Because recent events have decreased demand for crude oil, forced shut-ins of oil producing wells and reduced drilling activity, the energy industry’s focus has turned back to natural gas. As oil wells are being shut in, volumes of rich associated gas are declining as well. Moreover, a decrease in drilling activity means normal decline is not being replaced with new volumes of rich gas, thus creating dilemmas for producers and midstream operators.
Producers are now focused on finding every available revenue stream, including scrutinizing their existing midstream commercial contracts. Relief with lower fee levels for gathering, processing, compression and other midstream services is being sought out. As lower oil prices appear to be in the cards for at least the near term, any increases in gas revenue ease producer pain.
Midstream operators also face a major hurdle: declining volume throughput. With the transition over the last 20 years from legacy allocated percentage of proceeds (POP) contracts to fixed fuel and recovery fee-based contracts, gathering and processing inlet volume levels have become the largest variable for most midstream operators’ bottom lines. Moving away from commodity price exposure has flattened the risk curve for operators and afforded them other means of achieving slices of margin.