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Shell's Midstream Contracts Signal Natural Gas Build-Out in Permian's Delaware

An affiliate of Royal Dutch Shell plc has snagged long-term agreements with two midstream operators to build and operate natural gas gathering systems in West Texas across part of the supermajor's Permian Basin Delaware acreage.

In one deal, Crestwood Equity Partners LP secured a contract with SWEPI LP to build a system with targeted in-service by July 1. Shell also completed an agreement with Western Gas Partners (WES) to gather gas in the Delaware.

Specifically in the Delaware, Shell has about 300,000 net acres with more than 5,000 well locations. It has highlighted its success in the Wolfcamp formation, where estimated ultimate recoveries have risen while well costs have improved. SWEPI has been developing its southern Delaware position since 2012, when it paid $1.935 billion to acquire Chesapeake Energy Corp. properties, which at the time were producing 26,000 boe/d (see Shale DailySept. 13, 2012).

The new Crestwood system, estimated to cost $180 million, would be owned by Crestwood and its 50-50 private equity partner First Reserve.

SWEPI agreed to dedicate to Crestwood close to 100,000 net acres and provide gathering rights for its gas production across Loving, Reeves and Ward counties. Initially, the system is designed to handle 250 MMcf/d and include 194 miles of low pressure gathering lines, 36 miles of high pressure trunklines, and centralized compression facilities expandable over time as production increases.

Crestwood would provide gathering, dehydration, compression and liquids handling services on a fixed-fee basis. Additionally, Shell has an option to purchase up to half of the equity interest before Sept. 1, 2017.

The 50-50 Delaware JV between Crestwood and First Reserve came together last year (see Shale DailyOct. 28, 2015). The partnership gives Crestwood "additional financial flexibility to invest in this great long-term growth project," CEO Robert G. Phillips said. "With the financial structure from our joint venture and the targeted in-service date for the new natural gas gathering system, we expect the investment will be accretive to Crestwood as early as late 2017 and, in any event, fully accretive to Crestwood in 2018."

Under terms of the JV, First Reserve is funding 100% of the initial capital requirements in the early-stage build-out of the gathering system. Crestwood then would finance all of the capital requirements until each party has funded an equal amount. Crestwood and First Reserve had agreed last year to pledge up to a combined $500 million initially for the JV to pursue infrastructure opportunities in the Delaware.

"The joint venture with Crestwood serves as a strong platform for Crestwood and First Reserve to pursue incremental opportunities in the Delaware Basin which, in our view, is currently the most attractive onshore resource play in the United States," said First Reserve Managing Director Gary Reaves.

In the WES agreement, the Anadarko Petroleum Corp. partnership contracted to provide midstream services for SWEPI at least 20 years. In addition, Shell would dedicate gas to WES from some of its wells and acreage. No other details were disclosed.

"This agreement enables us to provide midstream services to another top-quality producer in the region as we continue to expand our best-in-class gathering and processing footprint in West Texas," said WES CEO Donald R. Sinclair.

Anadarko earlier this month announced plans to increase its spending and rig count in the Delaware, where it was running six rigs in the second quarter (see Shale Daily,Sept. 13).

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