Crestwood Equity Partners LP (NYSE: CEQP) said May 24 its joint venture (JV) with First Reserve Corp. is set to build a new Delaware Basin cryogenic gas processing plant in West Texas.

Crestwood, First Reserve JV To Expand Delaware Basin Processing Capacity With New Project West Texas Map

The JV, named Crestwood Permian Basin Holdings LLC, has fully sanctioned the construction of the 200 million cubic feet per day (MMcf/d) plant near Orla, Texas, and related infrastructure required to connect the Willow Lake system to the plant and multiple third-party pipelines.

In connection with the expansion, the JV agreed to acquire Crestwood’s Willow Lake gathering and processing assets located in Eddy County, N.M., which are valued at $151 million.

Upon completion of the project, the JV’s integrated gathering and processing footprint will span more than 100 miles and service customers across Eddy and Lea counties, N.M., and Loving, Ward, Reeves and Culberson counties, Texas.

"The announced Orla processing plant and the contribution of Willow Lake to our Permian joint venture with First Reserve is an important step in Crestwood’s strategy of expanding and integrating our Delaware Basin footprint to create a super system that spans over two million acres located in the heart of the most active development counties in the Delaware Basin," Robert G. Phillips, chairman, president and CEO of Crestwood's general partner, said in a statement.

The initial project scope will include the Orla Express Pipeline, a 33-mile, 20-inch high-pressure line connecting the existing Willow Lake gathering system in Eddy to the Orla Plant. The Orla Plant will offer full liquids handling and multiple residue and NGL interconnects.

Initial capital for the project is expected to be about $170 million with an in-service date in the second half of 2018, according to the company release.

"This project, which expands the scope and adds processing capabilities to our joint venture, creates a Delaware Basin infrastructure footprint that we believe is ideally positioned to provide superior netbacks to our customers," Gary Reaves, managing director of First Reserve, said in a statement. "It also will allow us to capitalize on incremental organic growth opportunities over the next 12 months in the Delaware Basin which, in our view, is currently the most attractive onshore resource play in the United States."

The Orla Plant is supported by current dedications from existing Willow Lake customers, including Concho Resources Inc. (NYSE: CXO), Mewbourne Oil Co., Matador Resources Co. (NYSE: MTDR), Cimarex Energy Co. (NYSE: XEC), Marathon Oil Corp. (NYSE: MRO) and ExxonMobil Corp. (NYSE: XOM).

The plant is strategically located to attract processing volumes in Eddy as well as around the Orla Express Pipeline and Nautilus system, the release said. Nautilus is a new gas gathering system for SWEPI LP, a subsidiary of Royal Dutch Shell (NYSE: RDS.A), in Loving and Ward counties, Texas.

The Orla Plant will provide needed incremental processing capacity and enhanced netbacks to producers through improved connectivity to the best NGL and residue gas takeaway options out of the basin.

The JV, focused on developing, owning and operating midstream infrastructure in the Delaware, is owned 50% by Crestwood and 50% by First Reserve.

As part of the JV agreement, First Reserve will fund 100% of the initial capital requirements during the early-stage build-out of the Orla expansion, after which Crestwood will fund 100% of capital requirements until both parties have made an equal amount of capital contributions.

The sale of the Willow Lake assets will be credited as part of Crestwood’s capital requirements to the JV. Capital requirements thereafter are expected to be funded 50/50 by Crestwood and First Reserve.

"As we continue to build out a large integrated platform in the Delaware Basin, Crestwood and First Reserve are aggressively evaluating new organic expansion opportunities for existing and new customers that will further expand our Permian presence and drive meaningful cash flow growth beginning in 2018," Phillips said.

Crestwood will continue to receive 100% of the available cash flow generated by the Willow Lake assets until the earlier of the Orla Plant in-service date or June 30, 2018, at which time the parties will receive distributions on a 50/50 basis.

Following the closing of the Willow Lake transaction, the JV will own all of Crestwood’s Delaware Basin assets, which include the Nautilus gas gathering system and the Willow Lake gas gathering and processing system (including the announced gas processing plant and Orla Express Pipeline) comprising more than 200,000 acres of dedication, 255 MMcf/d of processing capacity, 300 MMcf/d of gathering capacity and more than 360 miles of pipe.

The conflicts committee of Crestwood’s board of directors unanimously recommended this transaction, and the board unanimously approved the transaction. The Willow Lake contribution is subject to anti-trust review, and the parties expect to close the transaction in June.