Nuevo’s Playground

In 2011, Houston-based Nuevo Midstream LLC was launched with a $65 million equity commitment to focus on developing and operating midstream infrastructure for operators in the Permian Basin. Nuevo is focused on the Bone Springs, Wolfcamp and the Avalon shale trends in Southeast New Mexico and West Texas.

Equity backing for the new company came from EnCap Flatrock Midstream, Torch Energy Advisors Inc. and Petroleum Fuels Co. Inc. After the successful start up, EnCap Flatrock increased its commitment to Nuevo to $120 million in 2012.

Nuevo’s initial assets, which were initially acquired by Torch and Petroleum Fuels and ultimately contributed into Nuevo, include the Ramsey system with some 130 miles of low-pressure gas-gathering pipeline, compressors and measurement stations, and processing, fractionation, storage and loading facilities in Reeves County, Texas. The gathering system extends into Eddy County in Southeast New Mexico and Culberson, Loving and Reeves counties in West Texas.

Nuevo Midstream is led by Jay Lendrum, president and chief executive, Randy Ziebarth, vice president and general manager and a team of midstream professionals. Lendrum credits Ziebarth as one of the driving forces in the company’s growth story.

“Torch operated the Ramsey system, which had been built in the 1960s by Conoco in the Delaware Basin on the western side of the Permian Basin, since late 2004,” explained Lendrum in a telephone interview with Jeannie Stell, editor, Midstream Business. “Conoco had been using it as a gathering facility. The emergence of several unconventional plays, including the Avalon shale, the Bone Springs and the Wolfcamp shale near our system caused us to focus on the potential of this area.”

Lendrum and Ziebarth knew the gathering system and processing facility needed to be upgraded significantly to adequately handle new production from the emerging unconventional plays developing in the area.

Focused development

Initial upgrades were completed in late 2011 as part of the first phase of the upgrade and expansion, and the existing cryogenic plant is now in operation with the capacity to process 11 million cubic feet (MMcf) per day. Nuevo is now refurbishing a large cryogenic processing plant and an amine treating plant, which will be installed at the same site this summer. The new cryo plant will have the capacity to process more than 100 MMcf per day.

Nuevo continues to focus on developments on the west side of the Delaware Basin, in Culberson, Reeves and Loving counties in Texas, and Eddy and Lea counties in New Mexico. In addition to the new plant installations, the second phase of the Ramsey expansion includes the installation of more than 70 miles of gathering lines and three new compressor stations. Once completed, the Ramsey gathering system will cover a significant portion of the region, and its footprint will extend roughly 50 miles east to west and about 30 to 40 miles north to south.

“With the addition of the new amine plant, we will have the treating capability for about 60 MMcf per day of high carbon dioxide (CO2) gas in the Ramsey gas-processing plant,” says Ziebarth.

Nuevo is seeing a huge amount of potential at its current location and will continue to expand to meet its customer’s needs. The company could potentially include a third major facility, with more treating capacity for the CO2 if the Avalon formation continues to be significantly developed. The expansion could begin during the coming 18 months.

“As far as this project goes, we see the potential to take the 110 MMcf per day that we will have this summer and double that,” says Ziebarth. “We are looking at equipment options right now to do that. We would like to get a few more drilling data points. It’s still a fairly new area that continues to evolve.”

Making connections

Nuevo’s anchor customers include ConocoPhillips, Concho Resources Inc. and Chesapeake Energy Corp. It also has a number of smaller, private companies on board, giving them a total of more than 35 customers.

The company’s gathering assets connect to Enterprise Products Partners LP’s intrastate pipeline for residue gas. Nuevo is in the process of building an interconnect into El Paso Corp.’s natural gas interconnect and is in negotiations for a natural gas liquids pipeline connection.

The residue gas will head to the West Coast using El Paso’s pipeline to serve the California markets. The liquids will end up in Mount Belvieu, Texas.

“There are probably seven or eight pipelines that go east to west, and our system is immediately adjacent to them. There are products lines, natural gas lines, liquefied petroleum gas lines and crude oil lines. We’re in a very fortuitous field position because we have access to a number of different lines,” says Lendrum.

While Nuevo’s focus has been in the Permian, management is open to opportunities in other shale plays.

“If a producer that we currently have a relationship with, says, ‘Why don’t you see what you can do in the southern part of the Permian or a shale play in Louisiana?’ we would definitely look at that,” says Lendrum.

Nuevo is currently looking at two specific shale projects that are emerging on the eastern shelf of the Permian Basin, which might have a very large aerial extent up into the southern panhandle of Texas. The company is also taking a look at other emerging areas, such as the Brown Dense in southern Arkansas, and—because Torch Energy has some gathering assets in Mississippi—the Tuscaloosa Marine shale.

“Torch does own other gathering assets including this one, and we have an agreement with EnCap Flatrock that if an attractive project develops, we will continue to contribute those assets either to Nuevo Midstream and operate them inside Nuevo, or to a newly formed entity,” Lendrum clarifies.

He also feels that with greenfield shale plays the producers need a good, full-service midstream company to respond to them, including the capability to process, treat and compress—and that fits very well with what Nuevo does.

Challenges and solutions

Lendrum sees opportunities for the midstream companies to help producers get maximum value for their gas. Nuevo executives are also watching crude oil plays, which are driving drilling programs. “But the associated liquids in those plays have to be handled as well,” he says.

The company has had internal discussions about oil gathering. Given the right opportunity, the company would consider “jumping in.”

Meanwhile, Lendrum and Ziebarth acknowledge that there are challenges in the energy industry today. The most prominent is timing—getting the right infrastructure in place to meet the requirements of drilling schedules, production schedules and producers’ take-away needs.

The second challenge is a result of the surprising speed at which shale plays have developed over the past few years. It’s been hard for local communities to keep pace, which can cause problems for workers looking for lodging, restaurants and many other requirements of day-to-day life.

“The Ramsey facility is more than 40 miles away from the closest town. That creates some challenges with respect to getting people. Human resources is a constant challenge,” says Ziebarth.

Some challenges can be overcome by installing real-time telemetry communication equipment to enable operators to monitor all of the well sites and their plants remotely from an off-site location, says Ziebarth. This also allows them to monitor any issues or problems in real time and gives them the ability to react immediately. The system also enables them to access the plant control system from their base in Houston.

Also, getting electric power to remote sites is an issue. “We’re seeing the infrastructure for electrical power is lacking. There’s not enough capacity to go around, so we will self-generate a portion of the power we are using until the transmission capacity to the area is expanded.”

And, as in many other newly developed unconventional plays, water availability can be troublesome. “There are not enough water resources,” says Lendrum. “We need water for our processes, so we have to truck it in as we don’t have a well. For process heat, we’re using hot oil processes instead of steam processes to help meet that challenge.”

Nuevo’s experienced employees, who anticipate what might occur, are its main solution to meeting challenges, he says.

Refurbished equipment

Meanwhile, getting sufficient equipment on-site can be a problem for midstream operators. Nuevo solves the problem of acquiring needed equipment for new processing facilities by finding and refurbishing under-utilized structures.

“The equipment being used for our current expansion is used equipment. We use a network of brokers who scour the industry for out-of-service equipment that we can refurbish,” says Lendrum.

“By doing this, we accelerate the timeline from the point of making a decision to installing and actually having it done, without having to wait for a new plant to come off the assembly line.”

Currently, all of Nuevo’s equipment is refurbished in the Houston area. For example, the cryogenic plant that is being installed by Nuevo in West Texas was actually used in Louisiana and is being refurbished in Tomball, Texas.

In addition to the new plant installations, the second phase of the Ramsey expansion includes the installation of more than 70 miles of gathering lines and three new compressor stations such as the facility pictured here.

What’s next?

So what is next for Nuevo Midstream? Because Nuevo is backed by a private-equity firm, management recognizes that EnCap Flatrock will look for exit opportunities at some point in the future.

“We would welcome the opportunity to do that as a public vehicle through Torch Energy,” says Lendrum. Torch has taken six companies public over the years. “We’ve been in this for about a year. We’ll start looking at our options in another year or so and decide which way is the best way for everybody.”

During his 30-year career in the energy industry, Lendrum has been involved with multiple transactions involving private-equity firms and both large and small public companies. Lendrum is highly appreciative of the EnCap Flatrock program. He believes the firm’s formula is a tremendous asset to their portfolio companies because EnCap’s team is comprised of industry professionals who have significant backgrounds in operating midstream companies. “At EnCap Flatrock, they’re midstream people first and finance people second,” Lendrum says.