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Oil Majors 'More Patient Investors' in Appalachia

The frenetic activity on the midstream and the production side in the Appalachian Basin isn't slowing down anytime soon, but one group appears willing, and able, to invest time and money for a payoff a few years down the road, according to Williams CEO Alan Armstrong.

The independents are pouring cash into natural gas and liquids targets hand over fist, with midstreamers attempting to stay in front of the activity. It's a difficult job, as basis prices have indicated. However, for Williams, investments actually are beginning to fall in some areas of the Marcellus Shale because of long-term investments by oil majors, with money to burn.

Natural gas liquids (NGL) volumes are growing quickly in Williams' Ohio Valley Midstream (OVM), which serves operators in northern West Virginia, southwestern Pennsylvania and eastern Ohio, and its Laurel Mountain Midstream joint venture in southwestern Pennsylvania, both in the heart of the Marcellus Shale. An expansion is ongoing at OVM for fractionation and processing facilities to meet forecasts that output will grow by close to 73% between now and 2015, or about 1.4 Bcf/d, Armstrong told analysts.

With all of the growth in the region, it would be expected that Williams would be increasing its investments in OVM and Laurel Mountain, but that's not the case, said Armstrong. Williams has cut its investments "pretty significantly" because "a lot of the private equity groups that were invested out here have now sold out to parties like Chevron and Statoil," he said. Laurel Mountain is 49% owned by Chevron Corp. It includes almost 1,400 miles of pipeline with average throughput of 200 MMcf/d.

"And I would just say that they are more patient investors" than independent producers are. "I think they're waiting to make sure that the infrastructure is available to get both their gas and their NGLs to market."

Those are the types of customers that Williams likes for its huge pipeline proposals, such as Bluegrass Pipeline, which would haul NGLs from the Northeast to Gulf Coast facilities (see related story). The majors "obviously make great customers for Bluegrass...but they're going to look at these resources and make sure that they can get their products to market and to good markets before they go into more aggressive drilling programs out here."

The reallocation in investments is "really one of the major changes here as we shifted from more aggressive independents owning some of these resources to more patient investors like Chevron and Statoil."

There's "just a more careful effort on their part to make sure they maximize the NPV [net present value] of their reserves and not just to quick-drive toward IPs [initial production rates] and...reserve growth...What shifted really was...sitting down and wanting to make sure that we weren't investing capital too far out in front of the reserve packages that we're seeing there and not taking on additional risk.

"And so that resulted in sitting down and getting very detailed granular analysis on what their drilling plans were...That's a little harder to predict because the motives of the majors are more around allocating capital around, and so it's a little harder to predict than somebody who just has one resource to go develop...We've gotten a lot more conservative in our approach toward that forecast, and it's just built from the ground up. And that probably is -- the major shift that we made, moving from a resource-capability player to a detailed analysis of what the producers are actually doing and their actual drilling plans.

CFO Don Chappel added that Williams no longer is forecasting the outlook for 2016 and 2017 "given the challenges we've had in projecting the next couple of years" because of the continuing changes in the Appalachian Basin. "We're really focused on projecting '14 and '15 and just conforming the volume forecast to our guidance period and really not trying to get too far out, given all the variables that we see in the Northeast."

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