| EDITOR'S NOTE: C. Park Shaper is president of Kinder Morgan, one of the largest pipeline transportation and energy storage companies in North America. The company is also the second largest oil producer in Texas, producing over 55,000 b/d at the SACROC Unit and the Yates Field in the Permian Basin. The Kinder Morgan companies include Kinder Morgan Energy Partners LP, Kinder Morgan Management LLC, and Kinder Morgan Inc., a private entity. Shaper recently took time from his schedule to speak with OGFJ's Mikaila Adams. |
Mikaila Adams, OGFJ Associate Editor
OGFJ: Kinder Morgan is one of the original companies with hydrocarbon producing assets to utilize the MLP structure. How did the company come to be a pioneer on that front?
PARK SHAPER: I wouldn't characterize us as one of the original companies to put producing assets in the MLP structure. In truth, in the 1980s there were a number of MLPs that owned production assets that didn't fare well because the exposure to commodity prices led to volatility in distributable cashflow, resulting in volatility in distributions – which investors found unappetizing.
When Kinder Morgan became Kinder Morgan in February 1997 (the MLP had been in existence prior to that, but that's when Rich Kinder and Bill Morgan purchased the general partner and renamed it Kinder Morgan), we took a bit of a different approach. We believed the MLP structure could be used very effectively as a growth vehicle. We focused on assets with stable cash flows, which really were, and primarily are, midstream assets – assets where we don't actually own the commodity that's moving on them, but rather we own the asset and get paid a fee for transporting that commodity. That gave us stable cash flows. We were able to expand those assets and grow the cashflows through increased utilization and by investing additional capital in them. We were able to acquire additional assets that fit that profile, which allowed us to grow the cashflows and grow the distribution. That was really something that hadn't been done in MLPs prior to that. I think in that way, Kinder Morgan started taking a unique approach to the MLP structure and it was very effective. And, there are a number of people who are doing it very well today.
That being said, we do own some production assets. We got into that business through our CO2 transportation business. All of the production assets that we own are related to CO2 floods. We were able to take our CO2 expertise and apply it to a production field and have a significant impact on the production coming out of that field, thereby attaining very attractive rates of return. In general, we would avoid that kind of asset within an MLP because of the commodity price sensitivity. We pay out the vast majority of our cashflows to our investors and we don't want that payout to be reduced quarter to quarter or year to year. Exposure to commodity prices is not something that we seek out; it is something we try to avoid, but the opportunity that we found to apply our CO2 expertise to these fields was so significant that we took on that exposure and hedged away as much as we could. We have relatively limited exposure in the near-term and we will layer hedges on throughout the years to limit our exposure to commodity price movements.
The Rockies Express Pipelines is one of the largest ever constructed in the US. The 1,679-mile line runs from Colorado to eastern Ohio and boasts capacity of 1.8 bcf/d.
OGFJ: Thirteen years in that capacity is a long time. How has the company continued to be successful using the MLP structure?
SHAPER: Our approach has been consistent and will be going forward. We look for stable assets, largely based on fee income from our customers, that are integral to the energy infrastructure of the US – typically longer-line, bigger assets that the economy really depends upon. We get growth and cashflow by increasing utilization. We get growth by operating them efficiently. We get growth by expanding those assets. We hope to sign up customers for new storage contracts – incremental storage and incremental transportation. We also get growth in cashflows by acquiring similar assets and operating them efficiently.
OGFJ: Should we expect to see a wave of E&P companies looking to get in on the structure?
SHAPER: For producers considering this, I think there are some advantages and disadvantages. The advantage is that it's a very tax efficient structure in that you eliminate a layer of taxation at the entity level. All of the tax attributes are taxed to the partners, so the tax does get paid, but it eliminates double taxation. The disadvantage is, if you have a commodity sensitive business, investors in MLPs are generally buying in for the distribution, and if they don't have confidence that your distribution, at a minimum, will stay flat (but hopefully grow), you may not get a very attractive valuation. That's the balance that producers have to strike when considering the MLP structure.
OGFJ: Kinder Morgan CO2 Co. LP ranked No. 25 in Oil & Gas Journal's recent ranking of US producers by total assets in 2Q10. This coupled with the company's large midstream operation is impressive. Is there room for growth, and what is the future of Kinder Morgan?
SHAPER: On the production side, clearly our goal is to produce incremental volumes so we're very happy with our performance. We'll work hard to maintain that level of production or grow it. Our other major business segments are: products pipelines where we're transporting gasoline, diesel fuel, and jet fuel; natural gas pipelines where we're transporting natural gas and storing natural gas; terminals where we store a lot of refined products and chemicals; and Kinder Morgan Canada where we own essentially two crude oil pipelines coming out of Alberta. One is the only pipeline currently that goes to the West Coast; it runs to the refineries in Washington State and also to the Vancouver area. The second is a line that runs down into the Rocky Mountains and east to Wood River, Illinois. Our growth in each one of those is driven by the same philosophy. We see opportunities across all of those business segments.
OGFJ: Does any infrastructure tie in to shale?
SHAPER: What's happening in the natural gas world right now is some shift in supply sources, namely the shale fields. We have a presence in the Haynesville, Eagle Ford, and Marcellus. We see opportunities in each one, but especially the Eagle Ford as it's on top of existing assets that we currently own that move natural gas out of South Texas. It's very attractively located for us. It also seems to be attractive for producers. They're getting more oil out of the field, which helps their economics when oil and gas prices are where they are. We also have some long lines that access Haynesville gas. We entered a joint venture with Petrohawk in May called KinderHawk. It gathers natural gas volumes within the Haynesville. Clearly there is a lot of activity around the shale. There will be need for incremental infrastructure development around it and we think our existing asset base leaves us very well positioned to participate in that.
OGFJ: Thank you very much for your time.
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