CMS Energy Corp. last week continued building what’s shaping up to be a Powder River Basin dynasty. Subsidiary CMS Continental Natural Gas agreed with Pennaco Energy, and CMS corporate affiliate CMS Oil and Gas to gather coal-bed methane gas from the Powder River Basin in Wyoming and Montana.

The CMS acquisition of Continental last year and this expansion of its activities are part of a growing trend in which financially healthy downstream companies are using their steady cash flow to vertically integrate, picking up upstream and midstream assets from foundering producers and liquids processors. Michigan-based gas and electric utility Consumers Energy is a subsidary of CMS. (See also Dominion Energy’s Canadian Purchase this issue)

CMS Continental is to provide long-term, low-pressure gathering. The deal includes dedication of more than 580,000 acres in the Powder River Basin within the previously announced CMS Oil and Gas/Pennaco Energy Area of Mutual Interest.

Previously, CMS paid $28 million for a 50% stake in Denver-based Pennaco Energy’s Powder River acreage, which, at 492,000 net acres, is one the largest in the Wyoming-Montana coalbed play.

CMS Continental last week also announced plans to construct a $190 million high-pressure gathering header from southwest of Gillette, WY, north to Montana and west to Sheridan, WY. The plan initially calls for about 110 miles of 24-inch, 20-inch and 16-inch high-pressure pipeline and about 40 miles of six- and eight-inch gathering laterals, with more than 14,000 hp compression. The first phase of the project is expected to be in service by Nov. 1. Construction of the system will begin in July at its southern terminus where it will connect with the previously announced Fort Union Gas Gathering system.

“Initially, the CMS system will gather coal-bed methane from as far north as Township 56 North Range 75 West and as far west as Township 55 North, Range 83 West, near the northern portions of Campbell County and Sheridan County, WY. Further expansion is anticipated, which would extend the northern terminus of the system into Montana,” said Dave Presley, president of CMS Continental. “We intend to offer quality low-pressure gathering and marketing services to third parties in the basin, particularly the northern Basin.”

CMS Oil and Gas and Pennaco Energy formed a 50/50 joint venture and area of mutual interest last October to develop and produce coal-bed methane on 492,000 net acres in the Powder River Basin. Since October, the parties’ acreage position has grown to more than 580,000 net acres in the area of mutual interest through additional acreage purchases. The parties will each operate about 50% of the wells.

Pennaco Energy is headquartered in Denver and is primarily engaged in the exploration, development and production of gas from coal-bed methane properties in the Powder River Basin Coal-bed Methane Play in northeastern Wyoming and southeastern Montana. Pennaco is one of the largest leaseholders in the play with approximately 311,800 net acres. This lease position includes about 290,000 net acres held by Pennaco in its previously announced joint venture with CMS Oil and Gas. Gas production is dedicated to a CMS affiliate.

Several pipeline companies and producers are planning major pipeline expansions to serve the Powder River Basin. KN Energy and Devon Energy are planning to build a $110 million, 126-mile gas gathering system that would extend between Gillette and Glenrock, WY, bringing up to 450 MMcf/d of new production to connections with multiple downstream pipelines during the first half of 1999. And Western Gas Resources and an affiliate of Colorado Interstate Gas have proposed a 90-mile, 20-inch diameter gathering system and a treating facility to bring 200 MMcf/d out of the basin. KN, CIG and Questar also are planning new downstream interstate pipelines and expansions that could increase access to the basin by 1.3 Bcf/d.

In August, CMS announced plans to buy Tulsa-based gatherer, processor, marketer Continental Natural Gas for $155 million (see NGI Aug. 10, 1998). Continental added about 2,000 miles of gathering systems and six processing plants with capacity of 520 MMcf/d and 25,000 barrels of natural gas liquids/d. In November, CMS bought Heritage Gas Services LLC (See NGI Nov. 2, 1998). The Heritage deal came only two weeks after CMS finalized the Continental acquisition. Heritage, also based in Tulsa, added another 2,000 miles of gathering pipe, as well as one 45 MMcf/d gas processing plant in the Hugoton Basin and a gas and liquids marketing staff.

Joe Fisher, Houston

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