May 2011, Vol. 238 No. 5

Features

Crosstex Energy: Neighbor To Barnett, Haynesville Shales

With its strategic location near the site of some of the nation’s most prolific gas plays – the Barnett and Haynesville shales – Crosstex Energy of Dallas has become a leading players in the midstream natural gas industry, specializing in the gathering, transmission, processing and fractionationof natural gas and natural gas liquids in North Texas and Louisiana.

Founded in 1996, the company owns and operates 3,300 miles of pipeline, nine processing plants and three fractionators, providing services for 3.2 Bcf/d or about 6% of marketed U.S. daily production. In fact, company’s strategic purpose from the beginning has been to provide the necessary midstream natural gas services to energy producers and consumers.

Barry E. Davis is president and CEO of the company he helped found 15 years ago and, in an interview, provided P&GJ a keen insight into today’s midstream sector.

P&GJ: When and why did Crosstex first become involved in shale plays?

Davis: We became involved in shale plays for two reasons:

1. Crosstex entered the Barnett Shale in 2004 in order to provide midstream solutions to producers in this rapidly developing shale play. There was a lack of infrastructure, and we responded by building a grassroots gathering and transmission system. We followed that with the substantial acquisition of Chief’s midstream assets in 2006. Since then, we’ve continued to grow our north Texas system into what it is today, a major intrastate gathering and transmission network that moves approximately 1.2 Bcf/d of gas out of the Barnett.

2. The discovery of the Haynesville Shale in March 2008 immediately followed the rapid development of the Barnett Shale in North Texas. The Haynesville Shale is near our LIG pipeline system, one of the largest intrastate pipeline systems in Louisiana. We responded to the Haynesville discovery by expanding a portion of our LIG system in a key part of the play. We now transport almost 500 MMcf/d of contracted gas supply out of the Haynesville. The throughput on our total LIG system averages approximately 1 Bcf/d of gas and we are well-positioned to capitalize on current and future opportunities in the area.

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?

Davis: Crosstex has focused on the Barnett and Haynesville shale plays during the last few years. Industry experts have recently debated about whether the Barnett or the Haynesville is the number one natural gas field in America. Production from the Barnett currently averages 5.4 Bcf/d of natural gas while Haynesville production averages approximately 5 Bcf/d of natural gas per day, depending on who you speak with. There are numerous opportunities for incremental expansion in both plays as we identify and invest in new projects, both around our existing asset base and beyond. Last year we announced two expansion projects in North Texas that are now in service. The first project is a pipeline extension with throughput during the first four years of operation expected to be approximately 100 Bcf and with a peak flow rate in 2012 anticipated to be more than 100 MMcf/d of processable gas. The second project is a 10-year firm gathering and compression agreement for an additional 50 MMcf/d of gas.

Additionally, we’ve expanded and reactivated our Eunice fractionators to accommodate 15,000 barrels of NGL per day, with additional capacity of 21,000 barrels per day as supplies grown. And our existing fractionation capacity increased to 55,000 barrels per day.

We are aggressively pursuing infrastructure needs in the emerging liquids-rich shale plays where producer activity is focused. It’s estimated that the development and growth of these plays, along with the growth in power demand across the U.S., will require a $6-10 billion annual investment in infrastructure during the next several years. We believe Crosstex will participate in the development of this infrastructure.

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

Davis: As a midstream company, we believe the best shales are those that are proven, like the Barnett. In early 2011, cumulative gas production from the Barnett exceeded 9 Bcf/d of gas. Daily Barnett production averages around 5.4 Bcf of gas, even though there have been fewer rigs running during the last 24 months due to their increased efficiency. In other words, the Barnett continues to perform exceedingly well despite fewer drilling rigs working the play.

Our assets are primarily located in what has been proven to be the core of the Barnett, and we expect development will continue around these assets. In the Barnett, we have approximately 840 miles of pipeline and move 1 Bcf/d of gas out of the play. The Haynesville, Eagle Ford and Marcellus shales also appear to be great plays. Another eight to ten developing shales also look promising.

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

Davis: As shales mature and infrastructure is established, we believe we will continue to see the majors purchase existing, maturing assets. Our customers range from small, independent E&P companies to the large integrated companies. We have great relationships with several key companies that will drive the need for infrastructure build-out in the emerging shale plays.

P&GJ: What is the prospect for pipeline development in these areas and what new infrastructure does Crosstex have planned?

Davis: For the most part, you have to look at a new shale play like a blank sheet of paper. Typically, the existing infrastructure is undersized and insufficient in meeting the current and future demands of the play. Significant infrastructure requirements exist in nearly every emerging shale play. We believe we have the right people and midstream experience to develop these opportunities. We use the knowledge gained in developing the Barnett and Haynesville shales and apply it to emerging areas, so we can readily identify and develop opportunities and provide the best market solutions for our customers.

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 pipeline miles is sufficient to handle near-term production from the various plays?

Davis: The market dynamics are focused on aggregating more supply into existing pipelines to serve U.S. markets. Pipelines are being expanded and infrastructure is being developed on an as-needed basis, and we believe that over time it will be sufficient. Again, it’s estimated that $6-10 billion will be needed annually to develop the necessary infrastructure so that demand can be met during the next several years. We are aggressively pursuing these opportunities and believe we will participate in this development.

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

Davis: Crosstex has some of the best, most strategically located assets in the industry, so we are well-positioned to capitalize on current and future opportunities. Our goal is to partner with our producer customers to provide the best solutions for getting their product to market.

We are focused on pursuing the infrastructure needs in emerging liquids-rich shale plays. Additionally, we believe that increasing NGL production will create opportunities for us to better utilize and grow our NGL assets in Louisiana where we have additional fractionation capacity and access to key NGL markets.

And finally, we are evaluating opportunities to acquire assets outside our existing asset base that are synergistic and provide entry points into new geographic areas. We have great regional experience with large shale developments such as the Barnett and Haynesville and strong relationships with our customers.

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

Davis: Crosstex has a significant gathering and transmission footprint in North Texas and Louisiana with over 3,300 miles of pipeline and services for 3.2 Bcf/d of natural gas. Our value chain ranges from wellhead to burner tip, and we provide a wide range of services for our on-system producers, off-system producers and interstate pipelines. These services help move gas from its production areas to its consumption points.

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?

Davis: In the last 24 months, we’ve seen U.S. NGL production increase by about 10%. Right now, the transportation and fractionation infrastructure is being tested, as well as downstream market demand. We believe the industry is responding to this, and the infrastructure will be built to meet demand. The biggest challenge will be the time between the interim solutions, such as truck, rail and barge transportation, and when the infrastructure is finally developed, which could take two to three years.

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

Davis: About 18 months ago, we began to see our producer customers’ strategies shift toward a heightened focus on liquids-rich shales. We believe we have good exposure to liquids-rich areas and see a growing need for fractionation and NGL handling as producers continue to make liquids-rich production a priority. This need is primarily driven by gas produced in developing shale plays, including the Eagle Ford, Marcellus, Bakken and Permian Basin, which have limited NGL markets and inadequate NGL infrastructure.

Right now, we provide our customers with excellent interim solutions by transporting their NGLs via truck, rail and barge to our Louisiana gas processing facilities and fractionators. In fact, we recently re-started our Eunice fractionator in south-central Louisiana to help handle some of this demand. This gives us great operational flexibility, increased fractionation capacity and the opportunity to capture new NGL-related business as demand develops.

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?

Davis: Over time, we have established ourselves as one of the leading providers of midstream energy services in the developing shale plays. Our asset mix includes shale plays and midstream solutions for NGLs and crude oil.

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

Davis: Shale plays tend to develop rapidly and have significant service requirements. We have developed systems and processes for shale development that are critical to meeting these requirements.

P&GJ: Is shale now the centerpiece of the midstream natural gas sector?

Davis: Production from shale plays grew during 2010 and will continue to play a major role in meeting current and future U.S. energy demand. We believe shale gas production drives the midstream energy sector. It’s estimated that shale plays and other unconventional resource plays, will account for 50% of America’s energy resources by 2015, up from 12% in 2000. Shale gas production is here to stay, and we believe that in the foreseeable future, it will drive most midstream opportunities.

We are well-positioned to take advantage of the macro environment, which is driven by producers’ emphasis on moving natural gas, NGLs and crude from new shale plays to market. But the infrastructure will require time and money to build. We are excited about the future for the midstream sector in general and Crosstex in particular. We believe we have the right experience, organizational capabilities and strategically positioned assets to benefit from current and future midstream opportunities.

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