?In January of this year, Alan Armstrong succeeded veteran Steve Malcolm as chief executive officer of Williams and its master limited partnership (MLP), Williams Partners LP, which holds most of the company’s midstream and interstate gas pipeline assets.

Shortly thereafter, in February, Williams announced a plan to separate the company's businesses into two stand-alone, publicly traded corporations. Williams plans to separate its exploration and production business via an initial public offering in third-quarter 2011 of up to 20% of its interest and, in 2012, a tax-free spinoff to Williams shareholders of its remaining interest.

Following the spinoff, Williams’ largest component will be its ownership interests in Williams Partners, including ownership of the controlling general partner interest, as well as a 73% limited-partner interest. Williams will continue to hold and grow its Canadian midstream and U.S. olefins businesses. Williams also owns a 25.5% interest in the Gulfstream interstate gas pipeline system, which it plans to drop down to Williams Partners in exchange for cash and/or additional partnership interests.

Williams Partners will continue to be a leading diversified MLP, with nine gas processing plants, eight separation/dehydration/treating plants, 8,500 miles of gas- gathering lines, and deepwater infrastructure, and operate some 14,600 miles of interstate natural gas pipeline, including Transco, Northwest Pipeline and Gulfstream (partially owned by Williams) systems that move more than 11 billion cubic feet of gas per day.

The company’s upstream business will be one of the largest independent producers of natural gas in the U.S. On December 31, 2010, it reported some 4.5 trillion cubic feet equivalent (99% natural gas) of proved reserves. The new E&P will have relatively undeveloped acreage positions in the Marcellus shale and North Dakota's Bakken oil play, as well as large, established positions in key Rockies basins, including the Piceance, Powder River, San Juan and Green River. Also, it has positions in the Barnett shale and Arkoma Basin. Through its controlling 69% interest in Apco Oil and Gas International Inc., it has significant South American reserves and production in Argentina and exploration and production contracts in Colombia.

Overall, the company is huge and getting bigger, but Armstrong has a firm grip on the wheel, definitive ideas for the direction of the company and its potential for growth, and the experience to drive it to future success.

Before succeeding Malcolm, Armstrong served as president of Williams’ midstream businesses in Canada and the U.S. Previously, he was vice president of gathering and processing from 1999 to 2002, vice president of commercial development from 1998 to 1999, vice president of retail energy services from 1997 to 1998, and director of commercial operations for Williams field services-Gulf Coast from 1995 to 1997. He joined Williams in 1986 as an engineer.

In addition to his position at Williams, Armstrong serves as president of the Gas Processors Association and is on the board of directors of the Natural Gas Supply Association.

From his office, Armstrong sees vast potential for the U.S. midstream industry as a whole, driven by upstream growth and hungry downstream markets. Yet, he says, inconsistent and even contradictory regulations could be a roadblock to that growth.

?New Williams chief executive Alan Armstrong sees vast potential for the U.S. midstream industry, driven by upstream growth and hungry downstream markets.

MIDSTREAM: What is your opinion of the current state of infrastructure in the U.S.?

ARMSTRONG: I see potential. There will be a lot of new midstream infrastructure needed to support new shale-gas plays. The growth of U.S. gas supply is dependent on new areas, places where we historically didn’t have much infrastructure. The new supplies, and our ability to extract them at ever-lowering costs, is certainly beneficial to our country, but with that comes a need for significant new gathering, compression, and in some cases, the processing of rich-gas volumes.

Also, once those volumes are processed, we have to do something with the liquids. It can require fractionation, transportation, and, ultimately, expansion in the petrochemical space as new gas supplies become more abundant and dependable. The nation’s current infrastructure is in no way adequate to serve the developing shale plays we now have.

MIDSTREAM: Where are the major growth areas?

ARMSTRONG: The Marcellus shale play is a good example of a growth area where there have not been existing and substantial oil and gas operations, so it lacks sufficient infrastructure. Even though the industry in Pennsylvania goes back a long way, it didn’t have the high-pressure, high-volume gas production we see there today. The Bakken play in North Dakota is another example. Most of the growth areas center around serving these and other new shale plays, not just in the immediate areas, but also to support the natural gas liquids and the downstream petchem business.

Also, we have seen producers that are barely capitalized well enough to drill all the wells they have to drill. Those producers are certainly not capitalized enough to drill and also build gathering systems. We are seeing a lot of producers look to midstream companies that are better capitalized to build out the infrastructure.

MIDSTREAM: What are your plans?

ARMSTRONG: At Williams, we will be focused on making sure that, over time, we are producing a strong return on capital for our shareholders, and increasing distributions from our partner entity, while we continue to grow organically. Last year, Williams, as a whole, spent about $4 billion on growth, and we will continue on a fairly hefty growth trajectory. Of last year’s growth capital, about two-thirds of that was spent on organic growth and the rest was used for acquisitions.

MIDSTREAM: Why do you prefer organic growth?

ARMSTRONG: Organic growth generally provides higher returns. And it should, because there is inherent risk in building new large-scale projects. So, while such large projects usually provide higher returns, there can be substantial risk, so we work very hard to keep these projects on time and on budget.

MIDSTREAM: Would that encourage you to take smaller projects?

ARMSTRONG: No. We are very focused on being a large-scale service provider. We do not think we are well suited to be a player in smaller scale projects. We have been in the midstream business as a distinct entity as long as any other midstream provider, and we learned that we must have large-scale infrastructure assets, as a basin matures, to have a competitive advantage.

MIDSTREAM: Why is that?

ARMSTRONG: There are several reasons. First, the unit cost is much lower on a large facility. For example, in the late 1990s and 2000, we conducted a study of our own gas-processing assets to find our best returns on capital, versus where we saw earnings growth. We found that small-scale facilities didn’t warrant the capital investment needed to optimize the facilities to get higher recoveries and lower fuel rates. However, in our larger facilities, we can make those investments in high-end controls, better technology, less emissions and more fuel efficiencies. We can spread that investment over the volume of gallons produced.

Because we have been in the business a long time, we have determined from our vantage point that being large scale provides the producers with more benefits, such as reliability, and allows us to provide services at a lower cost. So, strategically speaking, if we don’t think we can be a large player in a large basin, you won’t see us there.

MIDSTREAM: Speaking of gas processing, are you seeing an increase in the demand for gas liquids?

ARMSTRONG: Certainly, especially in the petchem industry. We don’t see a large increase in gas-liquids demand from the motor fuels or heating sectors, but we see a real driver for demand from the chemical industry. The U.S. has such a great advantage because we now have these cheap natural gas liquids feedstocks. In many other countries, olefins crackers and plastic manufacturers are using naphtha derived from oil.

When we compare oil prices to natural gas, it becomes quickly evident how much value there is in being able to use gas-derived feedstocks versus those from crude. As long as we can access gas reserves in the U.S., and stay out of our own way from a regulatory-constraint standpoint, we have the ability to continue to be a big exporter of olefins products that are made from low-cost feedstocks.

I think this is a great story for the U.S. People tend to focus on increasing natural gas demand by using it for transportation or for power generation—both of which are important, and I wouldn’t try to downplay that—but the message of our ability to export products such as polyethylene is not told very well. Yet, I see that as a huge opportunity. The U.S. is not a big exporter of ethylene-derivative products today, but we continue to increase our share of these in the world markets, and I don’t see a reason for that to end any time soon. That holds a lot of promise for the midstream industry, to continue to be a supplier to that opportunity.

MIDSTREAM: Do you see other opportunities?

ARMSTRONG: Yes, at both ends of the midstream spectrum, both upstream and downstream. At the upstream end, we can take some of the capital burden off producers’ shoulders and build the gathering systems in some of these emerging basins. At the downstream end, as our gas and natural gas liquids supplies continue to increase, we are going to continue to see bottlenecks, such as lack of fractionation capacity or ethane storage, even though there is plenty of margin between the gas in the ground and ethylene-derivative products, so there is an opportunity to build those out.

MIDSTREAM: Any major challenges ahead?

ARMSTRONG: Clearly, our regulatory arena has got to get straightened out. We have a lot of infrastructure being held up right now due to lack of clarity on air permitting. Even more complicated than that is the lack of jurisdictional certainty. A local county, township or municipality thinks it has jurisdiction, and the state thinks it has jurisdiction, and the Corps of Engineers thinks it has jurisdiction on the same matter.

In the midstream industry, one group tells us to do it one way, and another says do it another way, and neither group makes allowances for the permitting variances that the others require. It’s not a matter of us saying we don’t want to comply. It is that, literally, we can’t comply with three different requirements that are counter to each other.

As an industry, we are going to have to work harder to bring some highlight to some of these roadblocks. Here we sit, with a great resource and continued pressure to be independent of foreign oil, and we can’t get out of our own way on the regulatory front. That is clearly going to be a challenge for the midstream business. Other than that, I don’t see a whole lot of challenges. We’ve got talented people and well-capitalized companies and great management with expertise, well beyond those of other nations, so we are in a superior position to exploit these resources.

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