CHAPTER 9 GATHERING AND OTHER TRANSPORTATION ISSUES FACING SHALE OPERATORS1
| Jurisdiction | United States |
(May 2014)
GATHERING AND OTHER TRANSPORTATION ISSUES FACING SHALE OPERATORS1
Partner
Weber Law Firm, LLC
Denver, Colorado
[Page 9-1]
ANNE WEBER'S law practice focuses on the full spectrum of midstream sector matters including: acquisitions and divestitures; gas, crude and water gathering; gas compression and processing; buy/sell and other commercial contracts; gas, crude and NGL transportation by pipeline, truck and rail; midstream infrastructure siting and construction; regulatory issues; and environmental clean-up and defense of enforcement matters. In addition to supporting projects within the Rocky Mountain region and other parts of the U.S., her geographic experience covers the western hemisphere including cross-border transactions and projects from the Arctic Circle to the southernmost tip of South America. Anne earned a B.S. degree in geology from the University of Wyoming in 1977 and a law degree from Vanderbilt University in 1990. Her business positions have included oil shale geochemist for the U.S. Department of Energy, field engineer for Dresser Industries, petroleum geophysicist for Amoco Production Company, and chief geophysicist for Britons U.S. operations. Prior to establishing her law firm in 2003, she practiced law with a natural resources boutique law firm and served as assistant general counsel for an international gold company and subsequently a major U.S. pipeline/utility company. She continues to maintain national professional geologist certification with the American Institute of Professional Geologists (CPG 8653). Anne has served the Rocky Mountain Mineral Law Foundation as a Trustee, as Oil & Gas Program Co-Chair for the 2009 Annual Institute, and as a speaker at the 2011 Special Institute for Oil and Gas Agreements: Midstream and Marketing.
I. OVERVIEW OF GATHERING AND MIDSTREAM TRANSPORTATION CHALLENGES AND OPPORTUNITIES IN SHALE PLAY AREAS
As oil and gas production continues to ramp up from new shale play areas or from new shale zones in historic production areas, the midstream sector from the wellhead to interstate transportation continues to be a dynamic space. All shale play producers, no matter which shale play they are producing from or interested in producing from, face the critical issue of moving their production from the wellhead downstream, often before optimum or even sufficient midstream infrastructure is in place. Midstream companies are responding to shale producers' accelerated needs for more gathering and transportation infrastructure by undertaking an intense effort to build-out new gathering and midstream transportation facilities and to offer new types of midstream services to meet the specific needs of shale play producers. The pace of midstream build-out has never been greater. Drilling multiple horizontal wells from single well pads in shale play areas often means that the initial well pad wells are drilled and require physical connections to transportation facilities and disposition arrangements first, followed by infill drilling with greater volumes produced from infill wells drilled from the same pads anticipated over a longer time period.
Although never just limited to gas pipeline or crude oil trucking facilities, gathering facilities especially in the newer shale play areas, increasingly encompass various and multiple segments and modes of movement including: crude, water, gas, condensate and NGL pipelines; trucking; rail; and barge. It is not uncommon to see crude oil trucked from the lease to a crude oil pipeline, flowed by one or more crude pipeline systems to a rail terminal, and then moved by rail to an area outside of the traditional Gulf Coast refining and petrochemical belt. It is also not uncommon to see several segments of gas gathering, and even processing, located upstream of the interstate gas transportation pipeline.
At the same time, new and additional midstream services have emerged or gained importance, in addition to gathering and transportation. Water supply and disposal; leasehold gas lift and fuel
[Page 9-2]
supply; leasehold gas liquids separation and conditioning; and water re-use and gas re-injection; are among an expanding variety of field services being offered by midstream companies.
This paper provides a foundation for the successful negotiation and implementation of the necessary gathering and transportation arrangements from the perspectives of both the operator of the shale wells - the "shale producer" or "producer" and the gatherer/transporter - the "midstream operator" or "midstream company". The presentation that accompanies this paper will follow two different shale play producers, each having different business objectives, funding sources, and risk tolerances as they negotiate with two different types of midstream operators, and navigate dramatically different paths to secure the gathering and transportation arrangements that best meet their individual objectives.
II. THE ROLE OF MIDSTREAM IN SHALE PLAY AREAS
A. Midstream -- what is it? Because there are no uniform definitions or frameworks for addressing "gathering" and "transportation" - either between and among government regulators or between gas and crude oil, for example - the terms "midstream" or "gathering and midstream transportation" will be used interchangeably in this paper to define the scope of facilities and necessary services required to move molecules from the wellhead to points downstream where they are either used and consumed, disposed of, or more typically interconnect with interstate transportation to locations of further high-grading and end use.
1. Upstream/Downstream Link. Midstream is the critical industry sector link between dramatically different upstream and downstream industries. Midstream gathering and transportation facilities provide the physical connection and measurement between wellheads upstream and downstream interstate transportation facilities owned/operated by others. For example, the midstream sector is typically the bridge between measurement of gas in volume in cubic feet (Mcf) at the wellhead and measurement of gas in heating value as British Thermal Units (Btus) past the wellhead.
2. Supply/Demand Link. Midstream is the critical link in the energy value chain. Midstream services, such as gas processing, typically add value (greater value than the cost of those services) to the production stream by moving, and often enhancing, the raw production from the extraction and supply side of the energy value chain to the demand side of the energy value chain.
3. Transportation Link. Midstream is the critical and first transportation link to move the oil and gas molecules from the extraction point, the well or wellpad, to the point where further transportation is available to take those molecules to the demand location (petrochemical, refining and utility), and encompasses trucking and rail in addition to pipelines.
4. Field Services. Another term for the midstream sector is "field services", because it is typically a services sector, as well as a transportation sector. One analogy is the air transportation sector. The airline industry provides transportation, but also increasingly
[Page 9-3]
offers level of service options at different price points, with price also varying depending upon supply and demand. Large air carriers typically have larger interconnected transportation networks with more options compared to smaller or regional carriers that may offer a greater local service or value, but within a more limited scope.
B. Stuck in the Middle. A midstream company must correctly identify all risks and liabilities posed by upstream and downstream contracts and facilities and either not get stuck with them or make sure it is adequately compensated for assuming them - a difficult task. For example, a midstream company must continually monitor downstream quality specifications to ensure that it tightens its quality specifications when the downstream interconnecting facilities tighten theirs. Otherwise, in a worst case scenario, the midstream operator might be required to receive production into its gathering facilities that is off-spec and subject to rejection by the downstream interconnecting facility, and the midstream operator may not have the right to perform the midstream services necessary to address those quality issues.
Midstream is more than just moving a substance down a pipe. It is not an area to "dabble in" as there is little room for error. Successful midstream companies intimately understand midstream operations and efficiencies, which are often equal parts art and science, and costs of midstream facilities. Midstream profits are often expressed as cents on a dollar, and midstream services are required 24/7 over the course of many years. Midstream companies must satisfy their producer customers and obtain and maintain connections with dramatically different downstream facilities and markets, while still trying to eke out profits and maintain their own facilities in compliance with regulatory changes and technological developments.
III. NEGOTIATION OF GATHERING AND MIDSTREAM TRANSPORTATION ARRANGEMENTS IN SHALE PLAY AREAS
A. Starting Points for Negotiation.
...1. No One Stop Shopping for Producer. A good starting place for the shale producer is to identify upfront all arrangements needed for the disposition of the major hydrocarbon and the non-hydrocarbon components of its production stream: crude oil, raw gas with or without natural gas liquids content, water, carbon dioxide, etc. Even for production from a single well, multiple contracts are needed - at least for the produced gas, crude oil, and water components of that single well's production stream. This author has never seen even gas and crude oil gathering, for example, handled within the same gathering agreement, probably because those production
To continue reading
Request your trial