Shale Changes Producer, Midstream Relationships

The oil and gas shale revolution has changed the way producers and midstream operators collaborate as timeframes and demands have been altered by the pace of production. S&P Global Platts reports the issue was the subject of a panel discussion at the NAPE Global Business Conference in Houston, where participants agreed that the pace at which producers can drill in unconventional plays makes it difficult for midstream companies to keep up.

Marathon Oil Corp. director of marketing and midstream, Tom Lloyd, said his company is now capable of increasing production at a faster rate due to its presence in multiple shale plays, but that accelerated rate has caused problems in finding pipeline connections. “We can [produce] with these unconventional fields much more quickly. The disconnect is: how fast can we ramp up or ramp down, and how do we marry that with midstream assets?” he said.

With the ongoing low-price environment for oil and gas, producers are not interested in just having a connecting pipeline. They are looking for a line that can carry their product to the most profitable locations. “We want to take [production] from the wellhead, through midstream, to whoever can make the most capital out of it,” said Jim Finley, CEO of Finley Resources, a company active in the Uinta Basin. “You need to know the strength and weaknesses of refineries and the strength and weaknesses of the midstreams.”

Lloyd said Marathon Oil has the luxury of being able to move capital to other basins and slow down projects if midstream capacity is unavailable where it is operating. But while Marathon and others have that advantage, midstream companies require some guarantee they will get their money’s worth from a new project, which puts pressure on the producer. “We ramp up, ramp down more easily, and that’s great in many respects,” Lloyd commented. He emphasized that communication and transparency between producers and their midstream partners is paramount, adding, “It’s tough when it comes to five-year, 10-year, 20-year relationships.”

Former DCP Midstream president Brian Frederick said pipeline providers are showing flexibility by assembling agreement terms that are at least partly based on the reliability of the upstream partner. “We would do a lot of different deals, and a lot would depend on the producers themselves,” he said. “[For] good forecasters, we would do one kind of deal. We used to love ownership deals, where the producer would take part ownership because they would have a line of interest.”

Frederick outlined that having a strong rapport is critical in determining how much capacity is needed, as opposed to how much a producer may want. “Midstreamers probably want 80% to 90% utilization. Producers probably only want 50% so they can ramp up quickly and have that extra capacity.”

Further, whereas midstream companies seek assurances they will receive a preset amount of production as part of an agreement, producers look for certainty that pipelines will be constructed on time and connect to the most profitable places. “We want to know that there’s a track record, a history that projects will be done on time and on budget,” Lloyd said. “It has to be at the top of the class in terms of economics.”

(SOURCE: The Weekly Propane Newsletter, March 5, 2020. Subscribe for all the latest posted and spot prices from all major terminals and refineries around the U.S., market analysis and commentary delivered to inboxes weekly.)