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A Turnkey Operator
Rick Wilkerson is president and CEO of Velocity Midstream Partners LLC
Paul Hart, Hart Energy
Building a successful midstream operation requires multiple skills to assure projects go in on time and on budget—and that customers receive the service they need once a system is up and running. Velocity Midstream’s CEO takes pride in the ﬁrm’s expertise in comprehensive midstream development and operating functions. The ﬁrm focuses on engineering, owning and operating cost-effective natural gas and crude oil gathering and transportation systems in Texas and Oklahoma.
Velocity successfully built a premier crude oil gathering, transportation and storage terminal operation in the Eagle Ford before turning its attention to Midcontinent unconventional plays in Oklahoma—including major new crude oil systems to support producers in the SCOOP (South Central Oklahoma Oil Province) and STACK (Sooner Trend, Anadarko Basin, Canadian and Kingfisher counties) plays such as Continental Resources Inc. and refiner CVR Energy Inc.
MIDSTREAM You have an extensive background in midstream management. What led you and your partners to create Velocity Midstream?
WILKERSON Well actually, I worked for 10 years on the E&P side with Samson Resources [Co.] during the ’90s and some of that time was spent working on the producer side of midstream projects. My Velocity partners and I all worked together at American Central Gas and with other private equity midstream companies—all with relative success.
At some point, you just feel like going it alone—as a team. Energy Spectrum Capital was kind enough to indulge us, and the rest is a pretty successful history for all involved. It is really just the challenge and the flexibility to pursue the projects you want in the way you want. I was trained well by some very smart people along the way, and my partners are the best in the industry. It allows us the confidence to plow forward.
MIDSTREAM Velocity offers a broad slate of services—engineering, finance and systems operating expertise. Are these services mutually exclusive are do they go together often for clients? Is “turnkey” a good word for what you do?
WILKERSON I suppose it’s a good word. We design, construct, own and operate oil and gas midstream assets. We are a great fi t for an E&P organization that appreciates collaboration, speed, experience and extreme focus on a project. That is how we do things, quickly and inexpensively, while turning out high-quality, reliable systems.
MIDSTREAM Energy Spectrum Capital is your private equity partner. What is its role in putting together a typical gathering and/or processing system?
WILKERSON You know, I can’t say enough about the quality of people at Energy Spectrum. They bring on management teams that can manage, so Energy Spectrum becomes much more of an asset to our team and is never a burden.
They know a lot of people and have opened many doors for us. They helped us establish credibility when we were relatively unknown. Energy Spectrum, when on a project, sits down at decision time and walks through every facet with us as a partner. They understand the business, so their input and their ideas are valuable. As a team, we determine the risk, reserves, upside and long-term opportunity associated with entry into a given play. They have a long-term view, and we appreciate that.
MIDSTREAM What is your sweet spot? What size of project works best for you?
WILKERSON That’s a good question. Size is important. There are economies of scale associated with your time when you are lean and focused. Project capital requirements of $50 million to $200 million in an infrastructure rollout are ideal. A sweet spot for us is a fair risk-reward initial footprint in a play we feel has long-term economics for the E&P developers. We then determine the optimal size and scope for the assets with a view forward. Again, we look at the quality of the play, the quality of the upstream team(s) developing the play and the long-term requirements for infrastructure.
MIDSTREAM Earlier, you were active in the Eagle Ford. What trends in the midstream do you see happening in South Texas?
WILKERSON As most people know, we exited the Eagle Ford when we sold our assets to Plains All American Pipeline. Those years in the Eagle Ford were spent trying to solve the riddle of cost-effective, well-pad gathering—elimination of trucks—and learning to deal with a higher-gravity crude project both from an engineering perspective and market view.
For Velocity, we just had to learn how to deal with the lighter crude. There are certainly some nuances. The Eagle Ford was the first onshore U.S. play with well density, IP [initial production] rates and EURs [estimated ultimate recovery] high enough to warrant full crude oil gathering systems. Lower transport costs, higher reliability and reduced environmental exposure all equate to a pipe-based value proposition for the producers.
MIDSTREAM Velocity has a growing presence in Oklahoma’s SCOOP and STACK plays, including a gathering system for Continental Resources Inc. and your recently announced project with CVR Energy Inc. Are these plays overlooked? Do they have growth potential?
WILKERSON We were analyzing and working the SCOOP early with a watchful eye to its sister play, the STACK. We felt both plays would meet the density, EUR and IP criteria we were looking for with respect to crude oil gathering.
I think they were overlooked early. We tend to take risk, get in early and build things fast—that is our differentiator.
Continental had confidence in Velocity based on our track record in the Eagle Ford, and in the SCOOP we constructed and started operations on time even with the torrential rains we had at the time. We think these two plays have some of the best—if not the best—E&P economics in the U.S. And short transport to market provides a very solid netback, even more important in the current $45 to $50 per barrel environment. I think Texas projects get a lot more attention, but being headquartered in Tulsa, we are happy to be back home building and operating in Oklahoma.
MIDSTREAM The Oklahoma plays enjoy an advantage due to their proximity to the Cushing, Okla., trading hub. Has this proved to be a plus for the region’s producers and midstream operators, or is it more complicated than that?
WILKERSON Clearly, if you get the market price and that price is reflecting lower transportation costs to the refinery than other plays, it is an economic benefit—especially in this commodity-price environment. We do think the netbacks in the SCOOP and STACK help the economics support continued drilling while in other plays the economics struggle. Cushing provides a lot, and most of these producers are more sophisticated than we are with respect to marketing. We are barrel movers. It’s not sexy, but it is where we shine and truly add value.
MIDSTREAM Inland refiners such as CVR, with its refineries at Wynnewood, Okla., and Coffeyville, Kan., have enjoyed a renaissance, thanks to the unconventional plays. How has midstream’s role changed in supporting these plants?
WILKERSON Yes, the basis for the CVR pipeline project is to reduce the transport costs for the barrels going to the refinery. It is good for everyone. Reducing or eliminating trucking costs is the backbone to Velocity’s value proposition. Proximity of these refineries to the type of crude oil they prefer is an excellent market match. We simply connect the dots as inexpensively and reliably as possible.
Our infrastructure roll outs are evolutionary in that we initially shorten the truck haul with the trunk pipeline into the play. Then, when pad development is undertaken, that last mile of pipe—accompanied by a LACT [lease automatic custody transfer] unit and pump station—is deployed at the producers’ central tank batteries. At that point, we have eliminated producers’ reliance on trucking as well as the risks associated with trucking logistics.
MIDSTREAM Are you looking to grow into other regions, such as the Marcellus and Utica?
WILKERSON Candidly, we worked the Utica and Marcellus very hard in 2013 and 2014 and came up short. It was a difficult area with respect to terrain, costs and resources, but we were in there pretty early. We simply never got producers to coalesce around a new gas processing project or a single liquids market, and lack of drilling density made our liquids gathering projects uneconomic. Marathon has the refinery there, which gave them a leg up, and MarkWest was entrenched with several producers on the gas side. It was extremely competitive. It was a valiant effort, but we backed out and focused closer to home.
That said, I think our strengths and expertise are well suited for natural gas gathering and processing as well as crude oil gathering projects in the Permian and Niobrara. We will continue to target those areas with business development efforts.
MIDSTREAM How would you describe your management style?
WILKERSON My partners and I are each very good at certain facets of the business. Van Nguyen, our COO, is perhaps the finest oil and gas infrastructure engineer and operations manager working today, and he handles all of engineering and operations. Mike Parker, our CFO, is much more than a financial guy. He heads up environmental, right of way, permitting and of course, financial. These two guys allow me to focus all of my efforts on our company strategy, growth and business development.
We each allow the other to do what he does best. Mike and Van are very good managers of their respective areas. We work well together as a team, and I think that has been the secret to our success—that and a lot of hard work, of course.
MIDSTREAM Given the industry’s current challenges, how is the relationship between producers and midstream operators changing?
WILKERSON Working with producers has historically been an adversarial game, but we feel it is important from inception to behave and treat each other like partners. Optimal partnerships with producers come through better communication, more sharing and better agreements. It requires an understanding of requirements and needs—everybody needs to win. I can sense fairly early in process of proposals and negotiations whether an E&P team is likely to choose us based on their focus. Are they interested in deriving a good value? Or are they fixated on price? It’s all the difference in the world.
For a variety of reasons, many producers, especially the public companies, have chosen to go the route of doing an RFP (request for proposal) for each new project. This process is less personal at first, but as long as our reputation for getting things done precedes us, we have a leg up. If our design, approach and commercial terms are compelling, we can prevail. Midstream has gone from being a necessary evil to being viewed as a commodity—we think it is neither.
MIDSTREAM Looking at the big picture, how will the midstream industry differ in five years and 10 years?
WILKERSON There is still a lot of capital out there, and eventually, if the MLP model holds, it will likely get harder and harder to compete on larger projects. So the bigger, public, lower cost of capital guys may eventually prevail. That said, I do not believe they are as good at the smaller stuff. I don’t think they can move as fast, and that is often a key element in the producer’s requirements.
I also do not think the bigger players are necessarily rewarded for taking risks or moving early. Historically, and still so to a large extent, a prerequisite for an MLP project was it had to be accretive near term. So this leaves the door open for midtier firms like Velocity to make inroads—we just have to pick our battles.
I also think that the economics associated with multiwell/pad drilling allow midstream companies and producers to benefit from drilling density and volume aggregation with possibly fewer and larger inlet points to the systems. Lastly, communications technology is key—monitoring, remote control and automation all play a role in our operations today, all the way down to the gathering systems. Doing more with less while improving service and reliability—that is the goal.
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