ONEOK Gathering & Processing Predates Shale Plays

May 2011, Vol. 238 No. 5

In this interview, David Scharf, president of ONEOK Natural Gas Gathering & Processing, notes that ONEOK is certainly no stranger to the shale play.

P&GJ: When and why did ONEOK first become involved in the shale play?

Scharf: ONEOK acquired natural gas gathering and processing assets operating in the Williston Basin and western Oklahoma through a series of strategic acquisitions dating back to 2000, well before the shale plays (Bakken and Woodford, respectively) developed in these areas.

P&GJ: To date, how much of your activity is focused on shale and do you see this increasing in the next five years? How much of your overall budget are you allocating to shale development?

Scharf: We don’t drill any wells of our own. We focus on connecting to any and all natural gas that is within the reach of our natural gas gathering systems. So the extent of our focus on shale gas is entirely dependent on the activity of producers. Currently, almost all of our Williston Basin activity is gathering natural gas from the Bakken and Three Forks formations.

In 2010 and early 2011, ONEOK Partners announced it will invest approximately $1.8 billion to $2.1 billion between now and 2014 for natural gas gathering and processing and natural gas liquids projects.

The majority of these projects are related to the Bakken Shale and include the construction of three new 100 MMcf/d of natural gas processing facilities, that when completed, will nearly quadruple our natural gas processing capacity in the region. We will also construct an approximately 500-mile NGL pipeline to deliver NGLs from the Bakken to our 50%-owned Overland Pass Pipeline, and ultimately to our fractionator at Bushton, KS. The Overland Pass Pipeline and the Bushton fractionator are also being expanded to accommodate the increased volumes from the Bakken Pipeline.

The remainder of the growth program is for NGL projects in the Cana-Woodford Shale and the Granite Wash plays in western Oklahoma and the Texas Panhandle. We will connect our existing Mid-Continent NGL gathering system to three new third-party natural gas processing plants being constructed and to three existing third-party natural gas processing plants that are being expanded. This investment includes constructing 230 miles of NGL pipelines and expanding the capacity of the 440-mile Arbuckle Pipeline to 240,000 barrels per day.

P&GJ: From your perspective, where are the best shale prospects in North America? How long can we expect this boon to last?

Scharf: Who knows? There are many plusses and minuses between shale plays that constantly shift with changes in natural gas and oil prices, regulatory developments, infrastructure challenges, etc. With crude oil prices the way they are right now, we consider the Bakken to be one of the best places to be. Our producers tell us the core Cana-Woodford Shale also has some of the best economics of any other play they are in. Producers are finding ways to produce in new shales all the time, so we expect this will continue for a long time.

P&GJ: Do you see the majors continuing to assert themselves in the shale plays, and is this good or bad for midstream operators such as ONEOK?

Scharf: We do see the majors looking for additional shale opportunities. We’ve done business with the majors for years and have worked hard to foster good relationships with them. Majors certainly have the ability to install their own plants and systems, but most see the value of contracting with us for those services, so I don’t see their presence in the shale plays as particularly good or bad. I would say their presence is probably a great endorsement for the economic viability of these plays.

P&GJ: Overall in North America, do you see the new market dynamics dictating where future pipeline development and expansion is most likely? Do you think the number of planned pipelines miles is sufficient to handle near-term production from the various plays?

Scharf: Pipelines exist to transport natural gas from supply areas to markets. The markets haven’t really moved, but the location of the supplies is shifting to the shale plays. This creates a “supply push” in specific areas to build new natural gas and NGL infrastructure. A lot of new infrastructure is under construction and further growth opportunities will depend on the pace and scale of the producer developments. This development is dependent on the constantly changing economics of the various shales they are seeking to develop.

So, there will certainly be opportunities to build additional infrastructure, but as drilling patterns change, some areas may have more infrastructure than is needed. The Barnett Shale, for example, arguably now has more natural gas takeaway capacity than it needs. The Marcellus Shale, with its huge potential and close proximity to Northeast markets, could significantly change the flow patterns for natural gas in the U.S. as it begins to displace supplies that originate further upstream such as the offshore Gulf of Mexico production.

P&GJ: What strategies are you pursuing in developing your shale properties?

Scharf: We are securing large acreage dedications from shale gas producers and expanding our infrastructure to accommodate their needs. In concert with our natural gas gathering and processing services, we are also using our integrated downstream natural gas liquids (NGL) capability to attract new customers.

P&GJ: What precisely is ONEOK’s role as a producer, transporter, processor, marketer?

Scharf: ONEOK gathers, processes, transports, stores, markets and delivers natural gas. We also gather, transport, store and fractionate natural gas liquids. With the exception of drilling and production, we are in the entire natural gas value chain.

P&GJ: Do you feel there is a lack of NGL infrastructure for transport and fractionation? If so, what do you perceive as the key for continued NGL development?

Scharf: Clearly there are needs for additional NGL transportation and fractionation to serve the many NGL-rich shale developments across the U.S. In the Bakken, the keys to developing the needed NGL infrastructure are sufficient producer activity levels and commitments that justify our processing plants and their associated NGL production, which will in turn support the necessary downstream NGL infrastructure.

P&GJ: Is today’s low-price environment for natural gas affecting your planning, and are there any ways you can leverage against that?

Scharf: Low natural gas prices are pushing producers to produce gas that is rich in natural gas liquids. This gas must be processed, and that gives us natural gas gathering and processing and NGL opportunities. Many of our natural gas gathering and processing contracts are tied to the price of the natural gas and NGLs sold at the tailgate of the plant. We are sometimes able to adjust contract terms to take advantage of differences between our expectations and producer’s expectations of future prices. We also have an active hedging program to mitigate our commodity price risk.

P&GJ: How has your asset mix changed in the past few years and do you foresee further changes coming up? What businesses would you primarily like to focus on?

Scharf: From the natural gas gathering and processing perspective, our assets haven’t really changed, except that we are much busier and are investing more money in building and expanding facilities in areas where there is rich natural gas. We like that business and continue to invest in those areas. We also continue to look for opportunities to grow our NGL infrastructure and natural gas transmission pipelines, which generate primarily fee-based revenues. The stable cash flows generated from fee-based activities are a good thing for MLPs such as ONEOK Partners.

P&GJ: What have been some of the challenges that you’ve encountered in working the shale plays?

Scharf: The wells typically come on with high initial production rates and then decline as much as 80% or 90% in the first year of production, but stabilize to very shallow declines thereafter. Also, producers are drilling to hold leases, so drilling schedules are constantly changing and wells are sometimes being drilled in locations far from our existing gathering systems. This makes designing and installing efficient gathering facilities challenging.

With evolving completion technologies and an ability to focus rigs in one area, we’ve had many producers far exceed their initial volume forecasts. This is a good problem to have, but it does create challenges. The concentrated nature of the shale developments, especially in remote areas like the Williston Basin, makes it very difficult to engage the necessary resources, human and otherwise, that are necessary to be responsive to producers’ needs. The number of rigs operating within our Williston natural gas gathering system has increased nearly 500% in less than two years. We are sprinting to keep up.

P&GJ: Is shale now the centerpiece of the midstream natural gas sector, and what do you consider the most challenging aspect going forward for the midstream operator?

Scharf: Right now, liquids-rich gas is king, and the many shales with associated crude and/or NGL production are being rapidly developed. Other liquids-rich plays can compete, the Granite Wash for example, but I think it is fair to say that getting shale gas to markets is going to continue to be a major focus of the Midstream sector.

Each area has unique challenges. One overarching challenge is the tendency of producers to stop or slow drilling in one play in order to pursue another play. So, designing our midstream facilities with sufficient capacity to meet the producers’ needs and doing so in a way that leads to an efficient and economic use of capital will be essential to our success.

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