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Cost, secrecy weigh into energy companies' pipeline decisions

As the country's oil and natural gas producers have rapidly expanded over the past few years, pipeline companies have worked and competed to keep up. In some cases, the producers have chosen to build and maintain their own gathering systems that connect wells to larger transportation pipelines.
by Adam Wilmoth Modified: August 5, 2012 at 12:05 am •  Published: August 6, 2012

The oil and natural gas boom over the past decade has led producers into new fields throughout the country and to dramatically increase production in some of the country's oldest fields.

As the fields are developed, hundreds or thousands of wells can be drilled in a single region, all needing to connect to processing plants and then to the larger transportation lines that ferry the oil and natural gas to markets.

Sometimes the producers choose to set up their own gathering and processing systems. At other times, they prefer to work with a pipeline company dedicated to building and maintaining midstream systems.

Deciding which method to use is often a delicate dance of sharing enough information to make the project worthwhile to all parties, but not sharing so much information as to give competitors an advantage.

“Some producers don't like to do any pipeline and midstream. Others like that, especially if it's in an area that's strategic to them,” said Keith Mitchell, president of Enogex, the pipeline subsidiary of Oklahoma City-based OGE Energy Corp.

“I think it depends on the producer and the basin and the existing infrastructure.”

A growing concern

Producers have tended to be more likely to build their own gathering systems during the rapid growth of the past 10 years, in part because they have been unable to convince pipeline companies that the area will be profitable and because they were unwilling to share their information, said Jeff Hume, vice chairman of strategic growth initiatives at Continental Resources Inc., in Oklahoma City.

“If I were to drill in an area that did not have a gathering system or if it did not have one of adequate size, and I could not convince a third-party midstream company to come in and build a midstream system for a reasonable price, I could make the election to build my own,” Hume said.

Before a midstream company agrees to build a gathering and processing system in a new area, it usually needs to see the producer's data and determine on its own that the area will be productive enough to make the system profitable, Mitchell said.

Early on in a new development, producers often are reluctant to share all of their information because they are still buying up leases, he said. And many times they need pipes built before they can prove that the area will produce enough oil and natural gas to make the gathering system profitable.

As the new fields have developed, some producers have begun selling off the gathering infrastructure they have built. Over the past two weeks, two Oklahoma City exploration and production companies have announced such sales.

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by Adam Wilmoth
Energy Editor
Adam Wilmoth returned to The Oklahoman as energy editor in 2012 after working for four years in public relations. He previously spent seven years as a business reporter at The Oklahoman, including five years covering the state's energy sector....
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