Transportation, processing infrastructure critical to Utica Shale growth

With natural gas production in the Utica Shale predicted to reach at least 1.2 bcf/d by the end of 2014 and crude oil production expected to hit 155 Mb/d or higher by 2016, transportation constraints and competition for processing capacity take center stage in the Northeast.

"Even with nearly 2.0 Bcf/d of additional Northeast gas processing capacity scheduled to come online over the next two years, the combined production from the Marcellus and Utica shales could surpass total regional processing capacity by 2015. This would create significant transportation constraints and competition among producers vying for existing processing capacity," warned BENTEK in a November 2011 report. Bottlenecks linger for years, but companies recognize the problem and are taking action.

In early March, MarkWest Utica EMG LLC executed a letter of intent with Gulfport Energy Corp. to provide gathering, processing, fractionation, and marketing services in the liquids-rich corridor of the Utica. The agreement calls for MarkWest Utica to develop extensive natural gas gathering infrastructure with Gulfport and other producers primarily in Harrison, Guernsey, and Belmont counties that is expected to come online beginning in 2012. MarkWest Utica will process the gas at its Harrison County processing complex, and will provide NGL fractionation and marketing services at the Harrison County fractionator, where NGL purity products will be marketed by truck, rail, and pipeline. A March 7 note to investors from Global Hunter Securities said that while Gulfport is the only company named, "the rapid development of gathering and processing infrastructure in the Utica will undoubtedly benefit other producers as well."

On March 13, Chesapeake Midstream Development LP (CMD) announced its partnership with M3 Midstream LLC (Momentum) and EV Energy Partners LP to develop a complex expected to consist of natural gas gathering and compression facilities constructed and operated by CMD, as well as processing, NGL fractionation, loading and terminal facilities constructed and operated by Momentum. The cryogenic processing facility will be located in Columbiana County and have an initial capacity of 600 MMcf/d. Natural gas liquids (NGL) will be delivered to a central NGL hub complex in Harrison County that will feature an initial NGL storage capacity of 870,000 bbls and fractionation capacity of 90,000 b/d, as well as a substantial rail-loading facility. The partnership plans to invest approximately $900 million over the next five years. The current ownership structure of the partnership is 59% CMD, 33% Momentum, and 8% EVEP. Total E&P USA, Chesapeake's 25% JV partner in the Utica wet gas acreage, has an option to participate, which may reduce the ownership of CMD affiliates and EVEP to 44% and 6%, respectively. The first cryogenic processing and fractionation plants are scheduled to be in service by 2Q13.

In late March, ArcLight Capital Partners purchased a 28% stake in Magnum Hunter Resources' midstream segment, Eureka Hunter Holdings LLC for $100 million. ArcLight will also have the right to invest up to an additional $100 million of Preferred Units, bringing the total potential investment to $200 million. According to Stifel Nicolaus analysts, the transaction implies a market value of nearly $360 million for the midstream segment, slightly higher than its $300 million estimate.

In mid-July, Caiman Energy II LLC secured $800 million from Williams Partners, EnCap Flatrock Midstream, Highstar Capital, and management for the development of midstream infrastructure in the area.

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