Kinder Morgan's COO Comments on Future Trends

Steve Kean, the President and COO of Kinder Morgan, joins the Fool's Taylor Muckerman to discuss the energy industry and his company's contribution to it as the largest midstream energy company in North America. The Kinder Morgan family includes Kinder Morgan, (KMI -0.05%), Kinder Morgan Energy Partners, L.P. (NYSE: KMP), Kinder Morgan Management, LLC (NYSE: KMR), and El Paso Pipeline Partners (EPB).

While pointing out that Kinder Morgan isn't in the business of predicting the future, Mr. Kean does see several reasons why chemical companies in expansion would choose to locate manufacturing facilities in the U.S., as well as some factors that he thinks will put a ceiling on natural gas prices. The full version of the interview can be seen here.

A full transcript follows the video.

Taylor Muckerman: Talking about other tailwinds, one final one is the chemical industry, talking about building out ... Dow Chemical (DOW) says up to $100 billion could be built in the Gulf Coast. While I think that's inflated, their group that they're in with Huntsman (HUN -1.33%) and Nucor (NUE 1.81%) obviously benefiting from cheap natural gas and ethane production here in the United States.

Just wondering what you feel like, on a scale of $0 to $100 billion, what Kinder Morgan's feeling is on the potential there?

Steve Kean: Yeah. It's hard to know how big it's going to be, but it's likely to be quite large. Whether that's $50 billion or whether it's $75 or some other number, it's likely to be quite large.

The reason for that is that, again, we have this very robust natural gas infrastructure but we've also got a lot more gas to exploit. As gas prices came down, people started focusing the rigs on the richer plays. As they did that, they left behind dry gas that they know where it is, they know how to get it out, they can go back at it.

I've seen estimates that another 25 BCF -- we're about 70 BCF market today, growing to 80 and ultimately to 90 BCF when you get into the middle part of next decade, but about a 70 BCF market call today -- another 25 BCF a day is estimated to be out there in dry gas plays, and available at less than $5.

If that projection is right, then we have the ability to offer to these chemical companies -- and they look at a world market -- we have the ability to offer to those chemical companies here in the United States to invest in a place with abundant current resources and clear visibility to additional resources, and the most robust infrastructure in the world.

I think that's a pretty good combination -- in a good legal system, a stable economic environment, etcetera, the rule of law -- all the things that you look for when you're going to make significant capital investments.

I think that's a pretty good combination. If you think the world market is going to continue to demand the output of these chemical manufacturing facilities, the United States, given that mix, is a pretty good place to put them.

What we're seeing, what we can tell you that we specifically see, is we're seeing facilities that were mothballed in the Houston ship channel reopen and approach our natural gas pipeline folks about signing up for capacity.

We see customers under contract that, as they're renewing, want to renew for longer terms because they can see this coming. We're starting to feel the ground rumble a little bit as these guys are bringing their capital in to fund these additional projects.

Muckerman: You just mentioned the huge potential addition to the 70 billion cubic feet that we're currently producing. What do you see as far as natural gas prices, given that huge influx that could potentially come online if prices slowly start to creep up?

How long do you think it could take for prices to really become uneconomical in the United States for exportation, and for the use of these petrochemical companies?

Kean: We try to stay out of the business of predicting gas prices.

Muckerman: Fair enough, yeah. Probably a good idea.

Kean: Our customers are in that business, or they're investing based on their expectations. For us, where that comes to bear is when they're willing to sign up for capacity. I don't have any special insight into gas prices, but I can point you back to the statistics I gave you to say it looks like this has been a massive game change in what these producers have been able to do -- and all the credit to them.

They've been able to enter into a world where they don't drill dry holes anymore, where they can go out and exploit this resource and practically manufacture the stuff. They get so good at it, and then they get better as time goes on.

It used to be, there would be dry holes and then there would be some good wells, and the good wells would come on the front end. It seems like they've turned both of those things around. They know where to find it, they know where to go back to it if they want to go back and exploit it, and they keep getting better at extracting as they drill additional wells.

That's a big game change, and I think that puts -- at least for a foreseeable future -- kind of a natural ceiling on gas prices.

Now what you may see though, and you do see it in some places, you'll see regional dislocations. Again, that's where we come in. If there's a dislocation in price between what it's going for in the Marcellus, which there is right now in Pennsylvania versus what it's going for in Boston, that's when additional pipeline transport capacity needs to be developed.

I think you'll see those kinds of dislocations and that will drive additional infrastructure investment. We've got about $800 million worth of projects just getting gas out of the Marcellus alone, and I think there's more of that to come.

I think overall, gas production here and what the producers have been able to accomplish puts kind of a natural ceiling on that price, but you'll see the dislocations that will need to be bridged with additional infrastructure investment.