Williams (WMB) today announced an expansion of gas gathering services for Chesapeake Energy (CHK) in growing dry gas production areas of the Utica Shale in eastern Ohio and a consolidation of contracts in the Haynesville Shale in northwestern Louisiana to optimize production opportunities, streamline fee structures and restructure commitments to incentivize long-term development of the fields. The agreements with Chesapeake were entered into by subsidiaries of Williams Partners L.P. (WPZ), of which Williams own 60 percent, including the general partner interest.
“This demonstrates our commitment to working with Chesapeake to align our interests on mutual growth while sustaining the financial support of our investments,” said Alan Armstrong, chief executive officer of Williams. “These new fee structures are designed to promote production in the best locations across a wider footprint in these great basins, which improves the economics on both the drilling and midstream side. We’ve also increased certainty around fees and volumes to support our strategy of creating long-term, durable value for shareholders.”
In the Utica, Williams and Chesapeake executed a long-term, fee-based contract that gained a new area of dedication in the dry gas zone where Chesapeake and others are targeting production growth. The agreement extends the length of the Chesapeake acreage dedication to 2035, increases the area of dedication by 50,000 acres from 140,000 acres to 190,000 net acres in a strategic area adjacent to Williams’ existing assets and converts the cost-of-service mechanism to a fixed-fee structure with minimum volume commitments (MVCs). This change to a fixed-fee contract enhances Williams’ ability to gather third-party volumes and build scale in Utica’s dry gas areas. Williams expects this will provide the opportunity to invest more than $600 million over five years to install more than 200 miles of pipeline and related facilities as this prolific area of the basin grows with up to 800 million cubic feet per day of capacity to serve the development.
The companies also executed a new Haynesville contract that consolidates the Springridge and Mansfield contracts into a single agreement with a fixed-fee structure and a contract term to 2035. The consolidated contract is supported by MVCs and a drilling commitment to turn 140 equivalent wells online before the end of 2017. This commitment is projected to result in significant production growth in the Haynesville Shale asset over the next two years. The combined contract also better aligns producer-midstream interests, simplifies contract administration, optimizes development of the resource across both Springridge and Mansfield areas and extends the Springridge dedication 15 years to 2035.
Williams expects positive impact to EBITDA in both the Utica and the Haynesville areas due to near-term higher volumes and drilling commitments.
Williams (WMB) is a premier provider of large-scale infrastructure connecting North American natural gas and natural gas products to growing demand for cleaner fuel and feedstocks. Headquartered in Tulsa, Okla., Williams owns approximately 60 percent of Williams Partners L.P. (WPZ), including all of the 2 percent general-partner interest. Williams Partners is an industry-leading, large-cap master limited partnership with operations across the natural gas value chain from gathering, processing and interstate transportation of natural gas and natural gas liquids to petchem production of ethylene, propylene and other olefins. With major positions in top U.S. supply basins and also in Canada, Williams Partners owns and operates more than 33,000 miles of pipelines system wide – including the nation’s largest volume and fastest growing pipeline – providing natural gas for clean-power generation, heating and industrial use. Williams Partners’ operations touch approximately 30 percent of U.S. natural gas. www.williams.com
Chesapeake Energy Corporation (CHK) today announced it has finalized new gas gathering agreements with the Williams Companies (WMB) in its Haynesville Shale operating area located in northwest Louisiana and its dry gas Utica Shale operating area located in eastern Ohio. Key attributes include:
- Significant improvement in per unit gathering rates established in two major growth assets beginning in 2016, leading to enhanced volume growth
- Combination of gathering system agreements allows Chesapeake to satisfy minimum volume commitment (MVC) obligations in Haynesville Shale, increasing realized pricing per mcf of gas
- Aligned strategic interests improve drilling economics, operational efficiency and midstream asset utilization
Doug Lawler, Chesapeake’s Chief Executive Officer, commented, “Chesapeake’s operating efficiencies across the entire portfolio over the last two years have resulted in lower costs, higher production rates and higher recovery rates. Our improved performance in the Haynesville is the primary reason that we were able to negotiate new gathering rates. These agreements will result in lower gathering rates and lower differentials, making these assets even more competitive within our portfolio. In this capital constrained environment, we will benefit from these higher-return assets and expect to allocate incremental capital to these areas, while enabling Williams to more fully utilize its gathering systems. The commercial solution these new contracts provide will only enhance what we have already achieved with our operating performance. This is truly a win-win for both companies, and we continue to work with Williams to further enhance the value of our respective assets.”
Chesapeake will move to a fixed-fee agreement in the Haynesville Shale beginning in January 2016. Gas gathering fees in the Haynesville will be reduced on a unit basis, and the existing minimum volume obligations are expected to be met with the consolidation of two gathering systems and a projected increase in Haynesville area volumes. Inclusive of previously expected MVC shortfall payments, the company’s gas production is expected to see improved gathering rates of approximately $0.20 per mcf in 2016 and 2017 and approximately $0.30 per mcf in 2018 and beyond. As part of the transaction, and consistent with Chesapeake’s current operating plans, the company committed to turn 140 equivalent wells online before the end of 2017. This commitment is projected to result in significant production growth in the Haynesville Shale asset over the next two years, thus also increasing Williams’ revenue from the area.
Chesapeake will also move to a fixed-fee agreement in the dry gas Utica Shale, beginning in January 2016, and is expected to see an estimated gathering rate reduction of approximately $0.25 per mmbtu. As part of the transaction, Chesapeake is dedicating an additional 50,000 net acres to Williams and will be subject to a new minimum volume commitment of 250 mmbtu per day beginning in mid-2017. The company expects to meet this commitment with approximately one rig per year.
Chesapeake Energy Corporation (CHK) is the second-largest producer of natural gas and the 11th largest producer of oil and natural gas liquids in the U.S. Headquartered in Oklahoma City, the company’s operations are focused on discovering and developing its large and geographically diverse resource base of unconventional oil and natural gas assets onshore in the U.S. The company also owns substantial marketing and compression businesses. Further information is available at www.chk.com where Chesapeake routinely posts announcements, updates, events, investor information, presentations and news releases.