Granite Wash Glory

Today’s low natural gas prices are driving U.S. oil and gas exploration and production companies into oily and rich-gas plays in ever-increasing numbers. And among those plays is the venerable tight-sand Granite Wash play, found in western Oklahoma and the Texas Panhandle. By all accounts, it’s the Lone Star state’s superstar.

In fact, some producers say the Granite Wash is the most economic play now underway, with its high initial production rates of wet gas that can be processed into valuable natural gas liquids (NGLs). Historically drilled with vertical wells, the play is undergoing a renaissance, thanks to new horizontal drilling and completion techniques, which have unleashed the play’s phenomenal potential for profit.

As various producers move their drill rigs from dry-gas plays into the Granite Wash, midstream companies are ready to hook up wells to gathering systems, process rich-gas into value-added NGLs and residue gas, and move the gas and liquids through transmission lines and into waiting markets.

Yet, although the play offers a multitude of opportunities, some challenges still exist. Where the buildout of gathering systems lag behind production, some producers are building their own, which they might or might not monetize at a later date.

Also, midstream companies that have existing significant footprints already in play must determine the appropriate level of expansion to serve their existing customers and new upstream players.

Meanwhile, many newcoming midstream companies have jumped into the fray with quick buildouts, but must keep a wary eye on the play’s well-decline rates, which can reduce throughput through gathering lines as much as 20%. In such cases, an overbuildout could spell disaster.

While no midstream infrastructure company claims to have a crystal ball to foretell the level of future production, savvy midstream companies are fine-tuning their forecasts to project area productions rates—and, in some cases, formulate forecasts better than the producers themselves. It’s a matter of access to markets, timing, flexibility, optimized operations and good relationships, say the midstream operators.

Market access

Market access is a priority for Houston-based Linn Energy LLC, a major upstream and midstream player in the Granite Wash. The company, which is the ninth-largest public master limited partnership (MLP), a limited liability company and the eleventh-largest independent upstream oil and natural gas company, holds some 4.3 trillion cubic feet of U.S. reserves.

Although the company has holdings in California, Wyoming, North Dakota, Kansas, Illinois, Michigan, New Mexico, Texas, Oklahoma and Louisiana, it plans to continue to focus on the Granite Wash in a big way. The Granite Wash represents about 40% of its operations, and it has some 600 horizontal development locations, a gathering system and access to significant processing capacity to handle production from the play.

“We have our own gathering infrastructure to assure ourselves that we have access to market,” says Mark Ellis, chairman, president and chief executive. But that was not always the case.

“In the summer of 2007, we acquired the Granite Wash acreage position largely from a transaction with Dominion Resources Inc. Production from the Granite Wash was already dedicated to a large midstream company. Since this acreage was dedicated to that midstream provider, everything we did to develop this asset was tied to that company. We worked hand-in-glove with them to ensure that it could expand its facilities to handle our needs as we went forward.”

Control is crucial

The problem with depending upon only one provider of processing and gathering is that any operating upset dramatically impacts the ability to produce and maintain cash flow, says Ellis. Linn Energy needed a hedge against any interruption of its take-away capabilities and processing by a third party. To that end, the company decided to gain control of its own destiny by building additional infrastructure.

“We had the right to build our own gathering system and to reconnect to other parties in the event of deliverability issues. Now we can offload natural gas on an interruptible basis.”

The timely decision assisted Linn Energy early in the life cycle of the development of Granite Wash, he says. Thanks to its own infrastructure, Linn Energy could swing gas to other markets and keep production volumes flowing.

Also, while other operators build gathering systems and then monetize those assets to put capital into higher returns from the drill bit, Linn Energy plans to hold onto its gathering systems to ensure priority deliverability to premium markets. Control is crucial, says Ellis.

Meanwhile, to continue its philosophy of being in control of its own destiny, Linn Energy also built water-handling facilities. Using pipelines, the company moves water to each of its locations and then flows it back to a central location where the water is recycled, ensuring environmentally friendly operations that conserve water.

“We do that because, when you have 600 locations of potential opportunities with 215-acre spacing, you have to take a full-program approach. Now that we are into horizontal drilling, having that optionality is very important because such a significant amount of our growth is here. We need to make sure that we will be able to move our commodity.”

Today, Linn Energy has options for its production with multiple points of access, which reduces deliverability risk. The company’s buildout allows it to access a broader portfolio of third-party expansions, as needed, based on its production growth.

To further reduce risk, the company keeps a keen focus on protecting itself from commodity-price volatility. Its significant hedge position protects its cash flow from oil and natural gas price uncertainty.

“There is no one out there hedged like we are,” says Ellis. “We can weather the downturns that the industry is experiencing today. We anticipated this little bit of crude-price weakness, so a few months ago we added to our crude and natural gas positions. We are sitting in good shape right now.”

Growing production

Linn Energy plans to spend $1 billion dollars on upstream growth through its capital program, which does not include its plant-and-pipeline component—costing some $30- to $40 million during the past few years. The planned midstream expenditures represent significant capital “to put pipe in the ground,” but the investment will enable the company to hedge its operational and market access exposure to back up its growth plans.

And grow it will. In December 2011, Linn Energy picked up some 20,000 Granite Wash net acres that are producing about 70 million cubic feet of gas equivalent per day with high Btu content, and another 40,000 net acres just outside the Granite Wash fairway. The assets, found in Hemphill and Wheeler counties, were obtained via the company’s $555-million acquisition from Plains Exploration & Production Co., which added more than 200 low-risk drill locations to Linn Energy’s Granite Wash portfolio.

“This opportunity came up fairly quickly, and we were one of a handful of parties that got a look at this asset,” says Ellis. “It made a lot of sense for us to do, given the synergistic nature of the acreage because of its proximity to our current activity.”

Linn Energy began drilling horizontally in 2010 and now has 109 operated wells and participates in 35 non-operated wells. This year, the company plans to drill 65 operated and 16 non-operated horizontal wells, focusing on the liquids-rich Carr, Britt, “A,” and Hogshooter zones.

“It’s encouraging to expand our focus from the traditional Granite Wash Carr, Britt and “A” zones to developing the Hogshooter zone, which is predominately oil. This zone is also doing very well. We’ve identified more than 50 potential well locations and drilled three wells in the Hogshooter so far, and we intend to drill at least 10 more there this year.”

Also, the Atoka Wash interval, at nearly 15,000 feet deep, will produce “some outstanding horizontal wells, he says. But the zone is mostly dry gas, so producers are not tapping it for the time being. “We’ve done a few down there, and they have come in at very high rates, so that will become tremendous inventory when gas prices improve.”

Since the acquisition, Linn Energy has used horizontal drilling to increase its net production a whopping 59% by first-quarter 2012. “That clearly shows the level of growth we anticipated and the critical nature of being able to move that commodity to market,” he says. “Pipeline and processing infrastructure are very key to our success.”

With plentiful drilling opportunities, sufficient gathering systems and access to significant processing capacity, Linn Energy sees only one major challenge yet to overcome.

As the Hogshooter kicks off and the area undergoes further development, Linn Energy’s managers would like to see third-party midstream operators ramp up to increase liquids-handling and -hauling capabilities to deal with growth of oil volumes in the Texas Panhandle, he says.

Today, the company uses trucks to move most of its oil production, due to the area’s lack of pipelines infrastructure. In fact, if the oil-handling midstream operators don’t begin an adequate buildout in time, Linn Energy just might build it itself, says Ellis.

Heart of the play

While Linn Energy owns its own midstream infrastructure to ensure optimized operations, other companies specialize strictly in midstream, and some do that very well.

For example, gas gathering, processing, transportation and storage come naturally to Oklahoma City-based Enogex LLC. The 25-year old company is well-positioned in the producing basins of Oklahoma and Texas, including the Granite Wash. The 700-plus workforce of the intrastate natural gas pipeline and midstream service provider operates more than 8,000 miles of intrastate gas gathering and transportation pipeline, one of the largest such networks in the country.

Enogex provides gas-gathering services through its 500,000-horsepower comprehensive fleet and purchases gas from producers. It provides processing services through seven processing plants in Oklahoma. Also, the company operates an intrastate pipeline that moves gas from Enogex’s gathering systems and plant tailgate, and from shippers at 20 major intrastate and interstate pipeline interconnections, for delivery to 26 delivery points across two states.

Also, Enogex sells hydrocarbons to large industrial users and acts as a wholesale supplier to retail propane distributors in Oklahoma.

“The western part of our system is in the heart of the Granite Wash,” says Keith Mitchell, president of Enogex LLC. “That system can move supplies from many different areas to our processing plants, four of which are operating in the Granite Wash today and another that will come online next year.”

The four plants include the South Canadian, Clinton, Thomas and Canute facilities in Oklahoma, and the Wheeler Plant under construction in Texas, which will provide about 200 million cubic feet (MMcf) per day of capacity after its planned startup in August.

To support the Wheeler Plant’s new personnel, Enogex built a field and district office at the plant site. “We used to have a smaller space in the town of Wheeler. We have added technicians, mechanics and plant and pipeline operators in that area, so the area has become a significant district for us,” says Mitchell.

In addition, construction has just begun on the company’s new McClure Plant in Custer County, Oklahoma, which will provide an additional 200 MMcf per day. It is expected to be completed in 2013. Enogex has low-pressure gathering and compression systems associated with these plants, which is part of its total 8,200 miles of gathering and transportations pipeline system.

“We were actually there before the Granite Wash was the Granite Wash,” Mitchell laughs. “There have always been some Granite Wash areas that were developed with vertical wells, but it wasn’t known as it is today. Our original assets were a combination of many historical systems that we were able to tie together to create an overall gathering header.”

Some of the acquired pipelines gathered low-Btu gas that had no need of processing, according to Mitchell. Yet, after the Granite Wash development really took off, Enogex expanded those systems to move gas to its processing plants.

“We increased the capacities on some of the pipelines and installed some loops in certain areas where volumes are growing. But it was good to have the initial infrastructure that we could connect to wells,” he says.

Although Enogex is currently focused on gathering and processing gas, the company might consider offering other services in the future. “We have had some discussions with producers about gathering oil, and we are looking at those opportunities,” says Mitchell. “We have had some producers also asking for water-management services and we are just beginning to do some of that.”

Enogex has a mixture of revenue-generating contract types, ranging from percent-of-proceeds to fixed-fee contracts, so the company has an interest in gas prices. “We believe that we will see a long stretch of low gas prices before we see gas prices return to where they were,” says Mitchell. “There has been so much success by the producers, and while many of them are drilling for NGLs and oil, there is associated gas with those developments. With so much supply, the response to low prices might take a while to work through the system.”

One of Enogex’s secrets to success is to quickly respond to changes in the play. “Sometimes the producers don’t know what their plans for development are until the last minute,” says Mitchell. “You are always kind of behind the eight ball. But with our connective system, we have been able to quickly move gas to where it needs to go to accommodate their growth plans.”

Going forward, Mitchell sees more opportunities in the Granite Wash for gathering and compression. “The jury is still out on whether the producers will need more processing or not, but certainly more infrastructure will be needed in the area.”

New processing

Tulsa-based Superior Pipeline Co. LLC is also pleased to be a Granite Wash player. Overall, the company buys, sells, gathers, transports, processes and treats natural gas in Oklahoma, Texas, Kansas, Pennsylvania and West Virginia. Its 120-employee workforce operates three treatment plants, 11 processing plants and 35 gathering systems with more than 935 miles of pipeline, with throughput of about 250,000 MMBtu per day and some 650,000 gallons per day of NGLs processed.

Superior was formed in 1996 by current president Bob Parks with Unit Corp. as a partner owning 40% of the company. In July 2004, Unit Corp. acquired the remaining 60% of Superior, at which point Superior Pipeline became a wholly owned subsidiary of Unit.

To serve Granite Wash producers, Superior Pipeline’s Hemphill-Mendota gathering and processing facility includes four turbo-expander and one refrigerated-processing plants plus central compression and dehydration facilities and a low-pressure gathering system in Hemphill and Roberts Counties, Texas.

The nearly 200-mile gathering system includes about 45,000 horsepower of compression capacity while the Hemphill processing facility delivers residue gas into Southern Star, Westex and Northern Natural Gas pipelines. NGLs are delivered into Oneok Inc.’s liquids pipeline for ultimate delivery to the market hubs for NGLs.

“Since the end of 2011, we have expanded our processing capacity at our processing facility, in Hemphill, from 100 MMcf per day to 160 MMcf per day,” says Bill Ward, vice president of gas supply. “We process out about 12,000 barrels (bbl.) of NGLs per day, but we are going to ramp that up.”

Unit has a sizable lease position in the Granite Wash and has had considerable success out there. “Naturally, we have expanded our capacities for our affiliate. We also see active drilling programs by other operators, due to the gas-liquids ratio of the play and crude oil prices, which make it one of the most economical plays to drill right now. We have opportunities to process gas for other third parties that are in that general area.”

Linn Energy uses trucks to move most of its oil production, due to the area’s lack of pipelines infrastructure. In fact, if the oil-handling midstream operators don’t begin an adequate buildout in time, Linn Energy just might build it itself. Source: Linn Energy LLC

Understanding the game

For now, about half of Superior’s processing capacity serves third parties, says Ward. If full nameplate capacities of its plants are reached, the company would consider further expansions, but would take a careful look at the future volume growth opportunities before beginning any project.

“You just don’t want to be the last man standing with a 200 MMcf per day plant and a lot of excess capacity out there,” he explains. “We’ve been pretty successful at keeping our plant at 90%-plus loaded. We have the infrastructure to expand if we decide to do that.”

Specifically, Superior could expand its processing capabilities to about 200 MMcf per day by constructing another plant supported by compression and pipelines if needed, but for now, Superior’s market and capacities are in balance, he says.

Yet, while more processing capacity might not be necessary, more liquids take-away probably is, explains Ward. “There will probably be a questionable liquids take-away issue out there until about 2014,” he says. The constraint will be due to some large fractionation and pipeline projects underway.

“Right now, if you’re going to put in any type of expansion, it’s going to take you every bit of a year. So you don’t want to be out there holding the bag and can’t move gas. We look a year and a half and two years in front of us to determine where the volumes are coming from or not coming from. That’s the key to this game.”

Other key aspects include knowing the area, having sufficient infrastructure, good manpower and good relationships, he says. “We’ve been out there a long time and it’s our backyard. We’re a good neighbor, especially with regard to personnel and the environment. It’s a good place to do business.” Superior hires from the local community, whenever possible, to keep stability, and has found a skilled labor force with oil-patch experience in the area.

Gas price

As a processor, Superior keeps its eye on commodity prices. Ward believes that natural gas prices will remain in a slump. “As natural gas gets more favorable press as a high-yield energy source and as a clean-burning fuel, I think the demand will start correcting itself,” he says, but adds, “We are probably still a few years out.”

Like much of the industry, Ward has seen recent political views favoring natural gas and calls to convert oil-fueled fleet vehicles. “ExxonMobil Corp., Shell Oil and the other big majors have invested in U.S. gas plays. They’re in it for the long haul because they see it as not a bad area to bet on.”

Gas liquids, on the other hand, will probably see price recovery faster, he predicts. “There are some fractionators shut down right now, so it’s a tough picture to use to predict if prices will continue to be soft. We see new demand from the petrochemical industry, including the demand to export into South America because propane demand is increasing in Argentina and Brazil.”

So what’s next for Superior? “The Mississippi Lime has become a hot area for us right now. We’re building gathering and processing infrastructure in the Mississippi Lime. So that’s our next venue out there, and we are dedicating a large percentage of our 2012 capital expenditure budget to that play.”

Although Enogex is focused on gathering and processing gas at its assets, such as its Clinton process plant pictured here, the company will consider gathering oil and offering water-management services in the future. Source: Enogex LLC

Fine-tuned forecasts

MarkWest Energy Partners LP, formed in 2002 and based in Denver, Colorado, is engaged in gathering, processing and transportation of natural gas; transportation, fractionation, storage and marketing of NGLs; and gathering and transportation of crude oil in the U.S. Since 2007, the majority of its growth has focused on the development of natural gas supplies in emerging resource plays.

Specifically, the company has a strong presence in the Marcellus, Utica, Huron-Berea, Woodford and Haynesville shale plays. In addition, MarkWest is growing its presence in the liquids-rich Granite Wash play.

“We began construction of our Granite Wash system in the middle of 2008,” says John C. Mollenkopf, senior vice president and chief operating officer for MarkWest. “Our primary customer is Newfield Exploration Co. We also have Linn Energy, BP Exploration and Apache Corp. as customers.”

Initially, MarkWest built its Stiles Ranch gathering system, capable of gathering about 100 MMcf per day of gas, to serve the Granite Wash producers. “We’ve since grown that to about 225 MMcf per day with an investment of approximately $250 million.”

In 2009, MarkWest commissioned its Arapaho II processing plant to exclusively process Granite Wash gas. It was a 60 MMcf per day plant that brought the plant’s total processing capacity at the Arapaho complex up to 150 MMcf per day.

“About nine months ago, we put our Arapahoe III gas plant into service, which added another 75 MMcf per day of capacity,” says Mollenkopf. “So, in total, we have 225 MMcf per day of processing capacity.”

To date, the company has installed about 100 miles of gathering lines and acquired another 60 miles in the play. “It’s a compact and very efficient system and consists of larger diameter pipe, mostly 12- to 16-inch, with a high density of gas production over a relatively small acreage position,” he says.

Currently, several hundred wells are connected to the system, but that number will increase as MarkWest grows with its customers. “We talk with our customers all the time about their drilling plans. We model their gas production based on the type curves for the wells.”

Although MarkWest only recently completed its Arapahoe III plant, its Granite Wash gathering and processing systems are once again running near capacity. “We are constantly evaluating whether to add additional processing capacity and pipelines,” explains Mollenkopf. “We have been continuously adding wells to the system since 2008.”

Yet, the Granite Wash wells have a rapid initial decline, so it’s a balancing act for MarkWest to fine tune its forecasting to include decline rates along with newly producing wells.

“At this point in time, we’ve built enough capacity that we think will get us through another year or so,” he says. “But it really comes down to the drilling programs of the producers.”

MarkWest’s gathering and compression revenues are fee-based, while its processing services are provided through a combination of fee-based and commodity-based contracts. As a result, the company has a stake in NGLs and gas prices, as does its hydrocarbon-producing customers.

“The gas prices and the NGL prices are currently depressed in the Midcontinent region, particularly ethane and propane prices,” says Mollenkopf. “Propane is low, due mostly to the very mild winter we had last year. As a result, there is a lot of propane in storage throughout the country, so demand for propane, this summer, is quite low. If we have a normal winter in 2012 to 2013, the propane in storage will clear itself out.”

Also, ethane prices have reached record lows this summer, he says. “In fact, we are in an ethane-rejection mode of operations in the Midcontinent. But historically, that tends to be a short-term situation. We monitor ethane margins on a daily basis and expect that they will return to more normal levels in the coming months and years.”

Nonetheless, the Granite Wash is one of the most economic plays in the U.S. due to its high-liquids content, which adds significantly to the netback for the producers and fits well into MarkWest’s business mode, says Mollenkopf.

Superior Pipeline’s Hemphill-Mendota gathering and processing facility includes four turbo-expander and one refrigerated-processing plants, plus central compression and dehydration facilities and a low-pressure gathering system in Hemphill and Roberts Counties, Texas. Source: Superior Pipeline Co. LLC

Fuel for growth

Elsewhere, Crestwood Midstream Partners LP is looking to ramp up its Granite Wash presence to support the play’s growth. In April 2011, Crestwood acquired midstream assets in the Fayetteville shale and the Granite Wash play from Frontier Gas Services LLC for about $338 million.

The Fayetteville assets include about 161 miles of gathering pipelines that can move up to 510 MMcf per day and a treating capacity of about 165 MMcf per day. The assets serve dedicated acreage held by BHP Billiton Petroleum, BP America and ExxonMobil Corp.’s XTO subsidiary.

The Granite Wash assets include a 31-mile gathering system and a 36 MMcf per day cryogenic processing plant that serves dedicated acreage from several producers including Chesapeake Energy Corp. and Linn Energy LLC.

“The Indian Creek Plant and gathering system are in Roberts County,” says Joel D. Moxley, senior vice president and chief operating officer for the company. These assets are due north of Pampa, Texas, so we’re on the western flank of the Granite Wash area.”

Crestwood focuses on providing midstream infrastructure for unconventional resource basins, so the Granite Wash assets fit perfectly into its portfolio. By June 2012, the company has grown to include assets for gas gathering, processing, treating and compression for production from the Barnett, Fayetteville, Avalon, Haynesville-Bossier and Marcellus shale plays.

The company acquired the Frontier assets as a diversification ploy, says Moxley. “We were a one-basin company, the Barnett, and then we became a three-basin company with that acquisition.”

Crestwood plans to grow its Granite Wash gathering system. Recently, it undertook an expansion to handle gas from Great Plains Operating LLC that is drilling just to the north of Crestwood’s system and is looking for more customers to fuel growth.

“We’re talking to Chesapeake, one of the major producers in the area,” says Moxley. “They’ve got some nearby acreage that is not committed to any midstream company. Also, the sponsor of our general partner, First Reserve Corp., which is a private-equity firm, has an affiliated E&P company that has just entered into a joint venture with leased acreage to the west of our plant in Roberts County, so we’re optimistic that there is an opportunity for us to gather and process additional gas if they develop the area.”

Crestwood’s Indian Creek is the closest plant, and with a common ownership structure, the partnership’s managers are very optimistic about acquiring additional business for that plant.

For now, Indian Creek is processing about 20 MMcf per day, right about 50% of plant utilization. “We’ve got room to grow volumes in our existing facility, and if we need to install more plants or compression, we can do that because the site is large enough.”

Crestwood works with fee-based as well as percent-of-proceeds contracts in the Granite Wash, so it watches gas and liquids prices. “NGL prices definitely matter in some of our larger contracts. We’d like to see prices at least stay where they are or get a little stronger. Particularly, some of those liquids are priced on a Conway basis, so you can see the impact in ethane as prices stand today,” says Moxley.

Today, ethane in Conway is probably under water from the time you pay transportation and finance, and then fuel and shrink. It probably doesn’t pay to extract it. However, we are fortunate that our system is also connected to outlets that tie to Mont Belvieu markets where pricing is higher,” he says.

Meanwhile, working the Granite Wash keeps the managers at Crestwood on their toes, says Moxley. “It’s a competitive place, that’s for sure. There are a lot of very smart folks out there and they’re very aggressive. It doesn’t deter us any, but it’s certainly means you’ve got to keep your pencil sharp and you’ve got to keep close relationships with customers.”

One way Crestwood competes is to ensure its operations are the most efficient and are as environmentally friendly as they can be. “Since we have owned the Indian Creek facilities, we have put a lot of emphasis on improving our measurement equipment as well as maintaining our equipment to comply with all regulations.”

The other competitive advantage is to be flexible, says Moxley. “The number of expansions out there is just mind boggling, especially if you go back and look where it was 10 years ago. The Granite Wash has certainly grown to be a great play during the past few years. We have to be nimble and be at the right place at the right time. Sometimes, being ready to act quickly when the opportunities drive by is the biggest part of our business.”

The Texas Express

As one of the major movers of natural gas liquids, Enterprise Products Partners LP continues to show considerable interest in investing in the Granite Wash.

“We are working on a project called the Texas Express Pipeline for that area,” says Rick Rainey, spokesperson for Enterprise. “For that project, we are partnered with DCP Midstream Partners LP, Anadarko Petroleum Corp. and Enbridge Energy Partners LP.”

The project includes a NGL pipeline that will originate from Skellytown, Texas, in Carson County and extend about 580 miles to NGL fractionation and storage facilities in Mont Belvieu, Texas. Texas Express will help producers in West and Central Texas, the Rocky Mountains, southern Oklahoma and the Midcontinent with maximized take-away and new access to the Gulf Coast NGL market. Initial capacity on the pipeline will be about 250,000 bbl. per day, but could be expanded to 400,000 bbl. per day.

In addition, the joint venture will include two new NGL-gathering systems. The first will connect Texas Express to natural gas-processing plants in the Anadarko-Granite Wash area. The second system will connect the new pipeline to Barnett shale processing plants. Volumes from the Rockies, Permian Basin and Midcontinent will be delivered to Texas Express via Enterprise’s Mid-America Pipeline between the Conway Hub and Enterprise’s Hobbs NGL fractionation facility in Gaines County, Texas.

Enterprise will operate the pipeline, and Enbridge will operate the new gathering systems, all of which are expected to be online in second-quarter 2013.

Also, Texas Express will supply petrochemical facilities with feedstock, and important market as demand for NGLs remains strong due to wide spreads between crude oil and natural gas prices. “The Texas Express project represents a significant extension of our midstream network into the Granite Wash,” says Rainey.

Wanted: liquids take-away

Elsewhere, Penn Virginia Resource Partner LP (PVR) moves gas for operators in the Granite Wash and other liquids-rich plays in the Texas and Oklahoma panhandles and western Oklahoma. Its assets in the region include some 2,000 miles of gathering pipelines, 190,000 horsepower of compression, and four gas-processing plants with a total of 400 MMcf per day of processing capacity.

The gas-processing plants include its Beaver plant (100 MMcf per day capacity), Spearman plant (100 MMcf), Antelope Hills plant (140 MMcf) and its jointly owned plant with Enbridge (operator), the Sweetwater plant, of which PVR owns a 60 MMcf per day processing train and Enbridge owns a 120 MMcf per day train.

“Penn PVR got into the midstream business a little over seven years ago,” explains Ronald K. Page, president and chief operating officer for PVR Midstream. “We began by acquiring the Beaver plant and some gathering systems from Cantera Natural Gas LLC.”

Today, PVR’s midstream systems are running near or at capacity. To stay ahead of demand, the company has ordered another 200 MMcf per day plant from T.H. Russell Co., which is scheduled to be in service in third-quarter 2013. The company is looking at locations for the plant, which could produce about 13,000 bbl. per day of NGL’s when fully loaded.

“To determine the location of the plant, we are looking at the availability of NGL and residue gas take-away, the availability of power­ and the fit with our existing gathering system. Based on the gas we have contracted to us and the additional drilling we see, our projections show us that we will be able to fill up that new plant as well,” says Page.

Currently, PVR reports that about 40% of its total gas volume in the panhandle is from Granite Wash wells. Until the past few years, wells drilled into the Cleveland formation had been PVR’s “bread and butter” business. It now consists of about 40% of PVR’s total, with rich gas from other intervals, including Tonkawa, Morrow, Hunton and Marmaton intervals, making up the remainder.

The Granite Wash wells come online much stronger than wells from the more traditional producing zones, he says. “A typical horizontal Cleveland well averages between 1.5 MMcf and 2 MMcf per day during its first 30 days. But a Granite Wash well can come online at 20 MMcf per day as they start up and average 8 MMcf to 10 MMcf per day during its first 30 days.”.

Due to the prolific liquids-rich gas wells with impressive initial production rates, the new gathering and processing capacities are much needed. Yet, even more urgent is the need for NGL take-away from the play’s gas processing facilities, says Page.

“There is already an NGL take-away constraint in the Granite Wash,” he says. “We’ve got NGL take-away for our current expansion, but we do not have take-away contracts yet for the new 200 MMcf plant we intend to install. We are talking with current and soon-to-be NGL pipeline operators in the area. The Southern Hills pipeline and the Texas Express pipeline, which are either being constructed or about to be constructed to transport NGL’s from the midcontinent to Mont Belvieu, will be fairly close to our new plant location and should provide possible new outlets for our liquids.”.

Also, sufficient fractionation capacity is an issue for the play. “We don’t expect to see additional fractionation capacity available until about third-quarter 2013. That’s what we are hearing from companies, such as Enterprise, DCP and Oneok, that are building it,” says Page.

PVR will spend about $200 million in the Midcontinent during 2012. The capital will provide new infrastructure, such as its currently planned plant, new compression and pipeline additions and well hookups. The company expects to spend an additional $100 millionplus in 2013 if all goes according to its plans. “It’s a lot,” says Page. “But it’s not nearly as much as we are spending in the Marcellus.”

Crazy low ethane prices

Like other mid-sized midstream operators in the play, PVR offers both fee-based and percent-of-proceeds contracts to be flexible for its client producers. As a result, it closely tracks commodity prices. The company avoids pure keep-whole contracts where possible.

“Although the Granite Wash is probably the secondmost lucrative play in the country according to current rates of return as quoted by Bentek—behind the Cleveland, which makes us happy since we have a lot of Cleveland gathering—I can’t help but think that these low natural gas and NGL prices, and especially crazy low ethane prices, might slow activity down at some point,” says Page.

In fact, as PVR’s commercial and operating people speak to their counter-parties in upstream operations, they see a lessening of the usual push to get wells hooked up immediately, says Page.

“There is less urgency. We used to get calls from producers saying, ‘We know you promised hookups next week, and it is not yet next week, but why aren’t you here?’ We’ve always taken pride in our customer service, and in most cases we have had gathering lines ready at the well pad before producers finish drilling the wells. Now, our guys say we are not being pushed by the producers quite as much as we normally are.”

From his perspective, when a midstream company is gathering from 20 MMcf per day wells that have steep decline rates, and producers expect gatherers to handle the initial, flush production as well as the declined rate, a midstream operator can find its gathering system showing a 20% to 30% underutilization at certain intervals, says Page.

“We have to hook up a lot of wells just to stay even,” explains Page. “With 20 MMcf per day initial flow rate wells, which can represent a significant percentage of a plant’s overall capacity, it can be tough for a gatherer to handle the peaks, which seem to come with much greater frequency now.”

Yet, the Granite Wash opportunities outweigh the challenges, so the play continues to be a “major area of focus” for PVR, says Page. “We are going to keep building facilities as long as there is demand and we can make a reasonable rate of return.”