Development of the Fayetteville shale-gas play, based in Arkansas’ Arkoma Basin, is well on its way, but there is much gas left to produce. The shale covers some 34,000 square miles, slightly smaller than the Barnett shale, and encompasses Conway, Van Buren, Cleburne, Independence, White and Faulkner counties.

The 2010 U.S. Geological Survey’s National Oil and Gas Assessment shows some 13.2 trillion cubic feet (Tcf) of potential undiscovered gas reserves in the play. Production was projected to reach more than 2.3 billion cubic feet (Bcf) per day by the end of 2010, calling for a marked growth spurt in the resident supporting midstream industry. As ever more facilities are needed to move gas from wellhead to market, how are Fayetteville majors planning to expand?

According to two resident operators, CenterPoint Energy Co. and Southwestern Energy Co., the best is yet to come.

CenterPoint Energy

Houston-based CenterPoint, a domestic energy-delivery company currently active in the Fayetteville, can trace its roots back more than 135 years. The company has a market cap of $6.7 billion with a portfolio of five energy segments. Its electric transmission and distribution service has operations in Houston, and its natural gas local distribution operation is in six states, including Arkansas. The company has a large midstream presence in the Fayetteville as well as other Midcontinent shales.

"Our year-over-year throughput is up more than 50% across our gathering systems, driven by the production development in the shale plays where we have deployed over $1.1 billion in Capital," C. Gregory Harper, sr. vice president and group president of pipelines and field services for CenterPoint Energy Co.

C. Gregory Harper, senior vice president and group president of pipelines and field services for CenterPoint, says, “We access multiple market outlets and we have a strong regulatory and legislative relationship in the region. Also, we have a pretty solid environmental reputation, which helps.”

This is especially important for the current drilling and transporting environment, because, nationally, several recent pipeline incidents and spills have turned public concern towards safety.

“Our ability to deliver facilities on time and on budget is grounded by our existing relationships with contractors. We provide investors surety via long-term contracts with multiple quality customers. And, just as important, we are able to deliver our commitments to those customers because we have experienced and educated field personnel, with a strong safety history,” he says.

CenterPoint’s gathering, treating and processing business, its field-service segment, is focused on Midcontinent production basins and shale plays like the Fayetteville. Its transmission system moves gas to a variety of interconnects to interstate pipelines, including CenterPoint Energy Gas Transmission (CEGT), which moves the majority of its throughput. The company owns more than 4,000 miles of gathering facilities and operates about 200,000 horsepower of compression.

The play’s well count is on the rise, boosting midstream operations to new heights. CenterPoint has averaged more than 400 well connects in the past five years across its system, and is continuing to expand, thanks to heavy activity in the play.

“Our year-over-year throughput is up more than 50% across our gathering systems, driven by the production development in the shale plays where we have deployed over $1.1 billion in capital,” says Harper, adding that average initial-production well rates are from 2.5- to 7 million cubic feet (MMcf) of gas per day.

ExxonMobil Corp.’s subsidiary, XTO Energy, has dedicated about 350 sections, or roughly 225,000 acres, to CenterPoint’s midstream operations. The acreage is in White, Cleburne, Independence and Faulkner counties. The

producer has nine rigs and two spread rigs operating in the Rose Bud system. The commitment presents a growth opportunity for CenterPoint.

Although the produced gas coming out of these wells basically meets pipeline-quality specifications, Harper says some of the new production is showing “a little increased” CO2 content, but it’s not enough to change project plans for the Fayetteville.

“We have constructed more than 90 miles of 16-inch gathering lines, and we are scheduled to construct an additional 20 miles of 16-inch in 2011 and 2012, based on the original scope of the project. We also provide dehydration with a capacity of about 400 MMcf per day. We’ve spent about $90 million on the two projects as of the end of 2010.

“Depending on XTO Energy’s production schedule, we may spend an additional $50 million during the next several years,” says Harper. “We are well prepared to build facilities that will accommodate up to 900 MMcf per day, depending on XTO Energy’s production schedule.”

XTO is currently flowing 200 MMcf per day in the area—a throughput representing some 98% of all volumes on CenterPoint’s Rose Bud and Pleasant Plains infrastructure systems. The contracts are fee-based, and support secure rates of return on the substantial capital CenterPoint is investing. Harper says CenterPoint’s potential for growth is exponential as XTO Energy increases production in the play.

Meanwhile, additional services may be required, if amine treating or other facilities, such as compression, are needed to support increased gas production.

“Modeled production is expected to be more than 2.5 Bcf per day exiting 2011, and has the potential to increase by 20% through 2015, mainly depending on market conditions,” he says.

CenterPoint operates two wholly owned Fayetteville pipeline systems, the Centerpoint Energy Gas Transmission system and the Mississippi River Transmission, as well as the Southeast Supply Header, where the company holds a 50% ownership.

In total, CenterPoint operates nearly 8,000 miles of pipeline, including 18 interconnects, with a capacity of more than 9.2 Bcf per day, as well as more than 51 Bcf of working storage capacity, with expansions expected, says Harper.

Southwestern Energy

Houston-based Southwestern Energy Co., with upstream and midstream operations, is another shale-gas player. In the Fayetteville, its exploration and production operations are fueling a corresponding growth in its midstream business.

"We're seeing continually improving results in our driving in the Fayetteville shale," John Gargani, vice president, midstream planning and commercial operations, Southwestern Energy Co.

“Our midstream segment is designed to provide high-quality service and capture additional value by providing the midstream services along with our E&P segment. Typically you’ll only find us where our E&P segment is pursuing reserves,” says John Gargani, vice president of midstream planning and commercial operations.

Southwestern primarily conducts its exploration and production operations through its wholly owned subsidiaries, SEECO Inc. and Southwestern Energy Production Co., or SEPCO.

Historically, SEECO has operated exclusively in Arkansas. It holds a large base of both developed and undeveloped gas reserves in Arkansas and drills the Fayetteville shale as well as conventional targets in the Arkansas part of the Arkoma Basin.

SEPCO conducts development drilling and exploration programs in the Oklahoma portion of the Arkoma Basin and in Texas and Pennsylvania. DeSoto Drilling Inc, a wholly owned subsidiary of SEPCO, operates drill rigs in the Fayetteville shale play and in East Texas.

Southwestern’s midstream services generate revenue from gathering and marketing affiliate and non-affiliate gas in Arkansas, Pennsylvania and Texas through its gathering subsidiaries, Desoto Gathering Co. LLC and Angelina Gathering Co. LLC.

The company’s gas marketing subsidiary, Southwestern Energy Services Co., captures downstream opportunities that arise through its marketing and transportation activities.

“Southwestern’s strategy is very much one of organic growth, or growth through the drill bit, as opposed to growth through exploiting acquisitions,” says Gargani. “One of the measures that we look at is what percentage of our capital budget is aimed towards drilling wells. Typically, we have about 75% of our capital budget going in the ground via drilling wells.”

The company has a track record of significant growth. “From 2004 to 2009, we’ve shown an annualized rate of production increase of 40%. Over that time, we’ve also replaced over 500% of our production at an average F&D cost of $1.46,” he says. In 1998, its market cap was about $200 million, compared to about $12 billion today.

However, Gargani does not attribute the company’s success entirely to its devotion to the shale plays. He says it’s all about “the right people doing the right things, wisely investing the cash flow from the underlying assets to create value plus.”

Says Gargani, “We’re seeing continually improving results in our drilling in the Fayetteville shale. We are just shy of 900,000 acres in the play. For those who don’t know, the Fayetteville shale is the same age equivalent (Mississippian age) as the Barnett shale, so we had somewhat of a reference to go by there, when we first started looking at the Fayetteville shale. We will drill between 440 and 450 operated wells in 2011, so it’s a very active program, and we have a pretty sizable drilling inventory ahead of us.”

The Fayetteville shale’s story is one of continuous improvement, says Gargani. Not long ago, the shales were considered to be high-cost reservoirs. Yet, through technology, the industry has been able to lower the cost of many such reservoirs.

For example, Southwestern has been able to increase the lateral length of its wells while keeping the well costs flat, at about $3 million each. As the lateral length has increased, so have initial-production rates and reserves.

“We’re currently going through the year-end 2010 reserves process right now, but we expect to see significant growth there,” he says.

Gargani is pleased that Southwestern was a first mover in the play. “It had a big implication on the midstream side, because the company was able to develop a consolidated, contiguous acreage position, allowing Southwestern to realize economies of scale,” he says. “Back in January of 2006 we were producing about 10 MMcf a day. We are now producing more than 1.5 Bcf a day.”

That production volume has grown the midstream capabilities of the company substantially. In 2009, the company’s EBITDA was about $140 million, and the company is forecasting 2010 to be in the $205- to $210-million range.

“I’m told that we are either the biggest or one of the biggest contiguous gathering systems in the U.S.,” he says. “Again, that’s the benefit of having the first-mover advantage—being able to reach a high production volume, and having the contiguous acreage position to do so. We have gathering lines of more than 1,500 miles, and we have compression of more than 450,000 horsepower.”

Southwestern has firm capacity of about 800 MMcf on the Texas Gas Transmission (TGT) Pipeline in the Fayetteville lateral and 640 MMcf on the Greenville lateral. The Fayetteville Express Pipeline (FEP) came into interim service in October 2010. When fully in service, the firm capacity on the line will ramp up to 1.2 Bcf per day.

“One of the primary objectives that we’ve had with the TGT line, and I think we’ve been very successful at, is crossing a number of pipelines. That just gives us a lot of flexibility in terms of the markets that we are able to reach with our Fayetteville shale gas,” he says.

“Similarly, the FEP line takes Southwestern’s gas through the heart of the field and across the Mississippi River to tie into the TGT, ANR and Trunkline pipelines. We are looking for a lot of optionality for being able to sell our gas into premium markets.”

Current Fayetteville shale take-away capacity is about 4 Bcf per day. Southwestern’s share is about 2.2 Bcf per day, says Gargani.

“So, we do have some room for growth as we continue to drill in the area. As far as opportunities in the midstream side in the Fayetteville shale, the consolidated acreage position that we have allows us to be very efficient.”

Growth markers

As with any shale, Southwestern’s gathering volumes are tied to the rig count, which is tied to the currently less-than-optimal gas price. Also, the Fayetteville is not immune to the current trend of producers shifting to the liquids-rich sections of shale plays.

“There is some movement of rigs and equipment by other operators into the liquids-rich gas plays, and this could potentially lower activity in the Fayetteville shale,” he says. “On the positive side, the producer dynamic is changing.”

With supermajor ExxonMobil’s entrance into the play, and Petrohawk’s exit, the industry may see some additional consolidation leading to more midstream opportunities, observes Gargani. “Particularly encouraging would be if there were higher activity, as the new players continue to inject more capital in these acquisitions to get production rates up.”

The story of the Fayetteville shale and, indeed, all shales, is continued improvement in well performance and technology. Midstream operators plan to stay on top of new trends and manage their assets as conditions improve, while closely monitoring the gas markets and the midstream growth that correlates to production growth.

CenterPoint Energy Longhorn and Wildcat dehydration plant in White County, Arkansas, where natural gas is dried and treated.

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