Falcon and its subsidiaries and affiliated companies are one of the largest developers and operators of HDMC natural gas storage capacity in the United States. Its NorTex Gas Storage subsidiary owns and operates more than 30 billion cubic feet per day of gas storage capacity and 750,000 million cubic feet per day of deliverability at its Hill-Lake and Worsham-Steed gas storage facilities.

As fuel prices continue to skyrocket early in 2008, almost any investment into the oil and gas industry will be a sound one. But some of the most stable, high-net investments can be found in the midstream sector.

The midstream energy sector primarily consists of pipeline operators that transport oil and gas throughout the United States. These firms, notes Senior Consultant Jamie Webster of PFC Energy’s Global Gas practice, are stabilized by the nature of the industry, which has customers locked into contracts that can last decades.

“Pipelines are built after going through an open season that often locks up initial customers for 10 to 20 years, allowing investors to envision a steady return at low risk,” Webster says. “Given the current volatility and concerns in the broader market, a move to pipelines is a relatively safe option.”

Ernst & Young says new midstream opportunities are emerging in support of the Canadian oil sands, Rocky Mountain natural gas, Barnett Shale and liquefied natural gas (LNG). Standard & Poor’s (S&P) Ratings Services said it expects credit quality in the in the U.S. midstream sector to continue to remain stable in the next year. S&P also said that companies continue to focus on realigning their activities across more stable business lines and on strengthening balance sheets from equity proceeds and asset sales.

Webster took time to speak with Exploration + Processing magazine about the attractiveness of the midstream sector for investors, various factors for success and the effect new energy sources will have on oil and gas.

Exploration + Processing: What is so attractive about the midstream sector?

Jamie Webster: A number of factors have come together that are causing the midstream to be a hot market to invest in. On the demand side, I see some longer-term trends are again picking up, such as expanding natural gas power generation as reserve margins dip, and the increase in renewable generation will need firming while coal is increasingly costly both on a capital cost basis and a risk basis.

On the supply side, liquefied neutral gas projects have to find a market for the landed gas, and given the big slugs that such projects put into the system, pipelines must be sized to take on this new supply. Other supply impacts include increased drilling in new and reworked plays, and a desire to connect this lower-cost supply to premium markets.

The rise of tax-efficient MLPs (master limited partnerships) gives investors a solid, robust return. And the fact that the Federal Energy Regulation Committee will likely allow these types of companies to participate in the proxy group may help to increase tariff prices, and by extension, returns to investors.

E+P: Can you explain the midstream industry’s “open season?”   

JW: The open season is when a pipeline is planning to start up, they have an open season for any expression of interest. “If (there is) interest in moving gas from here to here, let us know,” they say. From there, they proceed to a more formal agreement and usually take a contract for 10 years. This is done before any building is done, so the base revenue requirements are in the bag. This stems from old requirements that make sure pipelines are not all over the country; they would prove there was a demand before they would build. Now, it is also a nice thing from a financial standpoint.

E+P: What factors will have an effect on the success of the midstream sector in 2008? What is the biggest threat to these companies?

JW: The possible inclusion of MLPs in the proxy groups will certainly help, and continued success in onshore drilling will also be a key factor as the expansion continues. Threats include pipeline-on-pipeline competition. There are often multiple pipes vying for roughly the same source-to-sink connection. Higher metals prices could also slow the growth down. As with all things in the energy industry, massive growth often leads to overbuilding and a dip for a few years as the excess capacity is worked off. Pipelines are somewhat shielded from this by the open season process.

E+P: Ernst & Young says “new technologies, like carbon sequestration, may prompt major changes in the way midstream companies conduct business in the coming year.” Do you agree, and what might these major changes be?

JW: I am not sure if carbon sequestration will really hit this year but it represents significant upside potential for these companies. Assuming carbon constraint makes its way into policy and law, coal-fired generators and others will have a demand for piping their carbon to sequestration areas. Expanding their business to include carbon shipping will require relatively little adjustments but represent a new, and potentially large revenue source.