Williams Companies announced today that it has entered into gas gathering agreements with Chesapeake Energy – the second-largest producer of natural gas and the 11th largest producer of oil and natural gas liquids in the U.S. The agreement sees an expansion of gas gathering services in growing dry gas production areas of the Utica Shale in eastern Ohio and a consolidation of contracts in the Haynesville Shale in northwestern Louisiana.
According to a statement issued by Williams the aim of the agreement is to optimize production opportunities, streamline fee structures and restructure commitments to incentivize long-term development of the two fields. The agreements with Chesapeake were entered into by subsidiaries of Williams Partners L.P. (NYSE:WPZ), of which Williams own 60 percent, including the general partner interest.
In the Utica, Williams and Chesapeake executed a long-term, fee-based contract which extends the length of the Chesapeake acreage dedication to 2035, increases the area of dedication by 50,000 acres from 140,000 acres to 190,000 net acres in a strategic area adjacent to Williams’ existing assets and converts the cost-of-service mechanism to a fixed-fee structure with minimum volume commitments (MVCs).
This change to a fixed-fee contract enhances Williams’ ability to gather third-party volumes and build scale in Utica’s dry gas areas. Williams expects this will provide the opportunity to invest more than $600 million over five years to install more than 200 miles of pipeline and related facilities as this prolific area of the basin grows with up to 800 million cubic feet per day of capacity to serve the development.
The companies also executed a new Haynesville contract that consolidates the Springridge and Mansfield contracts into a single agreement with a fixed-fee structure and a contract term to 2035. The consolidated contract is supported by MVCs and a drilling commitment to turn 140 equivalent wells online before the end of 2017. This commitment is projected to result in significant production growth in the Haynesville Shale asset over the next two years. The combined contract also better aligns producer-midstream interests, simplifies contract administration, optimizes development of the resource across both Springridge and Mansfield areas and extends the Springridge dedication 15 years to 2035.
“These new fee structures are designed to promote production in the best locations across a wider footprint in these great basins, which improves the economics on both the drilling and midstream side. We’ve also increased certainty around fees and volumes to support our strategy of creating long-term, durable value for shareholders,” said Alan Armstrong, chief executive officer of Williams.
Doug Lawler, Chesapeake’s Chief Executive Officer, commented, these agreements will result in lower gathering rates and lower differentials, making these assets even more competitive within our portfolio. In this capital constrained environment, we will benefit from these higher-return assets and expect to allocate incremental capital to these areas, while enabling Williams to more fully utilize its gathering systems. The commercial solution these new contracts provide will only enhance what we have already achieved with our operating performance.
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