CHAPTER 3 ANATOMY OF A COMMERCIAL GATHERING PROJECT
| Jurisdiction | United States |
(Apr 2018)
ANATOMY OF A COMMERCIAL GATHERING PROJECT
Andeavor
Denver, CO
Aaron O'Connell
Hogan Lovells US LLP
Denver, CO
Anne Weber 1
Weber Law Firm, LLC
Denver, CO
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CRISTOPHER J CASTILLO is Senior Counsel at Andeavor, in Denver, CO, where he focuses on creating value related to Andeavor Logistics LP's assets and entities. Mr. Castillo served from 2007 to 2015 as corporate counsel for Questar Corporation and QEP Resources where he had cradle-to-grave legal responsibility for numerous multimillion dollar midstream gathering and processing projects. Since graduating from law school in 1996, Mr. Castillo has represented oil and gas production, midstream, logistics, transmission, and refining companies, all from a perspective of stakeholder involvement building into and upon the company's brand. His energy law practice includes structuring and documenting energy development transactions and acquisitions, including litigation concerning contract enforceability and interpretation. Mr. Castillo has served as the Chair of the Regulatory Committee of GPA Midstream; has worked in leadership roles in the Colorado, Utah, and Navajo Nation bar associations; and has presented multiple topics at Rocky Mountain Mineral Law's Special Institutes. Mr. Castillo is a licensed member of the Navajo Nation Bar Association and he currently practices in the courts of the Northern Ute Indian Tribe and the Mandan, Hidatsa and Arikara Nation. Mr. Castillo has over 20 years of legal oil and gas experience, and an additional 10 years working in oil and gas financial management and systems development. He received his undergraduate degree in accounting and political science from Weber State University and his law degree from the S.J. Quinney College of Law.
AARON O'CONNELL is an associate in the Denver office of Hogan Lovells. Aaron's practice focuses on oil and gas, mining, and other natural resource projects and associated operations. Aaron represents a broad array of clients in the extractive industries and also maintains a pro bono practice. Aaron is a graduate of the University of Portland and of UCLA School of Law. Prior to attending law school, Aaron worked as an analyst for an energy consulting firm in Denver, Colorado.
ANNE D. WEBER's energy sector experience spans four decades, every commodity pricing cycle, and geography from northern Canada, throughout the U.S., to the tip of South America. She has provided the strategic legal analysis, advice, and contracts for hundreds of profitable energy projects across their entire life cycle from new construction to final closure, including billion dollar midstream deals across multiple geographic areas. In 2003, she formed Weber Law Firm LLC, focusing on the full spectrum of midstream oil and gas matters including: infrastructure buildout and consolidation; commercial and marketing agreements; gas processing and crude oil stabilization; water, gas, crude and NGL transportation by pipeline, truck and rail; regulatory matters; and environmental enforcement. Anne earned a B.S. degree in geology from the University of Wyoming in 1977 and worked as a geochemist for the U.S. Department of Energy, field engineer for Dresser Industries, petroleum geophysicist for Amoco, and chief geophysicist for Britoil's U.S. operations. She received a law degree from Vanderbilt University in 1990. Anne served as assistant general counsel for Echo Bay Mines, an international gold company, and subsequently the midstream subsidiary of Duke Energy (now DCP Midstream). She is a certified professional geologist (AIPG-CPG 8653).
I. INTRODUCTION - TODAY'S MIDSTREAM MARKET (Cristopher Castillo)
Rig counts rise and rigs counts fall. Oil and gas prices rise and oil and gas prices fall. While oil is almost like money,2 the currency's value can change on a dime. What was a viable project at the first of the year can turn into a dog within a few months. Acreage dedications and minimum volume commitments once virtually guaranteed a midstream gatherer, transporter or processor's economic position. Now savvy shippers with well-crafted agreements may not only negate a gatherer and processor's acreage dedication or volume commitment, the producer may simply demand that the parties include no such commitment and such demands may be heated due to the gatherer's desire to expend capital or build revenue.3 Such is the market that today's gatherers and processors find themselves.
The domestic shale boom has resulted in an oil and gas production surge that creates prolific opportunities.4 From the geologist to the reservoir engineer, from the frac specialist to the downstream oil or liquid marketer and from the midstream gatherer and processor to the purity product transporter, niches
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can be created, risks can be rewarded and strong customer service can result in long term profits. But the oil and gas business has never been kind to the weak hearted. Today's markets, including today's midstream markets, demand nimbleness, a safety focus, a commitment to cost efficiencies and a relentless desire to meet the producer and downstream market's needs.
The domestic logistics oil and gas value chain runs from the well head in the Permian, Marcellus, Williston Basins, to petrochemical plants in the Houston Ship Channel area, refineries on the west coast, interstate pipelines in the mid-continent and gasoline retail pumping stations throughout the United States, Canada and Mexico. Today's midstream players may be asked to truck or rail a barrel of crude from a well site as often as they may be asked to transport that same oil product by pipeline. As lucrative fields mature, today's producers will undoubtedly call for the midstream gatherer and processor to compress, treat, store or dispose of the producer's product or its by-products.5 This paper cannot address all entity and contractual issues related to the logistics value chain. Rather, this paper will focus first on the basics of three entity structures - equity backed sponsors; joint ventures; and master limited partnerships - and their inherent conflicts. This paper will then briefly address the potential effect of the recently promulgated Tax Cut and Jobs Act on the attractiveness of the MLP entity. Third, this paper will analyze contract structures, including specific terms and conditions, that the oil and gas practitioner can use to maximize the value of a midstream gathering and processing transaction. In this final section, the paper will focus on the three primary phases of midstream gathering and processing - oil, gas and water. After reading and understanding this paper, the reader should have a general understanding of useful entity structures and effective contractual approaches to gathering, treating and processing in today's midstream market.
II. ENTITIES (Aaron O'Connell)
A. Corporate Structures Remain Fluid
While entity structures in the midstream oil and gas sector can be as varied as the imagination of the midstream entrepreneur, equity-backed private investment sponsors, joint venture transactions, and master limited partnerships - bolt on or otherwise - are increasingly predominant. This section II A covers each of these entity structures in corresponding order.
1. Equity-Backed Sponsors
Private-equity investment is especially important for the initial development of midstream assets before the assets mature and generate cash flows, which may make them attractive for more public investment. 6 Equity-backed sponsors will generally have enough liquidity and flexibility to develop midstream infrastructure, particularly at its early stages. 7 Many public corporations and publicly-traded partnerships are subject to public stockholder pressure to generate immediate and sustained cashflows. Public stockholder demand often increases the public corporation's capital costs and equity demands. This creates opportunity for private equity backed companies with specific and focused asset targets, who are not subject to external public stockholder pressures that can leanly operate midstream assets.
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When the private-equity backed company seeks to market its developed assets, the contracts at the operating entity and holding company level become paramount as prospective purchasers evaluate the cash flows related to the operating company. Public investors often see value in long-term contracts held by a private equity company that secure stabile revenue streams and that remain freely assignable. 8
Much has been written about the various alternatives for structuring midstream transactions and development in various Foundation papers, but we will repeat some of the basics and common structures here. 9
2. Joint Ventures
Joint ventures are a common means to hold, operate and develop midstream assets. 10 A joint venture could be a collaboration between an upstream and midstream company (to provide service for the upstream acreage), between two midstream entities in order to pool assets, or to facilitate a number of other strategic alliances. 11 A joint venture is an undertaking between two or more parties, similar to a partnership (but only for a single business opportunity) where the parties pool certain assets and share the benefits and burdens of their operation.
...After forming the joint venture and contributing or developing assets, the participants must negotiate the joint venture's control; that is, the parties must decide how to manage the enterprise. In particular, the parties will need to determine whether each party shares control, or if a single party would solely control the venture ( e.g., with one party acting as a general partner and another acting as a limited partner). If the parties determine that one party is solely responsible for entity management, then minority protections in the controlling
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