As the Permian Basin continues to grow into its role as the nation’s hottest play, it is quickly shedding its label as a historical one. The Permian may have a great deal of legacy infrastructure, but as it extends beyond its historical borders, the region is adding new infrastructure to handle increased production as a result of its unconven- tional rebirth.

The new infrastructure being developed can be quite large, as in the case of Frontier Midstream Solutions LLC and Concho Resources Inc.’s approximately 400-mile, joint venture Alpha Crude Connector (ACC) pipeline in the northern Delaware Basin with a nominal 100,000 barrels per day (bbl/d) capacity and more than 300,000 bbl of operating storage, which is easily expandable. The system features midpoint pumps with optionality embedded in the design to allow shippers to flow to the market of their choice.

ACC will initially be connected with and provide immediate access to four pipelines, two regional refineries and one rail terminal. Further takeaway opportunities will be evaluated as they become available.

“This is the basin that keeps on giving. The northern Delaware, in particular, is a world-class resource with world-class producers developing it. You’re starting to see enough takeaway infrastructure being built to transport the production to where it needs to be delivered,” Dave Presley, president and CEO of Frontier Energy Services LLC, which operates ACC, told Midstream Business.

This region is a perfect example of the Permian’s growth as it has limited legacy midstream infrastructure in place. While this was an issue for producers in the northern Delaware, it presented a great opportunity for Frontier.

“That opportunity was there because most of these barrels are currently being trucked,” Ken Snyder, vice president, busi- ness development at Frontier, told Midstream Business.

Frontier’s principals have roots in the Permian dating back to 1982 with a focus on natural gas through ownership of pro- cessing plants and gathering systems. Since that time, the Frontier team has operated in all phases of the midstream space and is now focusing more on crude oil with the ACC project.

“This latest iteration of the Frontier entity was started with Energy Spec- trum Partners and Frontier Midstream Solutions focused on this major project in the northern Delaware Basin,” Presley said.

Though this project is one of the larger ones undertaken by any of the Frontier companies, Presley highlighted the team’s experience and noted they have worked on projects similar in scope. “Each member of our manage- ment team has more than 30 years of experience in the space. We’ve done both acquisitions and greenfield development, including large projects. This isn’t new to us,” he said.

The second iteration of the company, Frontier Midstream, closed in 2011 when it sold its assets after it was formed in 2008 with a focus on developing and/or acquiring assets in the Fayetteville, Marcellus, Permian and Midcontinent.

“The guys at Energy Spectrum Part- ners have been great equity partners for us and have had success with our previous two iterations. There’s a huge trust element in the partnership where they’re not looking over our shoulders on a daily basis. They trust us and believe in our ability to go out and make these types of projects happen. They know we’re patient and disciplined in our approach to projects. We understand commercial structure, and we understand we’re a service provider here to meet the needs of our customer, which is the pro- ducer,” Presley said.

The executive team’s experience allows the company to focus on deals with customers without having to spend as much time focusing on a strategy of running a business. “We can compete better by tak- ing a little more risk since we understand what the upsides and downsides are in each project,” Snyder said.

Frontier’s core team has worked together for more than 25 years in the mid- stream space and has built long-term relationships with producers and has a reputation in the industry that continues to serve them well as producers look for the same reliable service.

Closer to home

The vast experience of the Frontier ex- ecutive team in the Permian led to the focus on this “home” region when Fron- tier Midstream Solutions was founded in 2011 and partnered with Energy Spectrum Partners in its Fund VI. “Our focus was on areas with infrastructure needs, and we have a lot of experience in the Permian,” Presley said.

Producers look for a strong track record of project execution when evaluating a prospective midstream part- ner, he said.

“Execution risk is really important to them,” Presley added. “They know we understand how to execute and are focused. Because of our experience in the basin along with our experience in executing these types of projects, we were able to initially work with Concho to lay out a system that made tremendous sense for Concho, as well as others, without having to require huge throughput commitments.” Concho is an owner as well as an anchor shipper in this new crude transportation system. “Concho is the premier producer in the northern Delaware Basin and we are proud to have them as our partner.”

Although pipelines are the safest and most secure mode of transportation for hydrocarbons, Snyder noted that competing with trucks is the biggest hurdle a Permian pipeline system must overcome in the early stages of design and development.
This is because of the ease with which trucks can move barrels, along with their lack of commitment requirements and ability to reach multiple markets.

“We had to emulate that flexibility with ACC. That’s why we had to create all of the optionality so that we could make the same kind of flexible deliveries that trucks can make. We had to get enough economy of scale, a large enough pipeline and enough commit- ments in order to beat the truck rate,” Snyder said.

Fully committed

The commitments that Frontier is seeking for ACC are unique as they allow shippers to obtain low-cost, long-term capacity through acreage commitments. While it would be hard to see a publicly traded MLP make a similar decision on commitments due to the risk involved, a private equity-backed company like Frontier and a producer like Concho can take this risk on a greenfield project.

The status of both companies certainly helped in the development of ACC, ac- cording to Snyder.

“We take a lot of time to focus on the deals with our customers. When Frontier builds something, it always works. That reputation is important to Concho because there is a lot at stake when they put their production into our hands,” he said.

A tailored fit

The ACC project came about from preliminary discussions over construction of a simple crude pipeline to an existing rail terminal in Carlsbad, N.M.

“We knew that Concho was a major player in the Delaware Basin and found that Concho was one of the players in the rail terminal. After many meetings and brainstorming sessions, this simple crude pipeline morphed into a much bigger system,” Snyder said.

An important part of these discussions was listening to the customer’s needs, which were reliability, getting barrels off trucks, picking the barrels up at the lease tank battery, offering optionality and working with Concho to form a partnership, Presley said.

“We’ve seen almost every commercial deal structure there is and can work with our customers to provide the answer to their problem. In addition to trying to be a good listener, our understanding of cost structure and the engineering and development details associated with these projects allowed us to design a system that offers optionality, reliability, competitive pricing and timing advantage,” he added.

Indeed, this project is a reflection of the customization services that Frontier offers as it was tailored to meet specific customer needs. This includes the construction of pipeline to customer leases.

“This is not just a large crude oil takeaway pipeline. It’s a huge gathering system blanketing the northern Delaware Basin,” Presley said.

By securing producer commitments, Snyder anticipates that once the project is completed, one-third of the production out of the region that was previously being trucked will be transported on the system.

Worth the risk

Though Frontier is accepting risk by offering the acreage dedication option, Presley said that this move is worth it.

“We get acreage commitments in a very prolific, proven basin from world-class producers like Concho that have strong positions and the wherewithal to drill it, produce it and develop it even in somewhat depressed crude oil pricing en- vironments,” he added.

“When we’re in a basin that we believe in, we like taking that risk because we do a lot of work to figure out the geology and that provides a lot of upside for us,” Snyder said. “When prices fell, producers reallocated capital to the basins with the best returns. We know long-term this is a really good basin. We’re happy to be out there and patient enough to wait for the drilling to return. In this particular case, we’re fortunate that producers aren’t leaving, they’re actually allocating a higher percentage of their capital out here.”

While there has been a reduction in drilling around the U.S. as a result of the pricing downturn, the Permian has re- mained one of the most active plays as a result of its multiple zones. ACC is also expected to benefit from most of this con- tinued activity since it runs through the heart of the basin’s sweet spot.

“We’re losing some rig count within five miles of our pipe, but not anywhere near what the other basins are losing, including the Midland Basin, because of the profitability at lower costs found in the northern Delaware,” Snyder said.

As large as this project will be once it is online, there is room for future growth as the system was designed to transport vol- umes in multiple directions as well as connect to other production centers. The system will come online at approximately 70,000 bbl/d.

We have the ability to keep expand- ing the system by adding more laterals and bringing in a lot more supply and adding downstream pipeline outlets,” Snyder said. “Because it’s such a big project, it’s taking everything we’ve got to do this right. There are other places in the Permian Basin that we know we can expand into now that we’re an incumbent provider in the region. These opportunities include crude, gas and potentially water.”

The ACC system is designed to be a common carrier with different qualities of crude with a fairly wide variety of crude gravity between the north and south end of the system. Presley said that the gravity of crude is becoming more of an issue in the Permian because of various production streams.

“We initially designed this project as a common stream pipeline with the idea we’d have 42° to 44° API gravity, but as we started to look at different areas of the system, the gravity is higher in different formations,” Presley said.

To meet the needs of these customers, Frontier is considering offering batching options on ACC to ensure that all types of barrels can be economically transported.

“We see opportunities to deal with those variants. We’re challenging ourselves to create ways to attract crude to our system by dealing with it separately, segregating it and batching it since refineries don’t want these products blended together,” Snyder said.

This offers the possibility of growth within the current footprint of the system while also providing shippers with transparency.

“ACC crosses state lines from New Mexico to Texas, which makes it a Federal Energy Regulatory Commission-regulated pipeline. That means the rates, rules and regulations are transparent. It makes it an attractive system to put your barrels on with very competitive rates,” Presley said.

Difficult to duplicate

Companies with super systems tend to highlight the difficulties a competi- tor would have in recreating these sys- tems due to the costs and construction time involved. However, these difficul- ties are rarely mentioned when it comes to private equity greenfield projects. In the case of ACC, it bears mentioning that competitors would have difficulty in following a similar path to this pipeline.

“We worked with the [U.S.] Bureau of Land Management [BLM] and a dozen other agencies representing cultural, wildlife habitat and endangered species for 18 months because of the environmentally sensitive area that this project will traverse. It wasn’t just endangered species. You hear about that a lot, but it was also cultural, visual and recreational concerns. The shape of our system is a backwards C and there’s very little drilling going on inside of that C since it’s a very prolific potash mining area,” Snyder said.

The BLM worked as the lead agency and coordinated oversight of the project with the other agencies since most of the leases for the project are on BLM land. This required a complete 3,000-page environmental assessment to ensure that all cultural and environmental regulations were followed. This also involved having a team of cultural and biological experts walk every foot of the pipeline path.

Although this wasn’t the purpose of the report or design of the pipeline, it will create a bit of a competitive barrier as other companies will need to work the same 18-month time period to design and commission a similar project.

No question, if someone wanted to start this same project right now it would take them at least 18 months and probably two years to do what we’ve done,” Presley said. The company expects to receive its notice to proceed from the BLM in May. At that point con- struction can begin with completion scheduled for the last quarter of 2015.

The Alpha Crude Connector pipeline is aptly named since it is not only the first project for this third iteration of Frontier, but also because it will likely lead to additional growth for the company.

Whatever the future holds, Frontier will continue to apply its experienced approach to meeting producer needs.

“Our primary focus right now is to get this pipeline in the ground,” Presley said. “We’re in the eye of the storm and are pretty laser-focused on making sure we get this pipeline online by the last quarter of this year. We can’t take our eye off the ball, as we cover such a big area in the northern Delaware, and even looking into the southern Delaware, there could be several attractive bolt-on opportunities in the future.”