American Oil and Gas Reporter - June 2014 - 139

SpecialReport: Midstream Strategies
At some point, midstream success requires relationships with service providers
whose specialized expertise can help the
producing company move product to
market in order to maximize value. This
is especially crucial in unconventional resource plays onshore, where volumes
are increasing, competitive pressures are
high, and local infrastructure is often constrained. In this business environment, the
ability to access the right markets at the
right times can represent a distinct strategic advantage for an oil and gas operator.
Midstream Decision Making
The big picture in the midstream sector is that growing U.S. oil and gas production tends to get ahead of infrastructure, so producers can find it challenging
to develop the best paths for price discovery and profitability-or even to keep
their product flowing steadily. Producer
net backs can suffer through a lack of
good midstream solutions.
So, how does a producer approach
midstream decisions to maximize the
value of its production? Every situation
is different, and there are no one-size-fitsall solutions. But there are some common
threads of strategy in putting together successful midstream connections.
Looking downstream through the value chain, and forward in time through the
life cycle of production, leads to an integrated midstream approach that includes
a number of considerations.
One of these is connections for oil, water and gas. Crude oil drives the economic bus in many plays, such as the Bakken,
Niobrara, Permian Basin and the Eagle
Ford, but capturing the value of both rich
and dry gas will add to producers' returns.
And, in a gas play such as the Marcellus or Utica, producers still may need to
address some crude or condensate production. Of course, moving water into and out
of the field is a critical and environmentally sensitive job that takes its own kind
of expertise, but often is addressed as a
costly afterthought.
Just as producers forecast production
volumes to rise, level and decline, midstream thinking should look at life cycles.
Early in the life of a well, the need is for
trucks to haul small volumes. Then pipes

have to be laid to gather the commodities.
As the well or field matures, growing volumes require take-away connections to rail
or pipelines. A producer can save a lot of
time and money by creating relationships
with a partner that can "flex" with the
scale of production as it waxes and
wanes.
Multifaceted Service
Clearly, the midstream is more than a
single entity or service. It is transportation
by trucks, rail and pipelines; storage
near upstream development and again
downstream near the customer; processing, pressurization and fractionation of
NGLs; and marketing and delivery of
commodities to customers, whether refineries, industrial users or resellers, including exports of liquefied natural gas,
NGLs, and potentially crude and condensates.
There are a lot of moving parts. Producers can deploy their capital to build the
pieces of the puzzle one at a time, or they
can conserve their capital for production
and seek partners with a full range of services.
The fact is, a midstream partner that already has operations near the area of production can expand capacity or add services more economically than a service
provider that must build from scratch. A
midstream provider can be most competitive by adding to existing operations.
A partner in the region also can expand
more economically than a producer can
build its own infrastructure. However,
scalable basins require multiple midstream service companies, and competition lowers the costs and diversifies the

concentration risk associated with relying
on one provider.
Nevertheless, depending on a producer's overall acreage position, forging
a single midstream relationship in each
production area may make the most
sense for optimal reliability and cost in
time and money.
In partnering with producers ranging
from large-scale international companies to regional independents, as well as
with end-users of energy commodities, we
find that most are looking for integrated
services across the midstream value
chain. Producers standing at the wellhead
want to see all the way to the burner tip
because their connections through the
midstream keep the oil, gas and NGLs
flowing to market-and maximize returns.
Flow Assurance
The most critical factor in selecting
midstream connections is flow assurance. Producers need to ensure that gathering, processing and take-away capacity can keep up with production growth to
maintain a steady flow from their wells.
The worst possible outcome for a producer is to have to shut in a well and suffer
the loss of valuable days, and potentially, long-term production volumes.
Two characteristics of midstream partners are the keys to flow assurance:
* Adequate capacity through transportation and tankage assets to move crude
oil or NGLs, and the capability to store
those commodities when necessitated by
market timing; and
* Access to take-away by truck, rail,
pipelines and export facilities, so produc-

As "virtual pipelines," unit trains carry crude oil from the Bakken Shale to refineries on
the East and West coasts, providing downstream market options to producers.

JUNE 2014 139

American Oil and Gas Reporter - June 2014

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