This Doesn't Sound Good
The article below was sent to me. I am somewhat bothered by the "10-year, 100 percent fixed-fee gathering agreement." That seems to eliminate any competition or motivation to keep gathering costs down. Given the concerns we already have about CHK's higher-than-average deductions for their royalty owners, this does not sound good to me. Does anyone else have a better interpretation of what this means?
Midstream paying $500 mln cash
* Involves 220 miles of pipeline in Louisiana
HOUSTON, Dec 16 (Reuters) - Chesapeake Midstream Partners L.P. CHKM.N> said on Thursday it plans to buy a natural gas gathering system and related assets in the Haynesville Shale from a subsidiary of
Chesapeake Energy Corp (CHK.N: Quote, Profile, Research, Stock Buzz) for $500 million cash.
The acquisition will be financed with a draw on the partnership's revolving credit facility of about $250 million plus $250 million of cash on hand.
The partnership will acquire Chesapeake's 100 percent ownership interest in the Springridge system which consists of 220 miles of gathering pipeline in Caddo and De Soto Parishes in Louisiana .
At closing, the partnership will also enter into a 10-year, 100 percent fixed-fee gas gathering agreement with Chesapeake Energy.
After the deal, Chesapeake Midstream will have about $500 million of additional borrowing capacity on its credit facility.
The deal is expected to close before the end of this year. (Reporting by Anna Driver in Houston; Editing by Tim Dobbyn)
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Replies to This Discussion
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Permalink Reply by Les Bamburg on -
JD, that would not be my definition of "weighted average".
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Permalink Reply by Les Bamburg on
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JD, most wells would occur a similar gathering and treating cost regardless of being the 1st or 10th well. Third parties such as CenterPoint install a major gas gathering and treating network based on a volume and/or area commitment and assess the same fee for similar services for all volumes. The variations would typically occur based different levels of pressure or treating service. For example a low pressure well would incur an incremental fee over a high pressure well.
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Permalink Reply by Les Bamburg on
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JD, weighted average would just seem to mean if they have several offtake routes in a field area (remember that some wells are operated by others) that the operator would divide the total offtake costs by the total volume. This is not pulling a number out of the air but rather a common allocation approach utilized for various situations.
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Permalink Reply by JD on
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Les B,
Being an expert, do pipeline companies (both affiliate and non-affiliate) write off the capital costs of their pipelines and charge it back against the operating companies who in turn charge it back against the royalty owners? I think most would assume they do. Wouldn't this cost be factored into what they call transportation cost?
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Permalink Reply by Les Bamburg on
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JD, a gathering fee rate (or pipeline transportation rate) would allow the gathering company to recover operating costs, taxes, capital investment and a return on investment.
For regulated interstate gas pipelines, FERC approves the transportation charge. The pipeline files for their proposed rate and all impacted parties have an opportunity to file comments.
The TRRC approves the transportation rate charged by Texas intrastate gas pipelines.
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Permalink Reply by JD on
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Les B,
The charge approved by the FERC would be beneficial to know but with the "weighted average" method it would truly be difficult for the royalty owner to know what the impact would be on his interests. One of my biggest concerns is that the royalty owner may pay for the same offtake pipelines over and over again. What should be a recovery of operating costs could ultimately become a profit center for an operator and/or it's affiliates. Hold that thought for a moment.
I read in a similiar discussion today a response to Jack Blake's question as to what net price would seem reasonable if the Henry Hub price was $4.00. The answer was that somewhere between $3.50 and 3.75 would seem reasonable. The mid point between those 2 numbers is $3.625 which equates to a 10% deduction off the top to cover post production costs. On the "Price of Gas" spreadsheet we have seen a roughly 10% deduction off the top for those that have provided both sale and net.
My question is this. If a 10% deduction of the top for post production costs seems reasonable how would you feel if one operation consistantly charged in excess of 20% ?
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Permalink Reply by P.G. on
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If the royalty owner has to pay those expenses then why do the end gas users (customers) have to pay as well?
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Permalink Reply by Les Bamburg on
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PG, technically the end-user only pays expenses for movement of natural gas after their point of purchase. The remainder of their payment is for the commodity which is priced based on supply and demand for that market.
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Permalink Reply by Henry on
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JD,
My two cents would be that gathering and treatment should not be a percentage of the price. Rather, they ought to be a fixed price, based upon the volume of the gas. Something like X cents per mcf for treatment. Is this right?
My survey of gas prices suggests that the post production costs range from very small to as much as about 65 cents per mcf. One operator seems to charge consistently at the higher end, and others charge lower amounts.
So for your last question, maybe the better way to ask it is: If 30 cents seems to be a reasonable post-production cost, how would you feel if another operator consistently charged 50 cents? If it were my operator, I'd be pissed.
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Permalink Reply by Ben Elmore on
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Henry, is your database available to GHS members for review? If Operator A is charging a high post production cost v. Operator B in the same area, that seems improper. If Operator A is charging such higher deduct as a result of an affiliated gas gathering or gas purchase agreement, that adds to the potential impropriety.
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Permalink Reply by Henry on
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Ben,
I just bumped my discussion on prices up on the main board. It is called, "What Price Are You Getting for Your Gas?" The data are found in a spreadsheet in that discussion.
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Permalink Reply by Les Bamburg on
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JD, rates are structured to recover capital investment over an extended period of time so I do not follow the "over and over again" concern.
Deductions for gas transportation are primarily a $ cost per MMBtu with a small percentage for fuel. There is no general fixed percentage that is reasonable. If you research this site you will find extensive discussions on this topic. First, it is highly dependent upon which gas sales pipelines/markets are relevant to the production in question. I assume your $4.00 above was for the NYMEX final settlement price for the month you are analyzing. Most natural gas in the area is sold into the interstate gas pipeline at some discount to NYMEX. It is useful to use some historical data to determine how much this discount value is for the gas in question to assess the reasonableness of the discount. Next identify the amount of any deductions related to gas gathering, treating, compression, etc and determine if these deductions are reasonable and deductible under your lease agreement.
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