Midstream Matters


In the midstream sector, the characteristics of the hardware and infrastructure that facilitate oil and gas production leverage asset performance.  Realization of crude oil, natural gas, condensate, and natural gas liquids (NGL) reserves is dependent on the design and operating characteristics of the systems used to produce, gather, store, transport, treat, condition, process, separate, pump/compress, and measure gas and liquid streams.

Sentiments often expressed by stakeholders with interests along the oil and gas value chain include the following:

  • The contracted infrastructure doesn’t access markets with the highest demand or highest market prices.
  • The fuel requirements to get our gas to market are much higher than expected when contracts were signed.
  • The plant rejects ethane, but losses for propane and the heavier products are also very high.
  • There is plenty of system capacity available, but at twice the realized cost in other locations.
  • Our system offers plenty of very efficient capacity, but producers aren’t willing to contract for new capacity.
  • The fees are very competitive, but the system isn’t always available – something is always breaking down.
  • The facilities connected provide access to only one downstream market.
  • Why are the losses so high?
  • The base fees are in line with other systems in the area, but with all of additional costs specific to our production, the total costs incurred are way out of line.
  • Where do all of our liquids go?
  • Why is the disposition cost so high for our gas stream?

While the upstream sector has rapidly adapted to the competitive “manufacturing” forces driving shale development, midstream operators are faced with adapting static “bricks and mortar” assets to dynamic supply and demand patterns.  Despite projections, market studies, engineering design/specification, and capacity commitments, market balances and prices change while installed infrastructure lives on.

Midstream providers and consumers understand that infrastructure creates more value when it can adapt to support the competitive positioning of stakeholders along the value chain.  Characteristics such as the pipeline capacity, terminal location, and system capabilities to handle variation in natural gas quality are key considerations when designing or evaluating a system for potential use.  Leveraging components of value attributable to installed hardware and economically-accessible hardware should be evaluated as part of due diligence, project development, project feasibility, and contract negotiation.   Options for developing oil and gas resources should always include risk assessment with respect to potential infrastructure limitations or additional costs that may be incurred when operations differ from the expected case.  Valuation assessments that include Monte Carlo simulation can provide significant insight into the financial leverage attributable to the midstream and/or downstream infrastructure critical for project development.

No matter the producing basin or geographic location, the midstream assets that facilitate oil, gas, condensate and NGL production matter.  The design and operation of the available systems may impact the rate of production, operating costs, fuel consumption, realized losses, accessibility to downstream markets, quality of the streams produced and other factors such as well productivity and on-stream factors.

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Pearson Adair and Co. (Pearson Adair) professionals have assisted buy-side and sell-side oil and gas industry stakeholders with both technical and commercial due diligence for decades.

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