The Williams Cos. Inc. (NYSE: WMB) is partnering with privately-held Brazos Midstream in a new Permian Basin joint venture (JV) partially aimed at alleviating the residue gas headache facing producers in the prolific basin, the companies said in a joint release Nov. 15.

The JV also comes as a recently updated U.S. production outlook by the Energy Information Administration saw little improvement for natural gas takeaway dynamics in the Permian Basin.

As a result, analysts with Tudor, Pickering, Holt & Co. (TPH) believe the roughly 2 billion cubic feet per day (Bcf/d) of annual residue gas growth in the Permian will maintain pressure on infrastructure despite greenfield capacity additions of 4 Bcf/d from Kinder Morgan Inc. (NYSE: KMI) Gulf Coast Express and Permian Highway projects.

Brazos Midstream Asset Map (Source: Brazos Midstream)

“While the Waha differential has contracted in recent days on winter weather, we expect pricing to remain pressured as physical constraints are tested,” the TPH analysts said in a Nov. 16 research note. “Though near-term market concerns have faded on an expectation of less stringent flaring regulation, the basin requires a structural solution which will likely come in the form of ratable greenfield pipeline additions.”

Further, TPH forecasted supply model sees Permian wellhead production rising to about 22 Bcf/d in 2022 from the roughly 8.3 Bcf/d a year ago. However, despite a natural gas problem lingering for Permian producers, TPH analysts noted the opportunity that exists for midstream operators as pipeline FIDs to date “merely maintain status quo” for the basin.

Notably, TPH analysts believe the Williams-Brazos JV announcement also throws Williams previously proposed Bluebonnet Market Express pipeline back in the race.

Pro forma, the JV between Williams and Brazos will include roughly 800 miles of natural gas and crude gathering pipelines plus 75,000 barrels of oil storage located across the Southern Delaware Basin in West Texas in Reeves, Loving, Ward, Winkler, Pecos and Culberson counties. The JV will be supported by over 500,000 acres of long-term dedications currently under full-field horizontal development from leading major and independent oil and gas producers, the release said.

Initially, the partnership will have natural gas processing capacity of 260 million cubic feet per day (MMcf/d). Though, the JV gas processing capacity is set to grow first-quarter 2019 to 460 MMcf/d when the Comanche III processing plant that Brazos is currently constructing comes online.

As part of the JV agreement, Williams will contribute its existing Delaware Basin assets comprised of a roughly 100 MMcf/d natural gas gathering system to Brazos’ gathering and processing footprint. In exchange, Williams will receive a 15% minority interest in the JV. Brazos Midstream, backed by Morgan Stanley Infrastructure Partners, will hold the remaining 85% ownership in the JV.

TPH analysts noted that Williams will be “looking to translate minority stake to majority of natural gas residue volumes” as included in the JV is an agreement between Williams and Brazos to pursue a residue gas solution. This could potentially revitalize Williams’ Bluebonnet pipeline, the analysts said.

Williams Proposed Bluebonnet Market Express Pipeline (Source: Williams)

Williams’ Bluebonnet pipeline is a roughly 500-mile pipeline with 2 Bcf/d of capacity planned to connect gas supply from growing Permian production to the Gulf Coast or northbound via the Transco Zone 2 in Katy, Texas.

“With the residue gas position that we will establish together with Brazos, we unlock additional opportunities for value, as growing Permian natural gas supply increasingly needs access to high-value demand markets, including premium Gulf Coast markets served by our Transco system, the nation’s largest pipeline system by volume,” said Chad Zamarin, Williams senior vice president for corporate strategic development, in a statement.

Zamarin added the JV will increase Williams’ scale in the Delaware Basin, including a much larger footprint, new processing capabilities and greater exposure to the “impressive customer base” that Brazos serves.

Since forming in 2015, Fort Worth, Texas-based Brazos developed into one of the largest midstream oil and gas companies in the Delaware Basin. Its customers include major and independent oil and gas producers, which together have made long-term dedications from over 400,000 acres. The company continues to expand its asset base in cooperation with new sponsor Morgan Stanley Infrastructure Partners following a $1.8 billion deal that closed in May 2018.

Brazos CEO Brad Iles said in a statement: “We are excited to form this joint venture with Williams and greatly appreciate the confidence they have in Brazos to entrust us with operatorship of their assets and stewardship of their customers. Williams is well-known as one of the nation’s premier natural gas midstream companies, and we believe this partnership will greatly enhance both companies’ efforts to develop top-tier assets in the Permian Basin.”

RBC Capital Markets is the lead financial adviser to Williams for the JV transaction.

Emily Patsy can be reached at epatsy@hartenergy.com.

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