Kinder Morgan (KMI -0.17%) spent most of the past year and a half high-grading its growth project backlog, trimming it back to a more manageable size. This process led the company to pull the plug on lower-return projects and secure joint venture partners for others. With that process winding down, Kinder Morgan has recently turned its attention back to adding new projects to the mix by welcoming shippers to join in on the proposed Gulf Coast Express Pipeline. It's a project that came closer to reality this week when the company signed on DCP Midstream (DCP) as a partner for the project.

Jumping aboard the Express

Kinder Morgan's proposed Gulf Coast Express Pipeline would move natural gas from the red-hot Permian Basin to the Gulf Coast of Texas, where it could feed into upcoming petrochemical plants and liquefied natural gas (LNG) export facilities. The company hopes to have the 430-mile pipeline in service by the second half of 2019. However, it still needs to secure shippers that will agree to fill enough of the project's proposed capacity of 1.7 million dekatherms per day to make it worth the investment.

Pipes laid out for a natural gas pipeline.

Image source: Getty Images.

Kinder Morgan appears to be off to a good start after DCP Midstream agreed to not only become a shipper on the project but join Kinder Morgan as a development partner. As the largest natural gas processor in the U.S., including a considerable installed capacity position in the Permian, DCP Midstream is an ideal partner because it has access to gas that needs an outlet. Overall, DCP Midstream processes 1.3 billion cubic feet of gas per day in the Permian and markets 600 million cubic feet per day in the region. For perspective, that's a little less than half of the Gulf Coast Express' proposed capacity. That's not to say all that gas would end up flowing through the proposed system, but DCP Midstream certainly has access to an abundant supply of gas, which makes it an ideal partner.

Kinder Morgan still needs to secure more shippers on the project before it's a sure thing. However, it pointed out that it had seen a "tremendous level of interest" on the project so far.

What's driving this interest?

While the Permian Basin is known more for its oil production, the region also produces a tremendous amount of associated natural gas. In fact, at 7 billion cubic feet per day (Bcf/d) it's the second-largest gas producing region in the U.S. behind the Marcellus shale. Because of its high gas content, as oil production grows, so will gas output. That has certainly been the case for leading Basin acreage holder Occidental Petroleum (OXY 0.44%). Last year, its oil equivalent production grew by 13% while its natural gas and natural gas liquids (NGL) production grew at an even faster 20% clip due to the type of wells drilled last year. With Occidental Petroleum forecasting 20% to 30% compound annual production growth over the next three years, it'll need an outlet for its growing supply of associated natural gas.

Occidental Petroleum is just one of the many oil companies expected to use the Permian to fuel production growth over the next few years. According to estimates by Pioneer Natural Resources (PXD 0.17%), the Basin's oil output will increase from roughly 2 million barrels per day up to 5 million by 2025. Given the gas-rich nature of many Permian wells, its rising oil production could more than double the Basin's gas output by 2025, with Pioneer projecting 15 to 16 Bcf/d. In fact, Pioneer alone expects to grow its production from 171,000 BOE/D up to 1 million BOE/D over the next decade, with roughly 30% of that output gas and NGLs. Needless to say, the gas is coming, which means the industry will need to build more pipeline capacity.

Investor takeaway

Oil might be what's drawing producers to the Permian, but that oil comes with an abundance of associated gas production that will need a market outlet. That's an opportunity Kinder Morgan hopes to capture by proposing the Gulf Coast Express Pipeline, which is becoming closer to a reality given how quickly leading gas processor DCP Midstream signed on to the project. If this project does move forward, it will help drive cash flow growth, which Kinder Morgan could then use to boost its dividend.