DEPARTMENT
the back page
Unlocking Your
Gas Plant’s
Value
By Gas Processing Management Inc.
january • february 2008
T
here are several ways to maintain or
increase the value of your gas gathering and
processing assets. About a year and half ago in
this column we discussed the prizes and pitfalls
of gas plant rationalization, which focused primarily on managing operating costs. This time
around we are going to look at another side of
the equation: How we can increase the revenue
that these facilities generate.
In marketing any product or service, if
you can offer more options to your customers than your competitors, the more likely
you are going to be successful in attracting business. The same holds true when it
comes to gathering and processing thirdparty gas. The key question then becomes:
What options can you offer third parties
while still taking care of your own proprietary processing requirements? The following are six general structures that you may
wish to consider when thinking about how
to increase revenue generation from your
gas gathering and processing plants. Which
one would work best for you will depend on
your particular circumstances.
1. No defined midstream organization
– We are all familiar with this situation. You
build your facility to meet your own E&P
requirements, which are probably still in the
development and growth phase. Guaranteed
access to the plant’s capacity is critical to
maximizing the value of your development.
Your ability to offer third parties anything
other than interruptible service at this point
in time could detract from your value of the
asset. Any third-party business that may
come your way is gravy.
2. Internal midstream business development – This usually occurs when spare
capacity in your plant begins to become
available on a regular basis, even though your
own development and production efforts
are still significant. Making some effort to
attract third-party business (which can usually be achieved through your existing joint
interest group), even though it still may be
under only interruptible service terms, can
30 EP/C
result in an increased revenue stream that
will help reduce your plant’s operating costs.
However, the probability of maximizing the
revenue potential will be limited by your
inability to offer firm service.
3. Producer-midstreamer – Under this
scenario not only is more effort, focus and
attention given to the third-party processing business potential of your facilities, it
can also be a consideration in the design
and sizing of the facilities in the first place.
For example, if your own needs are for an 8”
pipeline and you have identified the potential for third-party business, increasing the
pipeline diameter to 10”, or even 12”, increases the capital cost by about 20% to 40% but
raises the capacity by 40% to 100%. For this
strategy to be effective, it usually necessitates
the establishment of a separate midstream
group within your company whose primary role includes identifying opportunities
to utilize the additional capacity that takes
advantage of economies of scale.
4. Wholly owned midstream affiliate
– By now you are probably noticing a trend
here of an increasing focus on third-party
business and (hopefully) a corresponding
increase in revenue potential. The wholly owned midstream affiliate is the next
structure in the spectrum of commercial
arrangements, where the parent E&P division now becomes a quasi arm’s-length customer which is required to contract for
its own gathering and processing arrangements, albeit usually with some preferential terms. This situation should only be
considered when your associated reserves
development has matured and your future
infrastructure capacity needs have peaked.
It will allow you to expand your offerings to
third parties to include a certain amount of
firm service capacity, usually accompanied
by use-or-pay provisions.
5. Farming out your midstream asset
management – Often a gas plant owner will
recognize that the potential for third-party
business exists within the capture area of its
facilities but lacks the resources or perhaps
the expertise to effectively take advantage of
those opportunities. In these types of situations it may be worthwhile considering
farming out the management of your excess
capacity to individuals who have or a consulting firm that has the necessary expertise.
6. Joint ownership of midstream facilities – This involves partial monetization of
your midstream facilities to a non-producer. This can be motivated by a realization
that your own proprietary requirements
are declining and/or a desire to extract a
level of value from your assets. This will
result in an even greater focus on thirdparty business since the new owner, having
no production of its own, will need that
revenue stream in order to be successful.
This model is often an intermediate step to
a complete sale of the facilities to the nonproducer, usually a pure midstreamer, at a
later date when the facilities become even
less strategic to their original owner.
So, which of the above models will best
fit your situation? The answer is that it
depends, and it depends on a number of
things, including: i) Your corporation’s view
of the purpose of your midstream facilities;
ii) Your corporate fiscal status; iii) Where
you are in the life of your producing assets
(are they in growth or harvest phase?); and
iv) Are your producing assets connected to
the particular facility core or non-core? The
best option can be different for different
facilities and can evolve over time as circumstances change. One model of commercial/
ownership structure may not necessarily be
the best option for all your facilities at the
same time, thus the ability to be flexible is
key to maximizing the long-term value of
your infrastructure assets.
Calgary-headquartered Gas Processing
Management Inc. has six principals, all
professional engineers with more than 25
years’ experience. From left: Ib Moller, John
Kingsbury, Bart Van Schaayk, Dave Esau, Pat
Forrest and Les Maxwell.