On January 31, 2012, MarkWest announced its intention to spend major capex on processing and fractionation infrastructure in the Marcellus and Utica shales, but the announcement, while welcome, comes as no surprise to the industry. The company has a reputation for double-digit growth—and then some—and promises more of the same in 2012.
MarkWest Energy Partners LP is a publicly traded master limited partnership (MLP), formed in January 2002, which focuses on gathering, processing, fractionation, storage, transmission and marketing of gas and natural gas liquids, and gathering and transportation of crude oil.
The majority of its growth, since 2007, has focused on midstream development in emerging-resource plays. As a result, it boasts a strong presence in the Marcellus, Huron-Berea, Woodford, Granite Wash and Haynesville shale plays—five top plays that are expected to be significant sources of domestic natural gas production for the U.S.
What's next for the venerable player? The Utica, naturally, answers John C. Mollenkopf, the company's senior vice president and chief operating officer.
Mollenkopf became chief operating officer for Markwest Energy Partners LP in January 2011. Prior to this, he served as the chief operations officer of the company's general partner since October 2006, senior vice president of the southwest business unit since January 2004, vice president of business development since January 2003, vice president of the Michigan business unit of the general partner since its inception in May 2002 and in the same capacity with MarkWest Hydrocarbon since December 2001, among other positions.
John C. Mollenkopf, senior vice president and chief operating officer of MarkWest Energy Partners LP, discusses the Marcellus, the Utica and the company’s plans for the future.
MIDSTREAM: MarkWest has had an exceptional growth history.
MOLLENKOPF: Yes. Actually, MarkWest has been around since 1988. We were a private company until 1996, when we went public as MarkWest Hydrocarbon Inc. Then, in 2002, we formed MarkWest Energy Partners LP, which is our MLP. Just prior to that initial public offering, MarkWest's market cap value was about $50 million. Today our market cap is about $5.7 billion. We've grown dramatically since 2002.
MIDSTREAM: How did you achieve that growth?
MOLLENKOPF: In the initial years, just after the IPO, we grew quickly through acquisitions. We made several acquisitions between 2003 and 2005, which led to the company doubling its size in each of those early years. But in 2005, the acquisition market became expensive, so we began to focus on organic growth projects—primarily in unconventional resource plays.
MIDSTREAM: Did you experience problems due to that fast growth rate?
MOLLENKOPF: No. In fact, we generated a very high customer satisfaction rating. We have been ranked first or second in midstream customer satisfaction since 2006, in the Energy Point Survey, and we finished first in the industry in the most recent 2011 survey.
MIDSTREAM: It seems that MarkWest has always worked closely with Range Resources in the Marcellus.
MOLLENKOPF: We teamed up with Range Resources in the Marcellus in 2008. We signed a contract in June of that year, and by November we were flowing gas through five compressor stations and an interim refrigeration plant, called the Houston plant, which is in Washington County, Pennsylvania. Today, our Marcellus system has grown to become five cryogenic processing plants, with capacity for 625 million cubic feet per day of gas, and includes more than 200 miles of gathering lines and is the largest fractionator in the northeast. We are currently processing about 500 million cubic feet per day.
MIDSTREAM: And recently MarkWest has formed a new joint venture.
MOLLENKOPF: Yes, with the Energy and Minerals Group (EMG). EMG was a great partner for us in the Marcellus shale development. We began working that play in the middle of 2008, but the stock market crashed shortly thereafter. We brought EMG in as a financial partner that also provided significant industry knowledge and experience. EMG owned 49% and we owned 51% of that development. Together, with EMG, we built the Marcellus infrastructure. So at the end of 2011, we bought the 49% from EMG so we could invest, as a partnership, in the Utica shale, where we plan an aggressive Utica shale development with EMG. MarkWest is the operator of the Utica joint venture with 60% ownership, with EMG owning the remaining 40% and the requirement to fund the initial capital in the Utica.
MIDSTREAM: Which areas of the Utica will you target?
MOLLENKOPF: We are building the Harrison County fractionator in a central location where natural gas liquids (NGL) from the Utica and the Marcellus, specifically the Majorsville complex in northern West Virginia, will be fractionated. We are also building a 200 million cubic feet per day gas-processing plant in Harrison County and another processing plant in the adjacent county of Monroe. We have our eyes on expanding further into the Utica shale as it develops.
MIDSTREAM: Do you think the Marcellus midstream infrastructure is nearing completion?
MOLLENKOPF: Because of the quality of the reserves, the location near the northeast market and the strong economics of play, the Marcellus will continue to develop rapidly and require significant midstream infrastructure. We have invested more than $1 billion in midstream infrastructure in the Marcellus, and our system extends south into northern West Virginia, where we are building two gas-processing complexes. We are connecting the two processing complexes together with an NGL pipeline that will extend north to our Majorsville and Houston complexes. So there is actually a significant midstream infrastructure for the rich-gas production in that area. I think you will see us continue to expand that system, as we have a very aggressive capital program slated for 2012 and beyond.
MIDSTREAM: What about ethane overproduction issues?
MOLLENKOPF: We are currently building ethane infrastructure in conjunction with Sunoco Logistics Partners LP, as we previously announced. The Mariner West project will take ethane from the Marcellus gas up to Sarnia, Ontario. That is scheduled to come online in 2013. We are also working with Sunoco to develop the Mariner East ethane project to transport Marcellus ethane from Philadelphia via barge to both the gulf coast and international markets. Finally, other announced projects are in the works to add additional capacity for ethane production. We are integrating our fractionation facilities in Harrison County, to provide our customers with maximum market access and optimum economics for their NGLs.
MIDSTREAM: Some reports indicate that the Monroe and Harrison systems will cost about $500 million.
MOLLENKOPF: We do not typically disclose project-level capital forecasts, but it's a very exciting play and we believe the development plan required to support our producer customers in the Utica will exceed $500 million over the initial two to three years of the development. I also want to mention that there will be a lot of jobs created due to the tremendous amount of construction labor that will be required to build the midstream infrastructure. Our initial development plans will require 500 to 600 contract jobs and we hope our permanent, full-time positions in Ohio will grow to about 150 during the next five years.
MIDSTREAM: Where might you put your headquarters for that work?
MOLLENKOPF: We're probably going to have an office in Harrison County, close to our assets. We are working on the details for that. That will be similar to what we did in the Marcellus shale, where we had no employees in June 2008. Today, we have more than 140 employees just south of Pittsburgh. The development in the Utica looks to be similar, so we hope to have an office near the assets in Ohio.
MIDSTREAM: Do you see any challenges to developing these reserves?
MOLLENKOPF: It is more challenging to develop midstream infrastructure in the northeast, mainly due to population density, the terrain and the regulations, which are somewhat tougher than in Texas and Oklahoma. I think a lot of that has to do with the maturity of the basins in the southwest. But we are seeing some changes in the state regulatory agencies in the northeast. They are trying to get their arms around how to efficiently develop the shale and still achieve their environmental and economic objectives. I hear good things from the governments in Pennsylvania and Ohio, which are encouraging the development of the shales. While it is a little more difficult than it would be in Texas or Oklahoma, the rules are such that it can be done with an eye toward environmental sensitivity and efficiency. We think it is an attractive place to invest.
MIDSTREAM: Are you seeing any cost escalations in these two major buildouts?
MOLLENKOPF: Yes, the costs have definitely increased during the past three years, which is a sign of the success that everyone has had and the demand for qualified construction contractors. We've seen the costs go up because there is so much activity in the area and all across the country for natural gas.
MIDSTREAM: Has that been a problem?
MOLLENKOPF: No. We anticipate those increased costs and schedule impacts when we put our deals together. We have a lot of experience from building the Marcellus system, so we feel good about our operational and financial projections.
MIDSTREAM: Are you worried about continued low natural gas prices?
MOLLENKOPF: Back in 2008, we made a concerted decision to focus on liquids-rich plays for our gathering systems and our processing plants. That strategy has proven to be a good one because the producers still have good netbacks in the plays that are liquids rich. There is quite an upgrade for NGLs on the east coast, as well, because of the demand for propane and other products. We intend to continue to focus on those areas where the liquids prices are important to the economics of the play. The impact of shale development will likely keep gas prices fairly low for the next few years as demand for natural gas continues to ramp up. However, we continue to be bullish on NGL pricing driven primarily by worldwide petrochemical demand.
MIDSTREAM: Going forward, does MarkWest plan to continue to grow organically?
MOLLENKOPF: Yes. We have long-term contracts in place for a good portion of the developments we are undertaking. In particular, the Harrison fractionator is anchored by the liquids that are coming online in the Marcellus shale. We needed to build an expansion to our Houston fractionator, so we made the decision to build that expansion in Ohio, in the heart of the Utica shale, which will serve the Marcellus and put us in a great position to serve the Utica producers as well. For the next three to four years, I anticipate we will be focused on the deals that we've put in place and building the gas plants, the fractionator and the ethane infrastructure for the eastern shales. That said, we continue to evaluate accretive acquisitions that complement our rich-gas midstream strategy.
MIDSTREAM: Given that you have no involvement, any thoughts on the Keystone XL pipeline issue?
MOLLENKOPF: My thought is that it makes a lot of sense to bring in oil from our friends in Canada to offset oil from the Middle East. There are a lot of politics involved in that pipeline, but we sure would support it, because we think it would strengthen America.
MIDSTREAM: Do you think the U.S. will, at some point, export natural gas?
MOLLENKOPF: I think it is a definite possibility. It's amazing how the gas situation has changed from five years ago when we thought we would be importing liquefied natural gas. Now, there are tremendous resources in these shales. The reserves are outstanding and the technology has improved to such a point that we have put ourselves in a great position to have many years of this very economic resource for the country. I think there is a chance of exporting, due to the surpluses that are likely to occur from these successful shale developments.