May 2012, Vol. 239 No. 5

Features

Midstream Executive Speaks Candidly About Strategy, Growth Prospects And Safety

There are few executives around today better able to discuss the evolution of the natural gas industry on this planet than J. Mike Stice, CEO of Chesapeake Midstream Partners, President of Chesapeake Midstream Development and Senior Vice President of Natural Gas Projects for Chesapeake Energy Corp.

He is responsible for overseeing Midstream-related activities and managing corporate natural gas projects.

Before joining Chesapeake in October 2008, Stice spent 27 years in a variety of technical and managerial positions with ConocoPhillips and its predecessor companies where he most recently served as president of ConocoPhillips Qatar. While At ConocoPhillips, he also served as vice president of Global Gas LNG, as president of Gas and Power and as president of Energy Solutions in addition to other positions within ConocoPhillips’ midstream businesses. Stice received his chemical engineering degree in 1981 from the University of Oklahoma, a master’s degree in business from Stanford University in 1995 and an international director’s diploma from Queensland University in 1997. He recently completed his doctorate of education at The George Washington University. He and his wife, Joni, have two sons.

Chesapeake Midstream Partners, L.P. was created to be a growth-oriented midstream natural gas services provider with operations focused on owning, operating, developing and acquiring midstream energy assets in the United States. The company provides gathering, treating and compression services to producers under long-term, fixed-fee contracts and has a strong asset base and extensive intrastate pipeline infrastructure located strategically in the Barnett Shale, Haynesville Shale, Marcellus Shale and Mid-Continent regions.

The company owns and operates natural gas midstream assets across seven states, with an average throughput of approximately 2.7 Bcf/d and more than 3,700 miles of natural gas gathering pipelines.

In this interview with P&GJ, Stice explains the company’s strategy involving the midstream energy sector and the characteristics that set Chesapeake Midstream apart from other midstream operators.

P&GJ: What is Chesapeake’s strategy involving the midstream energy sector?
Stice: Chesapeake Midstream (CM) is focused on becoming the number one or number two midstream service provider in every region in which we operate by leveraging Chesapeake Energy Corporation’s growth, knowledge and upstream presence. Our midstream assets include more than 5,000 miles of active pipelines connected to more than 6,000 wells and 227 gathering systems, which transport around 4 Bcf/d. In addition, we operate 139 compressor stations.

P&GJ: What characteristics make Chesapeake unique from other midstream operators?
Stice: Chesapeake Midstream has unique access to growth prospects as a result of its relationship with Chesapeake Energy. Moreover, Chesapeake Midstream has differentiated itself from its peers through a rigorous commitment to safety and environmental excellence. ZERO safety and environmental incidents is our goal.

P&GJ: What parts of the value chain is Chesapeake most focused on – transportation, production, processing, marketing, etc?
Stice: We focus specifically on the unregulated components of the natural gas, oil and natural gas liquids (NGL) value chain where fee-based services can be provided to eliminate direct exposure to commodity price risk. Chesapeake Midstream further concentrates its efforts on unconventional developments where capital can be deployed more efficiently.

P&GJ: Where are the majority of your operations centered and do you expect to expand beyond this focal point?
Stice: Chesapeake Midstream operates through two distinct organizations: 1) Chesapeake Midstream Development (CMD) has a strong asset base in Louisiana, New Mexico, Ohio, Oklahoma, Pennsylvania, West Virginia and Wyoming; and 2) Chesapeake Midstream Partners has a strong asset base in the Barnett Shale near Fort Worth, TX; the Haynesville Shale in Louisiana; the Marcellus Shale in Pennsylvania and West Virginia and in the Mid-Continent region of Arkansas, Kansas, Oklahoma and Texas.

Midstream’s most recent expansion is a joint venture announced in mid-March to build the largest integrated midstream service complex in eastern Ohio. CMD will partner with M3 Midstream LLC (Momentum) and EV Energy Partners, L.P. to develop a complex that will provide necessary infrastructure to process natural gas and natural gas liquids (NGL) in the liquids-rich Utica Shale play.

P&GJ: How is the wide disparity between oil and natural gas prices affecting business today and is there any way to hedge against this?
Stice: Obviously, the abundance of supply created by the new- found shale developments has resulted in a short-term oversupply that has disconnected oil and natural prices on a Btu basis. This price disparity may take some time to correct. With regard to the impact to Midstream, a shift in activity levels from dry gas plays to liquid rich plays has occurred. The result is an increased investment opportunity in gas processing, fractionation and liquid pipeline infrastructure.

P&GJ: When and why did Chesapeake first become involved in the shale play?
Stice: Chesapeake began its work with shale plays by acquiring a working interest in a Barnett Shale property as early as the summer of 2002. Chesapeake’s primary motivation was to explore the use of unconventional technology to develop the abundant resource within shale.

P&GJ: To date, how much of your activity is focused on shale and do you see this increasing in the next five years? What strategies are you pursuing in developing your shale properties?
Stice: Midstream greatly benefits from the unconventional development activities associated with shale plays. Pad development allows Midstream to lay pipeline to a single location and service multiple wells. This same unconventional approach is proving equally effective in the wash plays such as the Granite and Colony Wash in western Oklahoma.

P&GJ: What are some of the challenges you’ve encountered in working with your shale and other unconventional plays?
Stice: Midstream challenges range from route development to permitting, from meeting landowner requirements to timely construction. Chesapeake’s experience in unconventional plays provides the expertise and solutions to meet these challenges.

P&GJ: Do you see the majors continuing to assert themselves in the shale plays, and is this good or bad for midstream operators?
Stice: Opportunities in shale plays will continue to attract the majors. The abundance of reserves, low geologic risk and relatively low finding and development costs will continue to motivate E&P companies, large and small, to pursue these developments. Of course, midstream companies will be required to build the necessary infrastructure to bring these resources to market.

P&GJ: Overall, do you see the new market dynamics dictating where future pipeline development and expansion is most likely?
Stice: Market dynamics will always have an impact on midstream activities, as will the movement toward liquids. Current developments are within regions where significant new infrastructure is required to meet the growing supply of natural gas, oil and natural gas liquids.

P&GJ: Do you feel there is a lack of NGL infrastructure for transport and fractionation? If so, what do you perceive as the key for continued NGL development?
Stice: Infrastructure will need to keep pace with emerging and existing shale plays. Chesapeake’s joint venture in the Utica Shale is an excellent example of how the industry is developing the much-needed infrastructure to manage NGL transport and fractionation.

P&GJ: What is your strategy regarding natural gas-fueled vehicles and how are you helping to move this forward?
Stice: Chesapeake is a leader when it comes to natural gas vehicles. We were the first in the industry to start converting our corporate fleet to compressed natural gas (CNG). We have converted more than 1,300 vehicles to date and are on track to convert our entire fleet of approximately 6,000 vehicles to natural gas over the next three years. Chesapeake will realize more than $11 million in savings annually once the entire fleet is converted to CNG.

When fleet administrators hear real-life, bottom-line savings numbers like ours, they want to investigate converting their fleets to natural gas. And many, like UPS and AT&T, have already moved to CNG. Chesapeake is also moving the CNG movement forward by working with local fuel retailers such as Love’s Travel Stops & Country Stores and OnCue Express to increase the number of natural gas fueling stations available to fleet drivers and the general public. And, through our newly created Chesapeake NG Ventures, we have invested $150 million to accelerate creation of a natural gas infrastructure on America’s highways.

P&GJ: How successful is the industry being at getting the message out to the public about the rebirth of our resources?
Stice: Chesapeake has always been vocal about the benefits of clean, affordable and abundant natural gas. This past year, Chesapeake announced the creation of a new affiliate, Chesapeake NG Ventures, to invest in new infrastructure and technologies to create demand for natural gas and lower energy costs for American consumers.

P&GJ: How did you become involved in the energy industry?
Stice: I began my career in the midstream industry as a roustabout before moving into an engineering role and later into management. My entry into the industry was simply designed to leverage my training as a chemical engineer in college.

Editor’s Note: For more information on the midstream service complex in eastern Ohio, see the March 13, 2012 news release on Chesapeake Energy Corporation’s website.