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In Bordering States, Midstream Rates are Worlds Apart

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The Daley Note: January 25, 2023

Oklahoma and Colorado share a state border in the southern US Plains. Yet for oil and gas producers, the neighboring states are worlds apart for the cost of basic midstream services.

Oklahoma and Colorado feature some of the lowest and highest fees for natural gas gathering and processing (G&P) services, according to East Daley’s recent benchmarking of midstream rates. The Denver-Julesburg (DJ) in northeastern Colorado ranks as the most expensive US basin for G&P services, while the Anadarko Basin in central Oklahoma is among the most competitive for midstream costs.

EDA revealed our G&P rate benchmarking study in a Dec. 15, 2022 Midstream Navigator for clients. We’re now making this study, “Rate My Midstream: What G&P Rates Tell Us About Midstream,” available for download.

Using public data and our asset-level financial models, we have identified 200+ G&P systems for which we can confidently assess rates. EDA creates asset models from a granular build-up of volumes by plant and producer, gross margin, and operating expense to arrive at an implied system rate, so that Gross Margin / Volume = Blended Rate.

Our analysis finds wide variance in G&P rates in liquids-focused basins. In the DJ Basin, G&P rates average $2.59/Mcf, compared to an average rate of $0.74/Mcf in the Anadarko Basin. Put differently, producers in eastern Colorado paid 250% more than their Oklahoma counterparts for midstream services (see figure).

In fact, the basin with the lowest assessed G&P rates in our study, the Piceance Basin, is also based in Colorado, demonstrating that proximity isn’t so important in determining midstream costs.

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What then explains the wide range of G&P rates? In our view, the most important factor is the relative level of midstream competition. The Anadarko Basin has many public and private midstream companies competing for business, while the DJ Basin is dominated by just two companies: DCP Midstream (DCP) and Western Midstream (WES).

Contract structures also play a role. A key reason why the DJ features such high service costs is the large number of “life-of-lease” contracts in the basin, which keep leaseholders locked into services provided by incumbents.

A third factor is the relative sophistication of the counterparties. Smaller private producers tend to be more captive customers compared to larger operators, who can build their own gathering systems if midstream costs get out of hand. The Anadarko Basin features many large public producers such as Devon Energy (DVN) and Continental Resources (CLR), helping keep overall rates competitive.

As Colorado and Oklahoma demonstrate, the particulars of the business environment in a basin are the biggest influence on current and future G&P rates. Please reach out to learn more about our G&P Rate study. – Ryan Smith, James Taylor & Andrew Ware Tickers: CLR, DCP, DVN, WES.

Learn More about G&P Rates

To bring greater transparency to markets, East Daley Analytics is undertaking a broad study of G&P system rates. We maintain asset-level financial models for over 1,000 assets owned by public companies. From this asset pool, we’ve identified 200+ G&P systems for which we can confidently assess rates, and have created a G&P rate methodology based off our balanced public asset models. Contact us to learn more about how our G&P Rate Study can help your business.

Arbo + East Daley Webinar - January 31 at 1:30 PM EST

Join Arbo and East Daley for an in-depth discussion on gas pipeline rate cases and the impact of rate risk on transporters, shippers and investors.

We provide an overview of rate cases: their purpose, how and when rate cases are likely to be initiated, as well as the process, timing and potential outcomes. We then review recent case trends across the industry, using activity within the portfolio of Kinder Morgan (KMI) to illustrate rate risk and the impact at the entity level from an investor perspective. Register here.

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