How KMP Plans To Benefit From Increased Consumption of LNG

As the global demand for energy keeps growing, newer and more efficient methods of producing that energy will be required. One consequence of this process has been the growing global demand for natural gas. Since 2000, the global demand for natural gas has grown at a rate of about 3%. The demand for Liquified Natural Gas(LNG), a liquified form of natural gas that can be stored and transported for future use, has grown at an even faster rate of 7.6% over the same period. ^[1] According to the 2013 World Energy Outlook by the International Energy Agency(IEA), the global demand for LNG could double the 2012 level of 250 million tonnes. ^[1] Due to these reasons, Kinder Morgan Energy Partners (NYSE:KMP) has been increasing its liquified natural gas assets over the last few years. In our note below, we take a look at the various ways in which KMP is gearing itself up to face the challenges of a world with increased demand for LNG.

Trefis has a price estimate of $83 for KMP, which is slightly ahead of the current market price.

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Expansion Projects Related To LNG

The El Paso Natural Gas Company(EPNG), a wholly owned subsidiary of Kinder Morgan Energy Partners and Southern LNG, is developing new gas supply to markets in South Eastern United States. ^[2] Southern LNG is undertaking an expansion of its Elba Island liquefied natural gas (LNG) receiving terminal near Savannah, Georgia.  The construction of a new 190-mile interstate natural gas pipeline by Elba Island. The new pipeline, with a total daily capacity of about 1.2 billion cubic feet per day, will increase natural gas transportation capacity from Elba Island to markets in Georgia and through the southeastern and eastern United states through interconnection with other pipelines.

The two projects related to the development of new supply to Southeastern U.S. are:

1) Elba III Terminal Expansion Project: The project will add 8.4 billion cubic feet (Bcf) of storage capacity at the Elba Island facility and 900 million cubic feet per day (MMcf/d) of transportation capacity, doubling the storage and send-out capabilities of the facility.

2) Elba Express Pipeline Project: The pipeline originating from Elba Island runs to the Northwest of the United States and consists 190 miles of 42-inch and 36-inch natural gas pipeline.

Jones Act Qualified Tankers

Given the long distances between the source of these petroleum products and demand areas, the costs of transporting by road or rail are very high. Kinder Morgan’s pipelines have already been operating at full capacity leaving no space for the accommodation of any new supply. But KMP has seen a way around this problem by exploiting a century old law called the Jones Act. The Jones Act was established in order to protect the U.S. Marine Industry and stipulates that all transportation between U.S. coasts must be carried out on ships made in the U.S. and manned by U.S. personnel.

Recently, KMP ordered the construction of an additional Jones Act qualified product tanker, with an increased cargo capacity of 330,000 barrels. The tanker is being constructed at General Dynamics’ NASSCO shipyard in San Diego. ^[3] The product cargo carrier is expected to be delivered by the second quarter of 2017 and it is possible that it might be converted to carry liquefied natural gas. KMP already has five similar carriers in its fleet along with four others which are under construction at the same General Dynamics manufacturing facility.

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1. Global LNG: New pricing ahead?LNG demand growth, ey.com [↩] [↩]
2. Elba III and Elba Express Projects, kindermorgan.com [↩]
3. Kinder Morgan Tankers, kindermorgan.com [↩]