said he supports the rights of people to protest, he also believes the public good should outweigh individual protest.
Moreover, he believes it is incumbent upon the energy sector to improve its public image.
“We are part of what I view as the most important segment of the industrial world,” he concluded. “We have done more as an industry to advance the cause of raising living standards across the globe than any other industry I can think of. We need to do a better job of selling how important what we do really is. Sometimes I think we hide behind it like we’re selling cigarettes or something.”
For more information, visit www.kindermorgan.com or call (713) 369-9000.