Energy Transfer Partners LP plans three new pipelines -- Paris Loop, Southern
Shale and Maypearl to Malone -- in 2008 in the Fort Worth Basin to export
Barnett shale production.

The Barnett shale, first discovered in 1981, holds an estimated 26 trillion cubic feet of gas resources, centered near Fort Worth and covering some 8,000 square miles in 17 counties. Its boundaries are still expanding.

Some say the Barnett shale could possibly be the largest onshore gas field in the U.S. Operators have cracked the code to unlock tight-gas, low-permeability reservoirs with horizontal drilling, hydraulic fracturing, 3-D seismic and new completion technology, allowing production to grow at an ever-increasing rate.

The biggest challenge to the prolific gas-producing area is its constrained gas pipeline take-away infrastructure, according to Jim Simpson, vice president of operations for Golden, Colorado-based Bentek Energy LLC.

Current daily Barnett take-away capacity is about 3 billion cubic feet (Bcf), just slightly more than current production of 2.8 billion a day. This year, new construction projects will add more than 2.5 billion of daily capacity, but that still may not be enough, according to some estimates.

“In a way, Texas gas producers are experiencing a scenario similar to what Rocky Mountain producers were experiencing,” Simpson says. “Production in Texas is at an all-time high and all outlets moving gas out of East Texas into Louisiana and the U.S. Southeast are full. Certainly, the impact on basis differentials is not as dramatic as in the Rockies, but the dynamics of the situation are similar.”

One company working to relieve that constraint is Energy Transfer Partners LP (ETP), which, along with its general partner, Energy Transfer Equities (ETE), has a combined $20-billion enterprise value. Based in Dallas, ETP is the largest transporter of gas out of the Barnett.

Its operations include some 14,000 miles of intrastate pipeline and 2,400 miles of interstate pipe with an additional 400 miles of intrastate pipeline currently under construction. ETP also has gathering lines, three gas-storage facilities in Texas and gas-treating and -processing facilities in Texas and Louisiana.

“The Barnett shale is one of the most rapidly growing producing areas in the nation,” says Mackie McCrea, ETP president of midstream operations. “It is a significant part of the overall gas-supply picture for the nation.

“Currently, the shale is approaching 3 Bcf a day of gas production. There will probably be another Bcf flowing out of the basin this year. Within the next two to three years, the basin will likely exceed 6 billion a day. And I don’t believe that is the end of the story.”

ETP’s Barnett shale take-away capacity exceeds 2 Bcf a day currently. “We anticipate our capacity to grow beyond 3.5 billion by the end of 2008,” he says.

In 2007, ETP completed its 265-mile, 42-inch pipeline that connects its ET Fuel System with its HPL line that travels throughout the Gulf Coast Basin in South Texas and through the East Texas Basin. ETP also completed two compression projects to add 90,000 horsepower to this pipeline, increasing its daily deliverability to more than 2 Bcf to intrastate and interstate markets.

To 3.5 Bcf This year, ETP is constructing its 36-inch Southern Shale pipeline that will originate in southern Tarrant County to deliver gas to ETP’s previously announced Maypearl-to-Malone expansion project. Southern Shale should be completed by the end of third-quarter 2008. Maypearl-to-Malone provides a direct interconnect for Barnett shale production to some of ETP’s other large-diameter pipelines and is expected to be in service in second-quarter 2008.

Once completed, Southern Shale will provide an additional 600 million cubic feet of vital daily take-away capacity to Barnett producers.

“We also have a Paris Loop project. It’s a 36-inch, 140-mile pipeline extending east from the northern producing region of the Fort Worth Basin. We have experienced pipe delivery delays from the mill, which pushed the completion of this project into the second quarter of 2008,” says McCrea.

While the price of steel has nearly doubled during the past three or four years, it has now leveled out, he adds. “Pipeline construction costs have also risen over the past several years. However, we expect construction costs to soften once some nationwide pipeline projects have been completed.”

After ETP’s pipeline construction projects are completed, adequate capacity to satisfy its obligations to producers will be ensured, but production continues to grow as producers try to determine the outer boundaries of the play.

“There has been quite a bit of success out of Hill County, and additional production west and southwest. As the producers establish what the edges of the productive Barnett shale are, we will continue to see volume growth,” he says. Along with take-away capacity, more gas-processing and -storage capacities are needed. ETP currently has some 400 million cubic feet a day of processing capacity in the Fort Worth Basin. It is expanding its Godley plant, from a current capacity of 230 million a day to an additional 170 million. The expansion should be completed this September.

ETP’s working gas-storage capacity includes 7 Bcf in a depleted oil reservoir in the Fort Worth Basin and 7 Bcf at Bethel, a salt dome facility southeast of the Dallas-Fort Worth area. It also has working capacity of 74 Bcf at its Bammel facility, just north of Houston.

Liquids-rich

Crosstex Energy LP is also working to relieve Barnett bottlenecks. The $3-billion-market-cap gas-transportation company, headquartered in Dallas, operates more than 5,000 miles of gas pipelines, 13 gas-processing plants and approximately 200 gas amine-treating plants and dew-point control plants. It provides service for more than 3.5 Bcf a day. Its general partner is Crosstex Energy Inc.

“We’re running as fast as we can,” says president and chief executive Barry Davis. “This play has continued to exceed everyone’s expectations, which is really hard to do in the E&P business. Most of the time, expectations are far greater than the actual production. This play seems to be the exception.”

Crosstex’s Barnett shale assets are the North Texas Gathering System and the North Texas Pipeline, comprising some 700 miles of gathering and pipeline facilities in the area.

Today, Crosstex moves nearly 500 million cubic feet a day on its 137,000-horsepower-compression gathering facilities, and plans to add more capacity. Its main transportation pipeline is the 375-million-cubic-foot-a-day, 24-inch-diameter North Texas line. It moves production from the Barnett shale to East Texas, where it connects with NGPL, Houston Pipeline and end users. “We’re growing every day,” says Davis. “We are continuing to build infrastructure and will be building for several more years. We’ll construct upstream gathering facilities and processing facilities. We are also working on a new 30- to 36-inch-diameter take-away pipeline with a 2009 completion target.”

While the current pipeline projects will increase total capacity to more than 5 Bcf a day and relieve today’s capacity constraints, there are indications that daily Barnett gas production will ultimately grow to 6- to 7 Bcf, he adds.

“There are two 42-inch pipeline projects—by Boardwalk Pipeline Partners LP and Kinder Morgan Energy Partners LP—to move gas out of East Texas to the Eastern U.S. Those will be completed in late 2008 or early 2009, and will connect the Barnett shale to the many pipelines serving the major U.S. markets,” he says.

Crosstex is also building a 29-mile gathering line in northern Johnson County, Texas, to add capacity for producers such as Chesapeake Energy Corp. and EOG Resources Inc. Ultimate capacity of the low-pressure and high-pressure gathering system will be about 400 million cubic feet a day in 2009, when full capacity utilization is expected.

“We’ve had great demand in the Barnett for pipelines, so costs are going up as well,” says Davis. “We’ve seen contractor, labor and steel costs increase fairly steadily over the last three years.” These costs have grown by about 20% in the past two years, but could decline if gas prices weaken.

Crosstex complements its gas-transportation business with 280 million cubic feet of daily processing capacity at three facilities. In areas of shale production that contain rich gas, such as everything west of Fort Worth, Crosstex processes the liquids out of the gas stream. Everything north, south and east is dry gas.

Crosstex’s strategy is to allow production growth to drive the need for more processing capacity. In addition to its current processing facilities, it will build a fourth plant to process an additional 200 million cubic feet a day for a total of more than 450 million a day. That plant will be completed in 2009.

“This is an extraordinary opportunity for the entire industry,” says Davis. “To see what has happened here is just incredible. I drove through the heart of the play recently, and it’s amazing to see the impact on this area of Texas. I think it’s just the beginning. We will probably see this kind of activity for the next 10 years.”

MLP spin-out Quicksilver Resources Inc., a Fort Worth-based E&P company with a market cap of more than $4 billion, produces some 213 million cubic feet equivalent a day from the Barnett. It is the general partner of Quicksilver Gas Services LP, a midstream MLP it brought public in 2007 that owns and operates more than 120 miles of gas-gathering lines and about 200 million cubic feet of daily gas-processing capacity.

“Quicksilver Resources was fortunate to get in early on the southern edge of the play when there was a lot of speculation that it might not work,” says Toby Darden, chairman.

Quicksilver’s acreage is in Tarrant, Parker, Johnson, Hood, Somervell, Hill, Erath and Bosque counties. Its gathering and processing system, called the Cowtown System, serves the majority of Quicksilver’s production as well as third-party Barnett producers. Cowtown take-away capacity, in the form of tailgate gas and gas liquids, is transported to receipt points in lines owned by ETP, Atmos Energy Corp. and Enterprise Products Partners LP.

“For the volumes we anticipate developing ourselves, we have access to sufficient take-away capacity for the near and medium term. Depending on what happens in the play over the long term, we assume there will be additional capacity available,” Darden says.

The transmission pipeline companies, such as Crosstex, Enterprise and ETP, have anticipated growing demand and have been rewarded for their efforts, he says.

Barnett production is expected to increase in the next few years due to down-spacing in the basin. However, the bulk of the large systems are in place, so expansions on those systems are relatively inexpensive. “The biggest challenge we’ve seen, and have avoided to date, is constraint in liquids pipeline capacity,” he says.

The Quicksilver MLP is connected to and has capacity on the two liquids pipelines that serve the play, and are operated by Louis Dreyfus Pipeline LP and Chevron Pipe Line Co. Both have expansion projects to be completed in 2008.

Gas liquids make up a large part of Quicksilver’s sales, and are especially valuable during times of high oil prices.

“We’ve had some great margins on our liquids extractions for the last 18 months or so,” says Darden. “The bulk of our Fort Worth acreage contains liquids-rich gas, in the range of 1,200 Btu. We recover about 115 barrels of liquids per million cubic feet of gas. In total, liquids account for about 40% of our return on investment. We see a need for more liquids take-away capacity in the future.”

One new liquids pipeline may be Oneok Partners LP’s proposed 440-mile Arbuckle Pipeline that could transport gas liquids from processing plants in the Barnett shale and Oklahoma to the Texas Gulf Coast. It could be completed in late 2008. That would give the Quicksilver MLP three pipeline options for its liquids take-away capacity. “Three options are always good for a producer,” says Darden.

The lines would be used to send out liquids production from two existing Quicksilver processing plants, in Hood County, Texas, that process an aggregate 200 million cubic feet a day. Quicksilver is in the process of building a third plant in Hood County, with a capacity of 125 million a day.

Other projects Enterprise Products Partners LP, based in Houston, is building a new 178-mile pipeline, Enterprise Sherman Extension, to provide up to 1.1 Bcf a day of take-away capacity for the Barnett. The 30- and 36-inch-diameter line, beginning near Morgan Mill southwest of Fort Worth, and extending through the center of current Barnett development to Sherman, Texas, should be completed by fourth-quarter 2008. In Sherman, it will connect with Owensboro, Kentucky-based Boardwalk Pipeline Partners LP’s Gulf Crossing Expansion.

Gulf Crossing Expansion will be a 42-inch, 357-mile line beginning in Sherman and continuing to Perryville, Louisiana. When completed in fourth-quarter 2008, its capacity will be 1.7 Bcf a day.

Boardwalk also plans two other pipelines to serve the Barnett and other area gas producers. The first, called Southeast Expansion, consists of 112 miles of 42-inch pipe. It will begin near Harrisville, Mississippi, and extend to an interconnect with Transcontinental Gas Pipe Line in Choctaw County, Alabama, carrying an initial capacity of 1.2 Bcf per day. Expected completion is this quarter.

The second, East Texas-to-Mississippi Expansion, will begin in Carthage, Texas, and continue to Harrisville, Mississippi. That 42-inch, 240-mile line will have an initial capacity of 1.7 Bcf a day and will be completed in late 2008.

Another Barnett takeaway pipeline, Midcontinent Express Pipeline LLC, is a 50/50 venture of Houston-based Kinder Morgan Energy Partners LP and ETP. The 500-mile, $1.3-billion project will extend from southeast Oklahoma, across northeast Texas, northern Louisiana and central Mississippi, to an interconnection with the Transco Pipeline near Butler, Alabama. It will have an initial capacity of up to 1.4 Bcf per day and is expected to be completed by August 2008.