Oklahoma 2018

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OKLAHOMA: MIDSTREAM | November 2018 | 37 At the other end of the pipe, molecules need markets, and the innovation for Redcliff was its compass heading. "Everyone knew that the Stack was going to generate a lot of gas," Yates said. "And everyone was trying to send their gas south, driving competition for takeaway pricing. So our idea was to move gas to northwest markets, which had a healthy amount of existing demand." Since bringing Redcliff into operation, it has gotten dedicated acreage from a third producer. "Originally we just wanted volume to make mid- stream operations economically attractive," he said. "But then incremental revenue on incremental vol- ume is where you make money. We continue to talk to other producers, and are modeling out capacity." So far operations at the processing plant have exceeded expectations, Yates said. "We will start thinking in earnest about expansion in the spring. Capacity is 200 million a day and we are already running about 75 MMcf/d now. One of our portfo- lio companies is about to go to pad drilling, so they could fill the plant on their own. It is all a matter of balancing capital investments." The same goes for any midstream investment thesis. "First, there has to be scale to warrant the infrastructure," Yates explained. "Second there has to be an understanding of the reserves and the underlying economics. There is so much pri- vate equity in the midstream space these days. It is essential to determine if someone else's capital can do the job for you or if you have to invest your own. Given that we have so much knowledge and exper- tise with upstream investments, we can be quick to recognize when there is a compelling opportunity to invest in midstream infrastructure." As a gut feeling Yates reckoned that some- where between one-third and one-half will have to build out their own midstream. Then the ques- tion becomes how to fund it and who will run it. "Kayne is open to working outside the family as well through joint ventures or retaining profits interests." Yates said. "The midstream market has evolved significantly over the past few years and with enough competition today, there are a num- ber of ways to retain midstream upside outside of backing your own team. Silver Hill is an upstream portfolio company of ours, and they got a good midstream joint venture proposal from Outrigger, which is backed by Denham." That level of collaboration seems to come rel- atively easy in Oklahoma regardless of ownership relationships among producers and midstream operators. Part of the explanation, Yates reasoned, is that Oklahoma has just as much legacy as the Permian, in a smaller area. "People talk about the Permian as a single basin, but it is 53 counties over two states," he said. "Assets in the Delaware are different from assets in the Midland or Central Basin Platform. Oklahoma is less overall area, and has more gas pipes everywhere, so we had a better start on gath- ering and processing." A third factor is historical. "I don't think there has been a new lease in Oklahoma in 75 years," joked Yates. "The state is pretty much all held by production. Midstream operators are more com- fortable investing capital for dedicated acreage." 'Out of my dreams' Tall Oak Midstream III was formed just over a year ago, in July 2017, with a $200-million commitment from major midstream private-equity firm EnCap Flatrock Midstream. In January 2016, Tall Oak sold its first venture to EnLink Midstream for $1.55 bil- lion. At that time, the company already had formed Tall Oak Midstream II, which is focused on operat- ing and expanding its midstream assets in the Stack play. Tall Oak III is developing midstream oppor- tunities across North America outside the Stack, but not venturing too far afield at first: The initial processing plant is being built in the Arkoma Stack. "Throughout the Midcontinent, and in Okla- homa in particular, midstream has done a good job of keeping up with the rapid growth of pro- duction," said Ryan Lewellyn, CEO of Tall Oak III. "Oklahoma is the second fastest growth play in the country, after the Permian, so midstream has had to build aggressively to keep pace." He cited residue gas as an exception, which has been noted by others. "We have been saying for 20 years that residue capacity will be a problem, but with all the activity across the Stack, Arkoma and Scoop real constraints are here. With new transpor- tation projects coming down the line, that should

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