Welcome to the Business Journal Archives
Search for articles below, or continue to the all new BusinessJournalDaily.com now.
Search
Utica Processing Plants on Track for August Start
YOUNGSTOWN, Ohio -- Chesapeake Energy Corp.’s $4 billion deal to sell its pipeline interests isn’t likely to derail plans to build a natural gas processing network in the Utica shale of eastern Ohio, executives say.
“There doesn’t appear to be any change in their plans,” says George Passela, executive vice president and CFO of M3 Midstream/Momentum, Houston, Texas. Passela is referring to Chesapeake’s agreement, announced June 8 hours before its turbulent annual shareholders meeting, to sell its subsidiaries, Chesapeake Midstream Partners LP and Chesapeake Midstream Development LP, to Global Infrastructure Partners for $4 billion.
“We are moving rapidly to the point where we will begin construction. I think we anticipate that will kick off in August,” Passela says.
Chesapeake, Momentum and EV Energy Partners announced in March the formation of a joint venture to construct two processing plants in Columbiana and Harrison counties at a cost of $900 million. The Columbiana project, planned for a site in Kensington just across the Carroll County border, would be a processing plant that separates dry gas from natural gas liquids. The liquid gas would then be piped to the proposed Harrison County fractionation complex, which would separate the wet gas into specific products such as ethane, propane and butane.
“We’ve acquired several parcels of land, and we are obtaining the necessary permits to begin construction,” Passela reports.
Passela confirms that the Utica shale processing system is among the assets included in the sale of Chesapeake Midstream Development LP to Global. Under the terms of the proposed sale, there is a 45-day exclusive negotiating period and a 45-day extension period if the parties agree on a purchase price they’ve made progress toward closing the deal.
Chesapeake Midstream Development is an entity that houses “dropdown” assets, that is, assets still relatively “immature” or as yet undeveloped, he adds.
Passela describes the Utica processing asset as “very immature,” noting that it “exists as of today, only on the drawing board,” and it would be premature to speculate on what could happen over the next 90 days regarding the sale. He also acknowledged that as of a phone interview June 8, there was no contact with Momentum and Global about the deal.
“It would be some time before anything really happens to this asset,” Passela says. “As far as we’re concerned, nothing has changed.”
J. Mike Stice, president and CEO of Chesapeake Midstream Partners, said during a conference call June 8, that the transaction is “transformational” for the company, and would preserve future dropdown assets.
“GIP is a committed and experienced sponsor,” he said, “and we’ve given line of sight to an industry-leading growth platform.”
The sale comes as cash-strapped Chesapeake is divesting itself from not just hard assets such as its midstream subsidiaries, but also hundreds of thousands of acres it controls via leasehold agreements in the Utica and elsewhere across the country.
Chesapeake is busy also fending off a firestorm of criticism from shareholders, media and analysts directed at its CEO, Aubrey McClendon. Over the past two months, McClendon has come under scrutiny from the press, the Securities and Exchange Commission and the Internal Revenue Service related to his personal financial dealings that shareholders claim present a conflict of interest.
The company is looking to sell off $12 billion worth of assets as part of a planned effort this year to reduce debt; some analysts have estimated Chesapeake must raise enough cash to cover a $22 billion shortfall over the next two years.
Chesapeake, which spent about $2 billion in land acquisition in Ohio starting in 2010, is directing its attention to just a handful of counties in eastern Ohio as it homes in on what it believes is the most lucrative and profitable portion of the play. On June 4, Chesapeake placed up for sale its leasehold position on 337,000 acres in 18 northern, southeastern and central Ohio counties in the Utica, including the roughly 11,800 acres it holds in Trumbull County.
That still leaves Chesapeake with about a one million-acre portfolio, at least for now, in the Utica. Chesapeake’s leases in Mahoning, Columbiana, Carroll, Harrison and Jefferson counties are not in the up-for-sale package.
Indeed, during Chesapeake’s annual meeting held June 8 at its headquarters in Oklahoma City, McClendon took time to tout the Utica as “one of the most important discoveries in the history of our business.”
Among the Chesapeake leases up for grabs are 450,000 acres in northern Michigan, 503,863 acres in the DJ Basin in Colorado and Wyoming, and another 57,273 acres in the Woodbine Sands in Texas.
What’s also clear is that Chesapeake is taking steps to consolidate some of its land-acquisition activities in-house to save cash instead of contracting with outside vendors. In Mahoning County, for example, Chesapeake’s contractor Mason-Dixon Land Co. is scheduled to vacate its offices in downtown Youngstown by the end of the month.
Mason-Dixon set up offices last year in the Ohio One building with five employees and has since grown to more than 50. The company conducts title and lease research at the county recorder’s office for oil and gas companies looking to acquire mineral rights from landowners.
“A normal transition is occurring in parts of Ohio where more responsibility is being placed on Chesapeake field staff,” says Chesapeake spokesman Pete Kenworthy. Those staffers will work out of Chesapeake’s Uniontown office and are “focused on more targeted acquisitions based on our development efforts.”
While signals can be seen that Chesapeake’s exploration is slowing in some areas, its overall presence in the Utica shale is on the rise, Kenworthy says. “We’ve moved our 13th rig into the Utica, up from eight at the start of the year,” he reports.
Drilling remains very brisk in Columbiana County, reports county recorder Craig Brown. Yet the players have shifted, and at least one Chesapeake vendor, Del-Penn Services, is no longer working in the courthouse basement, he says.
“We’re seeing others coming in, though,” Brown notes. “They might be letting up on the gas pedal a little bit, but there’s still a lot of activity. The shale in Columbiana County is supposed to be the best in the region.”
Richard Zehentbauer reports that Chesapeake workers are busy drilling a second well on his family’s 1,100-acre farm in Columbiana County’s Hanover Township. “They’ve drilled one of the south legs,” he says, “and now they’re drilling the second leg.”
The area around Hanover Farms is also fast becoming a focal point for Chesapeake drilling, Zehentbauer says. “They’re really pushing a lot of wells.” He anticipates a host of new wells would be drilled and new drilling permits issued for the immediate area. “The next plan of action is to get these pipelines signed,” he remarks.
Zehentbauer says Chesapeake plans to run three pipelines through his property, two of which will connect with the Kensington processing plant. “There’s a lot of activity everywhere,” he observes.
In other parts of the Utica, Chesapeake has tempered its exploration activity compared to earlier this year, officials say.
“We’ve seen a slight pause as Chesapeake regroups,” relates Amy Rutledge, director of the Carroll County Chamber of Commerce. Carroll County has emerged as the epicenter of oil and gas exploration in Ohio. The county has recorded 84 horizontal drilling permits since last year. All but seven are Chesapeake permits, according to the Ohio Department of Natural Resources.
Rutledge says Carroll County was blindsided by Texas-based Select Energy Services announcement in early June that it is backing out of a deal to locate an office just outside Carrollton, nixing 200 new jobs. She speculates that Chesapeake’s cash problems may have been a factor in Select Energy’s decision.
“I don’t know why Select pulled out, but my gut feeling says that’s part of the reason,” she adds. .
Another company, McJunkin Redmen Corp., is still moving forward on construction of a 12,000-square-foot warehouse on 13 acres in the county, Rutledge says. The company distributes pipe, valves and other components for the energy market.
Permitting activity is also expected to gradually rise throughout the summer months, reports Heidi Hetzel-Evans, spokeswoman for the Ohio Department of Natural Resources.
ODNR failed to issue any permits for the week beginning May 27, the first week this year that the department didn’t issue at least one permit. “It was a four-day week and there were some scheduling issues [with the staff],” Hetzel-Evans explains. “We’re actually seeing a slight uptick (READ STORY). It’s not a huge increase, but gradual.”
EDITOR'S NOTE: This story was first published in the MidJune edition of The Business Journal. Much of our print edition's editorial content is not published online. To subscribe, CLICK HERE.
Copyright 2012 The Business Journal, Youngstown, Ohio.