Gathering and Processing Agreements and Their Impact on Asset Value
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A review of the basics of gas midstream, the contracts that manage it, and some key considerations to evaluate when reviewing an agreement with limited time
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Gathering and Processing Agreements and Their Impact on Asset Value
- 1. Gathering and Processing Agreements and Their Impact on Asset Value
- 2. Gas & NGL Midstream Process Dry Gas Plastics; Propane & Propane Accessories; Gasoline (Ethane, Propane, Butane, Pentanes+) Trucks/Rail/Pipeline
- 3. 1. Midstream Provider’s opportunity to recover the substantial amount of capital needed to construct the infrastructure for gathering and processing Producer’s gas 2. Producer’s mechanism for controlling the midstream process 3. No standard form, unregulated, confidential, and vary in scope and complexity 4. Can have very long terms (up to 10+ years) Gathering & Processing Agreements
- 4. Commitments 1. Midstream Provider’s Commitments • Gathering • Treating • Processing 2. Producer Commitments • Volume • Dedication
- 5. Volume Commitment 1. Fees for delivered volume PLUS 2. Fees for any amount of volume that was below a minimum volume amount
- 6. Dedication 1. Commits gas to the Midstream Provider • Acreage (sections or counties) • Wellbore 2. “Covenant Running with the Land” or “Binding on the successors and assigns of Producer.”
- 7. 1. Fixed Fees • Can be tied to volume or specific processes 2. Percent-of-Proceeds (POP) • Tied to commodity prices Fee Structures RiskProducer Midstream Provider POPFixed FeeFixed Fee + Vol Commitment
- 8. 1. Uneconomic Clauses 2. Midstream Provider Discretion 3. Overbroad Force Majeure Clauses or Lack of Performance Standards 4. Hidden Costs • Non-transparent passthrough fees • Drips Open Ended Contract Language
- 9. 1. Inform the valuation process: type of fees and amount, age of system, connection costs, other terms discussed 2. Renegotiate the contract What you should do about it Leverage Producer Midstream Provider Before Drilling Program Before acquisition Before/ During PSA After Well Connection (Good luck!!!)
- 10. Questions? Dan is an experienced Oil and Gas attorney and Registered Patent Attorney. His current firm, Kearney, McWilliams & Davis, specializes in Oil and Gas transactions and title, as well as the development, operation, and protection of business and personal property interests. Dan graduated with a bachelor’s and master’s degree in Chemical Engineering from Auburn University and received his Juris Doctorate from Baylor University School of Law, where he graduated cum laude and was associate editor of the Baylor Law Review.
Editor's Notes
- Yourselves, as Landmen … front lines of acquisitions and development … have excellent opportunity to identify risk and create value for your business unit and company If I’m successful, you’ll leave with a better understanding of Gas Gathering and Processing Contracts to do it. Context… In 2012 … COP … group designed … My opportunity came from engineering and law degrees … group was composed of Landmen, production engineers, and accountants. Group became integral to company success as the industry transitioned to a lower commodity environment and from focus on increasing shareholder value through proving reserves to profitability on a per-well basis.
- Midstream includes both Oil and Gas/NGLs This presentation will focus on Gas/NGLs Gas Gathering and Processing is the system of pipelines, compression, treating, processing, and fractionation It’s expensive capital investment Multiple pieces to go wrong, any of which can shut in the well, including oil