Steve Reese, President, Reese Energy Consulting Inc.

Faced with uncertainty in the NGL price arena, recent declines in prices and a more conservative atmosphere on drilling activity, natural gas midstream firms continue to structure their wellhead contracts toward fee-based margins.

The fact is that NGL prices have fallen. Note the decline on Oil Price Information Service Mont Belvieu Index prices from April 2014 to March 2015:

  • Ethane down 40%;
  • Propane down 50%;
  • Iso-Butane down 50%;
  • Nor-Butane down 52%; and
  • Pentanes down 47%.

Let’s translate this into real numbers for a processor:

Based on a stream of gas with 6.05 gallons per thousand cubic feet (cf) of C2+ where the processor retains 15% of the NGL value, the gross margin (on NGL alone) has declined from a range of 65 cents to  75 cents per thousand cf to 35 cents to 40 cents per thousand cf. For each 10 million cf per day, this represents a revenue decline of about $1 million per year.

Many processors now either offer a blended percent of proceeds contract (a mix of commodity risk and fees) or flat fees reflecting cost of service (opex) plus expected return on capital. These fees may be in the form of dollars per thousand cf, or dollars per million Btu. Some midstreamers have a fee that is “all in” that covers all services, or fees that are broken up by service, i.e., a compression fee, treating fee, processing fee and/or a gathering fee.

From allocated products to ‘fixed’ fuel and recovery

Another change occurring in the commercial arena is the move towards “fixed fuel and recovery” contracts. Instead of passing though actual gathering and plant performance to the producer, many midstreamers are now offering fuel rates and plant NGL recoveries based on a formula. This style takes away any guesswork for the producer in evaluating the midstream facility’s performance, while locking in fuel charges and creating a “virtual” plant for settlement purposes. Under this scenario, regardless of the midstream facility’s performance, the producer is paid based upon the fixed formulas in the purchase contract. In highly competitive areas, this is an excellent tool for a producer to compare “apples to apples” when faced with offers from multiple processors. Obviously, things such as customer service, back office response, accounting accuracy and commercial representation still will make a huge difference as to the preferred midstreamer a producer chooses to do business with.

Continued need for customer service

As the number of new midstream companies grows due to the mass infusion of private equity capital into the space, the intangibles relating to service now seem to be more important than ever. Most facilities that compete in the same basin still have similar operating costs, facilities and expected margins. Many new commercial offerings feature the risk averse terms as outlined above.

Based on my team’s vast experience in representing many producers, consulting for midstream companies and training thousands of midstream employees over the years, we feel that this recent commercial and contractual transformation, continued excellent customer service and knowledgeable midstream employees will continue to improve the efficiencies and structure of the midstream space.       

 Please be on the lookout for my next blog, “New Kids On The Block.”

With more than 30 years of experience in the energy industry, Steve Reese is a renowned lecturer, corporate trainer and authority in the areas of oil and gas production, natural gas and liquids marketing, contract evaluation and negotiation and midstream asset evaluation and management. For additional information, please visit reeseenergyconsulting.com or reeseenergytraining.com. Steve Reese can be reached at: sreese@coxinet.net and 405.216.8855.