photo of Mike Stice

Mike Stice, chief executive of Chesapeake Midstream Partners LP and president of Chesapeake Midstream Development, discusses the Marcellus shale play, natural gas prices and new technology for the future.

Chesapeake Midstream Partners owns, operates, develops and acquires midstream energy assets in the U.S., including gathering, processing, treating and compression services for producers under long-term, fixed-fee contracts. With a strong asset base and extensive intrastate pipeline infrastructure in the Barnett, Haynesville and Marcellus shales and Midcontinent regions, the company operates assets across seven states with an average throughput of more than 2.7 billion cubic feet (Bcf) per day and more than 3,700 miles of natural gas gathering pipelines.

On March 7, Chesapeake Midstream's leader, Mike Stice, was interviewed about Chesapeake Midstream Partners on CNBC's "Mad Money" television show with Jim Cramer, who said that, "with 12% long-term growth and a 5.4% juicy yield," the company is expected to consistently raise its payout.

In fact, on April 27, Chesapeake Midstream Partners declared a cash distribution of $0.405 per limited partner unit for first-quarter 2012, an increase of $0.055, or 15.7%.

Mike Stice was appointed chief executive of Chesapeake Midstream Partners LP in September 2009, and also serves as senior vice president of natural gas projects for Chesapeake Energy Corp. and president of Chesapeake Midstream Development LP, a wholly owned affiliate of Chesapeake Energy, since November 2008.

Prior to joining Chesapeake, Stice spent 27 years with ConocoPhillips and its predecessor companies, where he most recently was president of ConocoPhillips Qatar, responsible for the development, management and construction of natural gas liquefaction and regasification (LNG) projects. While at ConocoPhillips, he also served as vice president of Global Gas LNG, as president of gas and power and as president of energy solutions, in addition to other roles in ConocoPhillips' midstream business units. Stice graduated from the University of Oklahoma in 1981, from Stanford University in 1995 and from The George Washington University in 2011.

MIDSTREAM For an Oklahoma-based company, what's it like to move into the Marcellus shale play?

STICE If you're headquartered in Oklahoma City, Houston or Denver—which a lot of the midstream infrastructure providers are—you're not initially well received. And it's been a challenge to acclimate into the community and to earn those stripes. But it means a lot when people start to appreciate the kind of company we are and are showing what we can be. I very much look forward to being a local. We work with the culture of the local state and local counties.

MIDSTREAM During your extensive career in midstream, have you seen any step changes in technology?

STICE One of the exciting aspects about development is what technology has done in the infrastructure space. For example, back in my day, you literally had drafting tables. Any time you had a change order, it was a major deal. You better get your eraser out. Now, I am thrilled with the technology that we are able to apply, such as global positioning system (GPS) technology. Not only can I tell you where my pipeline is, I can tell you by GPS where the meter run is. A measurement tech literally has a hand-held device that he can log into and say, 'I'm standing at the meter run.' He can hold it over the meter tube and say, 'Here it is,' and it's now logged in back at the headquarters and dialed in everywhere in the system. You want to know where your injection points are, where your corrosion coupons are or to ensure that you have recorded non-destructive testing data to monitor pipeline integrity. Every point along that line tells you where your assets are and what is going on.

MIDSTREAM So GPS is fairly specific now?

STICE Better than that. Not only is it two dimensional with latitude and longitude, we now have the ability to tell the sea level of the pipeline. That's very helpful in an area like West Virginia or Ohio because of the hills and elevations. We have three-dimensional coordinates to show the location of the pipelines. This is something that was theoretically possible, but impractical in the midstream infrastructure business a few years ago.

MIDSTREAM What about new communication technology?

STICE Communication technology is absolutely crucial, especially for emergency-response efforts because, nine times out of 10, poor decisions are made on bad information. With today's technology, we have real-time information about what is going on out there. If an upset, pressure-drop, leak or release takes place that should not have happened, we can immediately see the devices that monitor our pipeline, and we oftentimes have video. In the basement of our building in Oklahoma City, we have real-time pipeline control. Years ago, the cost of radio towers and operating the old-fashioned way was prohibitive, so only the largest of companies made that investment. Now it's money well spent. It's very important to have this technology and embrace it, and we're having fun doing it.

MIDSTREAM Does this technology require a lot of training?

STICE We've got a lot of techie young people who understand this. At 53 years old, I was the average age at ConocoPhillips. The average age of Chesapeake Midstream is 30. Let me tell you, these young people know how to use that technology. Every once in awhile, I find myself saying, 'You can do what? You really can? Wow that's pretty cool.' I have a favorite photograph of our chairman's grandson. It's a classic. He is about 2 years old. He's got a bottle in his mouth, an iPad screen in front of him and he's playing a video game. He's multitasking. Can you imagine what the next generation of children will be capable of doing? It is incredible what new technology can bring.

MIDSTREAM Yet, we still see professional protestors claiming that oil and natural gas drilling and infrastructure is not environmentally sound. What do you say to them?

STICE Our drilling and infrastructure is absolutely sound. Chesapeake has a strong commitment to environmental excellence and safety that is an integral part of our culture and behavior. It's important to recognize that we, as a country, have a unique opportunity here. We can be energy independent. Natural gas can be our transportation fuel and reduce our emissions. Never before have we stood at the crossroads of opportunities to make huge environmental improvements, which we all support, and develop a less costly, abundant resource here in North America. I am pleased to hear that the administration is now supporting this effort and acknowledging the role that natural gas will play in the transportation sector. I think that will make a very important impact going forward. In fact, I spoke with Ford Motor Co. about converting other vehicles to compressed natural gas (CNG) and liquefied natural gas (LNG), and jointly we are doing some exciting things to expand the demand for natural gas.

MIDSTREAM Elsewhere, will Chesapeake Midstream continue to move into liquids-rich plays?

STICE Yes. It is the natural gas liquids (NGL) products that are making the money. Obviously, it's because oil prices are high, and the NGL prices are priced off oil. We have the largest frac spread ever, with natural gas trading on a Btu equivalency of only 15% of oil. Just a few years ago, if someone had told me that that was possible, I would have eaten your hat. But nonetheless, there is a huge margin for NGL processing today. One way to take advantage of that commodity-price spread and build that into your economics is to build your services off the commodity itself, but that's not our business model. Ours is to do everything on a fee basis. To me, that commodity increase or decrease belongs to the producer. We are here to provide a service, to provide the infrastructure and to do so in the most cost-effective manner. When those large frac spreads collapse, your predictable cash flow model goes away. It doesn't fit the master limited partnership (MLP) model. Everything we do is about the end game being part of the MLP.

MIDSTREAM What is your preferred type of gas processing?

STICE We use cryogenic plants, which are standard plants. We go for deep ethane recovery, which gives us the flexibility to meet whatever gas spec or NGL spec is required. Also, we use fabricators that can skid mount the equipment as much as possible. We don't believe in stick building, meaning construction on site. We believe that all of this should be built in a fabricating and manufacturing environment because we can get better quality control there. And in the southern Marcellus, we partner with MarkWest Hydrocarbon and Williams. MarkWest provides the processing for Chesapeake there. Chesapeake Midstream and Williams do the gas gathering, compression and dehydration before the MarkWest facility. In Ohio, we partnered with Momentum Midstream. Similarly, they are doing the processing and fractionation, and we are doing the gathering. This is a good balance, because these developments have to happen so fast that we need partners to expand our organizational capability to deliver on this aggressive timeline.

MIDSTREAM Will you be developing plants of your own in that area of the Marcellus?

STICE You bet. Beyond the initial startup, we are open to building the plants ourselves. Obviously, we have plants in other parts of the country. But here, it's important to take advantage of incumbency. Dominion Transmission had an incumbent plant up and going in Natrium, so Chesapeake obtained 70 million cubic feet (MMcf) per day of capacity in that plant just as we took advantage of the MarkWest footprint. We will add plants as needed.

MIDSTREAM Some processors are having trouble with condensate in the Victory field in West Virginia. What would be your solution to that?

STICE That is also referred to as natural gasoline, and it's highly volatile. Some people even call it crude oil. This is not your 30- to 50-gravity oil that we would often call volatile oil. This is beyond that. This is your 70-gravity C5+. From a hydrocarbon standpoint, if you go through a chromatograph, it looks like C7 and has components of naphtha. This product is difficult to market. It is not heavy enough to go straight into a refinery and make finished products, so people don't like it on the front end of an oil stream. Then again, it is not light enough to make its way into alkylate units or as isobutene or normal butane, even though it has an element of octane in it. So the number one market for this product has been to use it as a diluent. This product is needed in the tar sands of Canada. There is a project coming to try to build a pipeline from the Marcellus and Utica areas west, connect to Southern Lights and then go north into Canada. The goal would be to move this product, which is perfect to blend with the heavy tar-sand oil and make it flowable, then bring that oil back into the U.S. or where the demand is for that blended oil. This product actually has a premium market as a diluent.

MIDSTREAM Do you see any benefits for natural gasoline at denatured ethylene plants?

STICE It can be. I think everybody knows that the real margin for ethylene plants is to crack ethane into ethylene. I've been through this rollercoaster ride with petrochemical plants before. We all want the best deal for ethylene, but we also have a market for butadiene, which is a by-product of a heavier feedstock. We also have a market for propylene, a by-product of cracking propane, and you don't get much propylene out of ethylene cracking and no butadiene. We will focus on ethane, and the petrochemical industry is excited about it. There is a manufacturing advantage in this country, to put in these ethane crackers. Due to the shift from heavy-oil, gasoline and naphtha crackers to the light end, there will be a shortage of those by-products for which this country already has a demand. There will be a new demand swing for those by-products and then somebody will fire up one of those old crackers and use that gasoline for a feedstock, and ultimately get the products from it. Those products have a very thin demand, so you don't need a lot. You probably don't need to build a new facility. There are existing facilities on the Gulf Coast today that you could use to meet that demand.

MIDSTREAM What do you want from your vendors?

STICE The strategy of emailing 5,000 times at every level in the organization to try to get in the door is not a good strategy. That generally is one which puts us off. The best strategy is to work with our local operating teams, especially if you're in the helicopter business, or whatever, and get that first job, and it doesn't matter how big the job is. At that point, a vendor gets a master service agreement (MSA) with us. Once they get an MSA, they are going to see work coming because we are so busy. Rather than come through the headquarters office, go to the people that are actually hiring, and that's usually at the local level. We hire most of our work locally. We do, however, have a centralized procurement group, so a pipe or steel vendor should go to that group in Oklahoma City. The way to maintain business with Chesapeake is to be able to keep up. Not everybody can keep up with us, so speed is very important without compromising quality. The reality of it is that speed does not trump quality. The two have to be done in parallel. Once a vendor has an MSA, they are in our preferred database and will be called upon to bid on our work.

MIDSTREAM What are your thoughts about current natural gas production levels?

STICE This summer will be particularly telling. We have had no winter. We are going to have record inventory levels. Who would have thought we would have more than 2 trillion cubic feet (Tcf) of gas in storage at the end of winter? But we also saw air-conditioning loads last summer at record highs. If we continue to build 3.7 Tcf and have a mild winter again next year, dry gas plays are going to be at a disadvantage, no question about it. We are going to see the drillbit follow the economic stimulus. I don't think anybody should be surprised by that. That said, the price in Europe today is $10 per MMBtu. Natural gas has so many advantages, from an emissions standpoint, from an environmental standpoint and now from a cost standpoint that this country has got to acknowledge those advantages. I do not believe $2 gas is the right price. Yet, the story behind the Marcellus South is fascinating because funding and development costs are very low, so the incremental margin is very good once the leases are acquired, drilling is completed and the liquids are captured. The Haynesville shale has been hit harder—the Barnett as well. But the Marcellus has hung in there pretty well. In fact, we set a new record, on March 4, in the north, where Chesapeake produced 1 Bcf a day. That used to be a lot from one whole company, by the way. And that is just one part of our portfolio. Chesapeake Midstream manages more than 4.5 Bcf per day when you include all volumes.

MIDSTREAM What do you see in the future for gas prices?

STICE I believe gas prices will rebound meaningfully from the decade-low levels seen early in 2012, but it won't happen in 2012 or 2013. It will result from reduced drilling and natural demand responses to the low price. Because of this, the transportation, power generation and export markets offer particularly exciting opportunities. When it does rebound, the Marcellus play in the north is in a great position to take advantage of it. The pipelines to the southeast will help. Pipelines now take the gas to the New York market or other northern demand centers. Soon there will be pipeline connectivity to the south. I welcome the Williams Cos. and what they're doing to build that footprint. Also, the Florida market has a great counter-cyclical load to the northern markets, so this is going to help the Marcellus resource access that market. And it is cheaper to go from the Marcellus to Florida than from the Gulf Coast. The northern Marcellus is well positioned to provide dry gas to all of these markets in North America.

MIDSTREAM Are you involved in Chesapeake's Sundrop venture?

STICE My other job is senior vice president of natural gas projects. And in that job, I act as a consultant for these many opportunities. First, we are trying to make a tank-ready liquid fuel by taking natural gas, blending it with cellulosic biomass and converting it at very high temperatures into what you and I would call gasoline and diesel. We spent $150 million on a venture called Sundrop to actually develop that product. It's very exciting because the whole concept is creating synthetic gas, or syngas. Syngas is carbon dioxide and hydrogen. That's the starting point of making long-chain gasoline fuels. We have to get methane, or natural gas, to let go of its hydrogens. It kind of likes its hydrogens, so you have to do something fairly drastic. This process is high-temperature chemistry. In the past, high-temperature chemistry wasn't possible because this is at a temperature above where steel melts. New materials and processes are now available that make these high-temperature chemistries practical. As a result, we are able to lower both the capital and operational cost of producing this foundational chemistry. Additionally, the process is able to combine the renewable aspects of carbon-rich waste biomass feedstock with hydrogen-rich natural gas feedstock. This is truly a transformative and exciting new technology.