Williams and Chesapeake Energy have agreed to terms on two shale gas initiatives in Ohio and Louisiana. The companies announced Sept. 8 an expansion of gas gathering services 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.
“This demonstrates our commitment to working with Chesapeake to align our interests on mutual growth while sustaining the financial support of our investments,” said Williams CEO Alan Armstrong. “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.
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 (MMcf/d) 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 minimum volume commitments 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 on its earnings in both the Utica and the Haynesville areas due to near-term higher volumes and drilling commitments.
Key attributes of the agreements 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 obligations in Haynesville Shale, increasing realized pricing per 1,000 cubic feet of gas.
- Aligned strategic interests improve drilling economics, operational efficiency and midstream asset usage.
“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,” said Chesapeake CEO Doug Lawler. “Our improved performance in the Haynesville is the primary reason that we were able to negotiate new gathering rates.”
The agreements will result in lower gathering rates and lower differentials in an effort to make the assets more competitive, Lawler said.
“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,” Lawler said. “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.”