Gas

Gathering, Measurement, and Processing

An overview of the upstream, midstream, and downstream segments of our industry

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University of North Texas
Institute of Petroleum Accounting

Gas Gathering, Measurement, and Processing

Jim Tallant
Exigent Information Solutions, LLC
Littleton, Colorado

Introduction

The oil and gas industry in North America is typically divided into
three segments: Upstream, Midstream and Downstream. The Upstream
segment of the industry involves finding and producing oil and gas; the
Midstream segment involves transporting, processing and marketing oil and
gas; and the Downstream segment encompasses refineries for liquid
products, and the local distribution company (LDC), petrochemical
companies or commercial end users, among others, for natural gas. This
paper will discuss the Midstream segment with respect to natural gas.

Midstream infrastructure links supply with demand and connects

energy producers with energy consumers. In North America, the Midstream
segment includes more than 170,000 miles of pipelines, and the world’s
most technologically advanced infrastructure. The sector can include but is
not limited to the following:

 Gas gathering, treating, processing and fractionation

 Natural gas pipelines
 NGL Product pipelines
 Natural gas and product storage
 Natural gas and NGL Marketing

The midstream industry has gone through major structural changes over
the years. Today, midstream assets are most often operated as profit
centers, and held in many different ownership structures, including
integrated midstream companies, midsized specialty midstream companies,
and small start-up midstream companies, often using the corporate tax
structures of Master Limited Partnerships (MLPs) and Limited Liability
Companies (LLCs).

The ‘shale boom,’ which has brought the tremendous success of

unconventional oil and gas plays, has encouraged hydrocarbon production
in areas that were heretofore considered uneconomic. As these shale plays
are driving growth in drilling activity across North America, low gas prices
are causing producers to focus on rich gas plays (i.e., high in natural gas
liquid (NGL) content). For rich gas production to be profitable, NGLs must

1
2 Petroluem Accounting and Financial Management

be recovered, processed and transported to market. These new rich gas

resource plays are located in areas isolated from existing midstream
infrastructure and markets, and are driving demand for new midstream
assets and infrastructure.
 Tallant 3

Figure 1
U. S. Shale Plays

Demand for Midstream Infrastructure driven by shale and liquids-rich plays

Source: Energy Information Administration

4 Petroleum Accounting and Financial Management

History of Midstream

Before 1980 the major oil companies, large independents, interstate

pipelines and petrochemical companies owned most midstream assets.
Major oil companies built midstream facilities to bring their production to
market and to supply their refineries and petrochemical plants. Heavily
regulated interstate pipelines not only owned the interstate pipelines, but
also owned gas gathering and processing assets which enabled them to
expand their rate bases and secure supplies. At the time, energy markets
were heavily regulated and midstream assets functioned more as cost
centers and less as profit centers. This ‘artificial’ market environment
created years of supply and demand imbalances along with the associated
pricing distortions. Finally, in 1978, Congress enacted the Natural Gas
Policy Act (NGPA), intended to deregulate well head gas prices. The
Federal Energy Regulatory Commission (FERC) was charged with
implementing the NGPA.

By the 1980s, independent midstream companies serving third parties

began to enter the market. Independent gatherers and processors, intrastate
pipelines, and NGL logistics companies were expanding, fueled by price
deregulation and greater crude oil and natural gas availability.
The poor business conditions in the mid-to-late-1980s for the energy
industry gave rise to midstream asset sales and consolidation in the early
1990s. Major oil companies and large independents sold their midstream
assets as their production declined and they shifted focus to more lucrative
offshore and international projects.

In 1992, the most significant change in the gas industry happened when
the FERC passed Order No. 636, and Interstate pipelines became
transporters instead of merchants. Order No. 636 prohibited interstate
pipelines from owning any of the gas in their systems, and effectively took
interstate pipelines completely out of the merchant role they had historically
held. This created a dilemma – producers were without their purchasers and
distribution companies were without their typical city gate seller. Pipelines,
who use to schedule their own gas takes, had to develop a business process
to fill their pipelines and maintain the operations of their systems while
deliveries of gas into their systems were in the control of shippers, their new
customers (usually producers and marketers). Tariffs implementing Order
No. 636 went into effect in the fall of 1993 and called for shippers to
schedule gas through a nomination process and balance their deliveries with
downstream redeliveries; whereas in the past, pipeline purchasers bought an
entire well’s production, and the producer had to wait for its revenue check
to determine volume.
 Tallant 5

In the new era, producers have become shippers, and are required to
‘nominate’ transportation quantities before the first day of the month. The
nomination is due before the first MCF of gas flowed for the month, and
thus the producer / shipper do not know how much a particular well will
produce during the month. After the production month, gas is allocated on a
proportionate basis, usually based on nominations. Transporters / interstate
pipelines deliver the quantities nominated by the producer / shipper at the
downstream delivery point. The difference between actual, allocated gas
volumes delivered to the pipeline, and downstream volumes redelivered at
the delivery point becomes a pipeline imbalance, and is either settled by a
‘cash out’ (payment to the pipeline or producer using a predetermined price)
or by volume balancing (the overage / shortage to be made up the next
month on the pipeline).

By the mid-1990s, midstream had developed into a profit center in

processing, marketing and trading in an unregulated environment, as
midstream experienced returns exceeding the regulated cost-based returns of
the utilities and interstate pipelines. The attractiveness of the midstream
sector combined with a growing economy created robust demand for
midstream companies and assets in the mid to late 1990s. Electric utilities,
diversified energy companies, and energy marketers were the primary
acquirers of midstream companies and assets. Then, in the late 1990s, there
was a sudden availability of midstream assets on the market as majors and
large diversified energy companies decided to monetize their mature assets
with the goal of redeploying proceeds from the sale into higher-return,
upstream investments. During this time the midstream industry began to
significantly expand. Most majors spun off midstream assets into new
entities, which were able to use the Master Limited Partnership (MLP)
investment vehicle. MLPs are able to take advantage of a tax structure
which enables them to provide investors higher rates of return than those of
energy corporations. To provide investors with even better returns, MLPs
began to focus on growth, making large acquisitions and raising
distributions accordingly.

Modern Era

Gas can theoretically be sold by a producer at any point between the

wellhead and the burner tip, but activities beyond the production area are
still part of a separate business, the midstream marketing business.
Participants in the midstream marketing business aggregate quantities and
provide many other services which were historically provided by interstate
pipelines when they were merchants.
6 Petroluem Accounting and Financial Management

Today, the midstream industry includes major oil companies, large

independent midstream companies, energy merchants, petrochemical
companies, and smaller entrepreneurial midstream companies. Some have
upstream assets, some are focused strictly on processing, others are more
integrated, and many are funded by the MLP investment vehicle. The sector
continues to aggressively change, and many small companies are rapidly
building midstream assets, holding them for a short period of time, and
selling the assets to larger midstream players for significant returns. Other
companies and outside investors are taking advantage of this situation by
acquiring these midstream assets, while a few industry companies are
deciding their midstream holdings are not core to their long-term futures
and spinning them off. It is a very exciting time to be in the midstream
business!

Overview of Industry:

Transporting natural gas from the wellhead to the end user is a multi-
step process and involves infrastructure from the wellhead to interstate
pipelines to the local distribution company (LDC).

Gas And Oil Gathering, Gas Treating, And Gas Processing.

Gas Gathering

Natural gas gathering and processing infrastructure receives raw gas

from producers at the wellhead, processes it to meet the specifications of
pipeline quality gas, and delivers it into the pipeline grid. The natural gas
gathering system begins in the field, with the production of raw natural gas,
which is often treated in the field (separation and dehydration), compressed
and sent to a processing plant. Gas is usually gathered by several small
diameter pipelines which move the gas to larger gathering lines, and in turn
to a processing plant. Gathering lines are generally less than eight inches in
diameter, usually located in rural producing areas and operate under low
pressure. Most states do not regulate these lines. The raw gas stream
consists mostly of methane, but also contains other hydrocarbons such as
ethane, propane and butane, referred to collectively as Natural Gas Liquids
(NGLs). It can also contain carbon dioxide, nitrogen, helium, hydrogen
sulphide and water. Natural gas is commonly dehydrated near the point of
production or during the gas separation or sweetening process at a gas
processing facility. The gas then travels from the production area to a
processing plant to remove NGLs and non-hydrocarbon constituents, and is
raised to the level of pipeline quality gas. Once the gas has been processed
in a gas plant, it is compressed and transported in much larger pipelines
known as transmission lines, which can be up to 48 inches or more in
 Tallant 7

diameter. These pipelines operate at higher pressures and when they cross
state lines, they are regulated by the Federal Energy Regulatory
Commission (FERC). The interstate pipelines move the residue gas to
market hubs, local distribution companies (LDCs), commercial users,
chemical plants, or to underground storage reservoirs.

Gas Measurement

The gas must be measured at a myriad of points along the midstream

processing chain. The most common meter used to measure gas is the
orifice meter. Orifice meters measure the pressure drop across the orifice
plate, called the differential pressure. This variable, along with other
variables of the flowing gas, are used to determine of volume of gas flow.
The components of an orifice meter are a meter tube (meter run), orifice
plate, orifice holder, pressure taps, and a recording device (Electronic Flow
Computer (EFM) or a chart recorder).
8 Petroleum Accounting and Financial Management

Figure 2
Orifice Meter with an Electronic Flow Computer

Courtesy of COPAS Gas Accounting Manual

 Tallant 9

An orifice meter is called an ‘Inferential Meter,’ meaning that

characteristics of the gas flow are measured in order to ‘Infer’ the volume of
flow. Thus natural gas measurement is perpetually imperfect, since there is
always some degree of uncertainty associated with it. Although volume
calculations are based on science, we can never know the exact quantity of
natural gas flowing through a meter.

Processing

After the raw gas has been produced and gathered, it must be processed
to remove liquid hydrocarbons and impurities. Gas processing involves two
main operations: 1) extraction of NGLs from the gas stream; and 2)
fractionation of NGLs into their separate ‘Purity’ forms. Additional
processing may be required to treat and condition the natural gas and the
NGLs to remove CO2, H2S, nitrogen, etc. Once the NGLs have been
removed from the gas stream, they become feedstock or end products in the
distribution chain, and include ethane (C2), propane (C3), butane (C4) and
pentanes (C5). For the most part, NGLs are generally used by refineries,
petrochemical plants, the agriculture industry, and NGL distributors.

Processing a raw gas stream for delivery to interstate transmission

pipelines can involve a range of technologies, depending on the chemical
content of the gas stream, location of the hydrocarbons and other factors. In
some cases, dehydration is sufficient to move the gas down the pipeline,
while in other cases, the gas must undergo significant processing. The most
common treatment of natural gas is removal of excess water vapor, which is
necessary to prevent formation of hydrates and freezing in interstate
pipeline transmission systems. The gas processing industry uses a variety of
processes to treat natural gas and extract natural gas liquids from the gas
stream. The two most important extraction processes are the absorption and
cryogenic expander processes. Together, these processes account for an
estimated 90% of natural gas processing. If the raw gas stream includes
hydrogen sulfide or carbon dioxide, the gas plant must treat both the natural
gas and the NGLs to remove these contaminants. This process is called
“sweetening” the gas. There are many methods that can be used, most of
which rely on chemical reactions, physical solution, or adsorption. The most
common chemical processes are based on contact with amine solutions.
These solutions react with the acid gas compounds to form other
compounds which can be safely removed. Adsorption processes involve the
removal of unwanted components by passing the gas or liquid through a bed
of solid material that has been designed or treated to selectively extract
carbon dioxide, hydrogen sulfide, or other contaminants. The sour gas
10 Petroluem Accounting and Financial Management

effluent from a sweetening unit must be further treated, either for disposal
or for recovery of sulfur.

Once the gas has been sweetened, most gas processing facilities are
designed to recover NGLs and then deliver pipeline quality residue gas to
interstate pipelines at the tailgate of the plant. This involves three main
processes: 1) removal of impurities; 2) removal of water; and 3) separation
of NGLs from the gas stream.

The typical gas plant process includes dehydration, mechanical

refrigeration, turbo-cryogenic expansion, recompression and distillation
columns designed to recover and remove all NGLs from the raw gas stream.
Most plants will process the gas such that all NGL products from propane
and heavier (C3+) will be separated into a pressurized NGL product stream
(typically known as Y Grade) which can be transported via pipeline, truck
or rail to fractionation facilities. By separating the NGLs from the raw gas
stream, the plant operator is able to deliver Y Grade to another facility for
further processing, and deliver pipeline quality gas to the interstate pipelines
at the tailgate of the plant. Usually, the process uses mechanical
refrigeration to lower the temperature of the gas to approximately 30
degrees Fahrenheit, then uses a turbo-cryogenic process to expand the gas
from high pressure to low pressure. This cools the gas to about minus 125
degrees Fahrenheit, thus causing all the propane and heavier components to
‘fall’ out of the gas stream as NGLs. At the end of the process, the gas is
recompressed into the interstate pipeline for transport as pipeline quality
gas. Depending on gas composition, the gas processing plant may also
include additional treating to remove carbon dioxide, helium, or nitrogen.
 Tallant 11

Figure 3
Natural Gas Processing Schematic1

Source: Coalbed Methane: Recovery & Utilization in North Western San Juan, Colorado
                                                                 
1
 http://www.ems.psu.edu/~elsworth/courses/egee580/2010/Final%20Reports/CBM_Report.pdf
12 Petroleum Accounting and Financial Management

Fractionation

A Fractionation facility will take the ‘Y Grade’ as feedstock, and

‘fractionate’ it into separate products. NGLs are fractionated by boiling the
lighter products from the heavier products, using a sequence of towers in
which temperatures and pressures are controlled such that that the boiling
point will be reached by only one NGL in each tower. Fractionating towers
are usually named for the overhead or product which flows out the top of
the column. For example, the product flowing out of the top of a deethanizer
column is ethane. The deethanizer is the first step in the fractionating
process, where only the ethane is allowed to boil and escape through the top
of the tower and the propane and heavier components fall to the bottom of
the tower and are sent to the next tower, the debutanizer. The next step is to
process propane, which has the next-highest boiling point, and is heated and
boiled out the top of the column. The next step in the fractionating
sequence is to separate the butane, then the pentane and heavier
components. Once the propane and heavier components come out the top of
the tower as a gas, they are cooled so that they condense back to liquid form
and are piped to inventory tanks before being transported to market. The
NGLs involved in this process are:

 Ethane – a hydrocarbon with a molecular structure of two

carbon atoms (C2), and is produced primarily from natural gas
processing plants. It is used in the petrochemical industry to
make polyethylene, a building block for many plastics. The
economics of ethane extraction are driven by its value as a
petrochemical feedstock versus the value of its heating
content, if left in the gas stream. The process of leaving the
ethane in the gas stream is called ‘ethane rejection.’

 Propane – a hydrocarbon with a molecular structure of three

carbon atoms (C3). The primary end-use applications for
propane are as a home heating fuel and as a vehicle fuel. The
other main use for propane is petrochemical feedstock in the
manufacture of polyethylene and other chemicals. Since
propane supplies from gas plants are extracted in conjunction
with ethane, it is often transported as an ethane/propane mix.

 Butane – a hydrocarbon with a molecular structure of four

carbon atoms (C4). Its principal uses are to provide needed
volatility for motor gasoline. Another main use for butane is
to isomerize it to produce iso-butane, which is used by
refineries for the production of alkylate, a vital ingredient of
 Tallant 13

high-octane motor gasoline. Butane is also used either alone

or in mixtures with propane; as a feedstock for the
manufacture of ethylene and butadiene, a key ingredient of
synthetic rubber.

 Iso-butane – the chemical isomer of butane, is fractionated

from “field grade” butanes or derived by isomerization of
normal butane and produced as a separate product, principally
for the manufacture of alkylate.

 Natural gasoline – also known as pentane plus, is a mixture of

light hydrocarbons with molecular structures of five or more
carbon atoms (C5+). It is primarily used by refineries in
gasoline blending, but has a lower economic value than
gasoline due to its lower octane value and higher vapor
pressure. The use of pentanes plus in producing gasoline has
also been affected by the increased use of ethanol. As higher
quantities of ethanol are blended into gasoline, lower
quantities of pentanes plus are needed. It is also used as a
chemical feedstock and is increasingly in demand as a diluent
for the rising production of heavy oil in Canada.
14 Petroleum Accounting and Financial Management

Figure 4
Gas Processing Plants in the U.S.
 Tallant 15

Gas Processing Accounting

We have thus far discussed how gas is gathered, measured, processed, and fractionated into usable products and residue
gas. Next, we will cover discuss how the revenue accountant needs to ‘allocate’ and ‘settle’ with the producers for their gas
which was transferred to the gatherer / processor.
The diagram below depicts the process under discussion:

Figure 5
Flowchart of Midstream Operations and Flows
16 Petroleum Accounting and Financial Management

While the gas gatherer / processor took possession of the hydrocarbons

at the wellhead (or a similar custody transfer point), that same gatherer /
processor may not necessarily have taken title to the hydrocarbons at the
custody transfer point. All of the arrangements between the producer and
gatherer / processor from this point forward are governed by the gas
purchase agreement, gas gathering or processing agreement, or a similar
legal instrument. The gas accountant must read and be familiar with these
legal instruments to provide a fair and equitable settlement and payment to
the producer, or invoice to the producer for services rendered.
The gas accountant must process the gas gathering, allocation and
settlement accounting information for settlement and payment to producers
in accordance with the Gas Processors of America (GPA) standards for
measurement, as well as COPAS and petroleum accounting requirements
for revenue accounting.

Allocation Concepts and Terminology

To discuss gas plant or gas processing allocation methodology, several

terms must be defined:

 Attribute – a characteristic of a measurement point. For

example, a wellhead meter has a metered volume, stated in
MCF, as one of its attributes. The Btu factor (heating value)
from a sample taken at the same wellhead meter is also an
attribute of that measurement point.

 Plant Attributes – a characteristic of a measurement point

within the ‘Plant Fence,’ and typically includes such items as
residue sales MMBtu and production gallons by component.

 Derived Attributes – a characteristic that can be calculated

from other attributes to become an attribute for the
measurement point. For example theoretical wellhead gallons
by component, calculated as the product of wellhead MCF
times gallons per thousand cubic feet (GPM) by component
becomes an attribute of that measurement point.

 Measurement Point – defined as any distinct point along the

flow of gas where an attribute or attributes can be measured by
some means. A measurement point would include a
mechanical meter, an electronic flow measurement (EFM)
meter or a turbine meter. Both volumetric data and
 Tallant 17

compositional data (gas analysis) can be measured at these

types of measurement points.

 Primary Gathering System -- the first gathering system or

allocation group to which a meter or measurement point is
connected or related. Primary gathering systems are
commonly referred to as field gathering or satellite gathering
systems.

 Secondary Gathering System -- the gathering system or

allocation group to which a primary gathering system is
connected or related. Secondary gathering systems are
commonly referred to as main lines, trunk lines, or inlet
streams. At least one, but usually more than one, primary
gathering system is associated with a secondary gathering
system.

 Settlement meter -- any meter on which an allocation,

settlement and payment to a producer is made. A settlement
meter is a meter to which physical products are allocated and
dollar amounts are paid to one or more producers.

 Information meter – any meter which has its attributes

allocated to settlement meters or which provide management
information. A downstream check meter, a fuel meter or a
plant inlet meter are examples of Information meters.

The gas plant Allocation is designed to achieve two primary objectives:

1) physical molecular allocation, and 2) contract settlement. The purpose of
the Physical Allocation objective is to achieve a fair allocation of gas plant
attributes based upon the physical flow of gas and the physical attributes of
the measurement points. In actuality the design of the allocation will follow
the reverse flow of the gas, that is, the allocation starts at the plant’s tailgate
and works backwards to the wellhead (more on this below).

The Contract Settlement objective is to pay, or settle, with each

producer in accordance with the contract terms and obligations for each of
the custody transfer measurement points. Satisfying the objective of a
Physical Allocation should be independent of the Contract Settlement
objective. A ‘fair’ allocation of gas plant residue and liquids can only be
accomplished if the allocation is based upon the physical flow of gas,
regardless of any of the contract terms and obligations. The logical
extension of this statement is that any contract term or obligation that does
18 Petroluem Accounting and Financial Management

not follow the Physical Allocation becomes a Contract Settlement

adjustment. In short, the objective of a Physical Allocation is independent
of the Contract Settlement objective, yet the Physical Allocation is the
starting point for calculating the adjustments necessary to satisfy the
Contract Settlement objective. If the Physical Allocation objective is not
met, then it is virtually impossible for the Contract Settlement objective to
be met.

The concepts above are best illustrated through a simple example.

Assume that gas from two wells, operated by different producers, flows
through individual wellhead meters and is compressed before flowing to the
inlet of a gas plant for processing. Each well flows the same volume of gas
and the compressor burns 10% of each of the wellhead volumes as fuel.
The first producer has a contract that provides for a fixed field fuel rate of
6% of the producer’s wellhead volume. If this contract term is improperly
reflected in the physical allocation, then the second producer, who does not
have a contract with a fixed field fuel rate, will receive an unfair allocation
of more than 10% of the second producer’s wellhead volume. In effect, the
total compressor fuel has been allocated, but the contract terms of the first
producer have affected the allocation to the second producer. If the
Physical Allocation objective had been followed in the allocation, then both
producers would have shared in the actual compressor fuel equally. In other
words both producers would have had 10% of their wellhead volume
allocated as compressor fuel (remember, the Physical Allocation objective is
independent of the Contract Settlement objective). Subsequent to the
physical allocation, the first producer would get an adjustment equal to 4%
of the wellhead volume, calculated as the 10% actual fuel rate minus the 6%
contract fixed fuel rate (the Physical Allocation is the starting point for
calculating the Contract Settlement adjustments).

The example above also brings up another point about the Physical
Allocation objective. If an ‘unfair’ allocation occurs at the beginning of the
gas flow, then all subsequent allocations will also be unfair. In the example
above, if theoretical gallons were calculated on the basis of the wellhead
volume reduced for an unfair allocation of compressor fuel and theoretical
gallons were used to allocate production gallons, then the first producer
would receive an allocation of more gallons than entitled to and the second
producer, without the fixed field fuel contract clause, would receive an
allocation of fewer gallons than entitled to. Subsequent allocations of plant
fuel and residue gas would also be unfair to the second producer.

As indicated previously, the purpose of the Physical Allocation

objective is to achieve a fair allocation of gas plant attributes based upon the
 Tallant 19

physical flow of gas and the physical attributes of the measurement points.
In actuality the design of the allocation will follow the reverse of the gas
flow. In other words, the allocation should start at the tailgate of the plant
and work backwards to the wellhead, as follows:

Figure 6
Allocation Flow vs. Gas Flow from Wellhead to Gas Plant
Allocation Flow is Opposite of Gas Flow from Well to Gas Plant

Wellhead  Tailgate 

  Gas Flow 

 
  Allocation Flow 

The term ‘fair allocation’ is used in the Physical Allocation objective

instead of ‘accurate allocation.’ This is because the measurement of gas is
not precise, as noted above. For example, a volume chart from a
mechanical meter integrated by different individuals on different integration
machines will typically result in different measured volumes of gas. Even
the re-integration of a chart by the same person on the same machine will
typically result in different measured volumes. Although plant operators are
installing electronic flow meters (EFMs), it has not been proven that EFM’s
are any more precise than integrated charts from mechanical meters.
The accuracy of an allocation is also affected by the composition of a
measurement point. In most cases, a sample of a stream of gas at the
wellhead is taken and analyzed every six months, called a gas analysis. The
composition of the gas stream is supposed to be a representative sample of
the gas stream and is used in the allocation scheme until replaced by a later
representative sample. The actual composition of a gas stream is constantly
changing, although the change is typically only slight over a short period of
time. Continuous samplers may achieve greater precision than periodic
representative samples, but the primary benefit of continuous samplers is
the real-time data available to a plant operator. Furthermore, continuous
samplers are quite expensive and therefore only used in applications with
large flows of gas. As a result of the inaccuracies inherent in the
measurement and composition of gas streams, it is not possible to achieve
an absolutely precise allocation.
20 Petroluem Accounting and Financial Management

Allocation Methodology

The first step a gas plant allocation is to allocate plant attributes (residue
MMBtu and production gallons) to each inlet stream based upon the
attributes (volume and composition) of each of the Measurement Points
representing the inlet streams. For example, if a Plant has four inlet streams

a) NGL Gallons are allocated to the four inlet streams on the

basis of theoretical content gallons. Theoretical content
gallons are calculated as measured MCF volume at the
Measurement Point times the weighted average gallons per
MCF (GPM) by component for samples of gas taken and
analyzed at the Measurement Point during the month.
b) Residue Gas is allocated to the four inlet streams on the
basis of a calculation of theoretical residue. Theoretical
residue is calculated as follows:
i) Measured volume at the inlet meter, minus
ii) Allocated plant fuel, minus
iii) Allocated NGL gallon equivalents (commonly
referred to as "shrink")

The purpose of the first level of allocation is to isolate plant gains or

losses by inlet stream. This allocation level allows for the proper allocation
of other plant attributes to each of the inlet streams. For example, if inlet
compression exists only on one of the inlet streams, then all of the inlet
compression fuel can be allocated to the one inlet stream that requires
compression to enter the plant.

The second level of allocation is to allocate the attributes (residue

mmbtu and production gallons) previously allocated to inlet streams to the
various Secondary Gathering Systems associated with each inlet stream.
The purpose of the second level of allocation is to isolate system gains or
losses, product attributes and field compression fuel by those settlement
points that actually contributed the hydrocarbons, added to the gain or loss,
and consumed the fuel.

Plant Attributes which have been allocated to Secondary Gathering

Systems are then allocated to each of the related Primary Gathering
Systems. The use of common delivery points in an allocation isolates any
gain or loss and compression fuel between the settlement points behind the
common delivery point to only those settlement points. For example, if one
 Tallant 21

field gathering system has a 10% loss between the settlement points and the
common delivery point, then only those settlement points behind the
common delivery point would be affected by the 10% loss. The allocation
to a field gathering system will be based upon either: the attributes (volume
and composition) of a common delivery point for the field gathering system,
or the sum of the attributes (volume and composition) of settlement meters
associated with the field gathering system. The choice is dependent upon
whether or not measurement exists for a common delivery point into the
inlet stream.

a) Most Secondary Gathering Systems have at least two or

more Primary Gathering Systems (though this is not
always the case). All of the measurement points
associated with each inlet stream are separated into groups
of measured locations when a physical meter exists.
b) Allocation percentages to the metered Primary Gathering
Systems are calculated on the basis of the relationship of
the measured Primary Gathering System attributes to the
downstream inlet Measurement Point attributes.

The third level of the allocation is to allocate the attributes (residue

mmbtu and production gallons) previously allocated to the field gathering
systems to each of the settlement points associated with the field gathering
system on the basis of the attributes (volume and composition) of each
settlement point. Plant Attributes which have been allocated to each of the
Primary Gathering Systems are allocated to the Measurement Points –either
Information meters or Settlement meters – related to each Primary
Gathering System.

Plant Attributes which have been allocated to each Measurement Point

can then be further allocated to each related Settlement Point on the basis of
allocation percentages as follows:

a) Property Allocation Percentage - allocation percentages to

multiple properties behind a common Measurement Point
are determined based upon well test data (for example, a
common delivery point (CDP) may have several wells
behind it).
b) Contract Allocation Percentage - allocation percentages to
multiple contracts associated with a common property are
determined based upon ownership percentage.
22 Petroluem Accounting and Financial Management

Residue gas allocated to Settlement Points is reduced by an allocable

share of residue gas returned to the field for lease use. Plant Attributes
which have been allocated to Settlement Points are then priced out in
accordance with contract terms.

Needless to say, this type of ‘fair’ allocation requires a tremendous

amount of data and a tremendous amount of number crunching. Over the
years, some allocation systems allocate plant attributes (residue mmbtu and
production gallons) to each meter and contract on the basis of aggregate
attributes (volume and composition) for the "pay meter" or settlement points
associated with each contract. Sometimes, this is known as a “Super Plant”
allocation. Here, plant gains or losses, field fuel, and gathering system
gains or losses are shared equally by all settlement points, regardless of the
physical flow of gas. This means that if your gas is 1/2 mile from the gas
plant, and is feeding directly into the plant trunkline inlet, you will be
allocated the same amount of field fuel, loss and unaccounted for gas as a
well which is 50 miles from the plant, and has three levels of field gathering
systems and associated compression to pass through. Also, plant attributes
that need to be specifically allocated to a separate source of gas are being
shared equally by all settlement points. As mentioned, field compression
fuel is being shared equally by all settlement points, even if some settlement
points are not physically compressed before entering the plant. Plant gains
or losses and gathering system gains or losses are being shared equally by
all settlement points.

Gas Contracts

There are numerous contracts utilized in the midstream industry. Some

of the most common are:

 Gas gathering contracts,

 Gas processing contracts,
 NGL fractionation contracts,
 Product purchase contracts, and

These agreements set forth obligations, pricing, and risks between the
producer, processor, transporter, buyer and seller.

Gas Gathering Contracts

Gas gathering contracts are usually fixed term, fee-based agreements.

In this way, the midstream gathering system operator has little risk or
exposure to commodity price fluctuations. The risk is further abated
 Tallant 23

because the producer is usually not under an obligation to deliver a

minimum quantity of gas to the gatherer. The gatherer usually agrees to
accept product at the wellhead, and re-deliver the product back to the
producer at a certain point. In most cases, the gas gathering agreement is
part of a processing agreement, so that the redelivery point is the tailgate of
the gas plant.

Gas Processing Contracts

Natural gas is typically processed under several different contracts:

Fee Based Contracts

In fixed-fee contracts, the producer pays the plant a flat fee based upon
the volume of gas or NGLs that flow through their systems. In these types
of contracts, the producer carries all the risk of commodity exposure since
the processor doesn’t take any of the products as compensation for
processing the gas. These contracts usually have penalties for high field
pressure, high levels of impurities in the product and other attributes which
have negative effects on the processor.

Percent-of-Proceeds Contracts

The midstream operator gathers and processes gas on behalf of

producers. The processor sells the resulting residue gas and NGLs at market
prices and remits to the producer an agreed upon percentage of the proceeds
based on a contractual. For example, contract would pay the producer 80%
of the proceeds from the sale of natural gas and NGLs, and the remaining
20% would be retained by the processing plant operator as a fee for
processing the gas. Both parties share the processing margin risk in POP
contracts because the total revenues to be divided are dependent on the price
of products sold. In a POP contract, most processors try to negotiate
economic loss provisions to minimize margin exposure, while producers try
to gain flexibility by negotiating the right to bypass processing and rejecting
ethane from the NGL stream.
24 Petroluem Accounting and Financial Management

Percent-of-Index Contracts.

Here, the gas processor purchases the gas at a percentage discount to a

specified index price or a specified index price less a fixed amount (often
called trans and frac fee (T&F)). The processor gathers, processes and
delivers the gas to pipelines where the processor resells the natural gas at
the index price. Under the percentage discount, gross margin increases when
the price of natural gas increases and decreases when the price of natural
gas decreases.

Keep-Whole Contracts

Keep-whole contracts require the processor to process the gas, and then
return enough processed gas to the producer to equal the total BTUs of raw
gas delivered at the plant’s inlet. The processor bears the risk of the
processing margin, and the producer is allowed to monetize gas without
incurring the expense of processing the gas.

Fractionation Contracts.

As discussed above, fractionation plants separate raw, mixed NGLs (Y-

Grade) into ‘purity’ ethane, propane, iso-butane, normal butane, and natural
gasoline. Fractionation agreements are usually fee-based, with adjustments
for fuel costs.

As the midstream segment continues to evolve and competition

continues to increase, midstream contracts are becoming quite complex;
particularly in mature areas where substantial midstream infrastructure
exists. Conversely, in the newer production areas, the ‘unconventional’
plays, midstream infrastructure is under great demand, and midstream
operators are able achieve high rates of return.

Transportation

Interstate Natural Gas Pipelines

Once the products have been fractionated, they are transported to

market. For the residue gas, Interstate Transmission pipelines receive gas
from the midstream facilities and deliver gas to end users, local distribution
companies, or to other transmission pipelines for further transportation. The
Federal Energy Regulatory Commission (“FERC”) is charged with
approving the construction and operation of interstate natural gas pipeline
facilities which operate as common carriers. This business model results in
cash flow stability for the pipelines, as these companies receive a fee for
 Tallant 25

handling a producer’s or marketer’s product on their pipeline system. The

efficient and effective movement of natural gas from producing regions to
consuming regions requires an elaborate transportation system. In many
instances, natural gas produced from a particular well will have to travel a
great distance to reach its point of use. The transportation system for natural
gas consists of a complex network of pipelines, designed to quickly and
efficiently transport natural gas from its origin, to areas of high natural gas
demand. The interstate pipeline network is a complicated system built to
efficiently move the gas to the delivery point. The overall infrastructure
demands huge investments in terms of materials, labor, and equipment.
Interstate pipelines measure anywhere from 6 to 48 inches in diameter,
though usually mainline pipelines are between 16 and 48 inches in diameter.
The main gas transmission lines are wide-diameter pipelines (20-42 inches),
operating over long distances. Interstate pipelines in North America extend
to distances as long as 2000 miles, transporting as much as 12,000 MMcf/d
(million cubic feet per day) of gas to states throughout the country. To
maintain the flow of gas, compressor stations are installed at intervals of
approximately 40-100 miles along the pipeline.

As discussed above, the pipeline companies no longer own the

commodities, virtually eliminating commodity price exposure and
smoothing out its cash flows. Natural gas pipelines receive stable income
from pipeline capacity reservations, independent of actual throughput,
largely via “ship-or-pay” contracts. Other product pipeline revenues depend
on throughput, but are protected by inflation escalators that act as a hedge.

Product Pipelines

Some NGL pipelines carry mixed NGLs to fractionation facilities,

while other NGL pipelines transport purity products, from fractionators or
storage facilities to end users. In the high growth environment of today, the
availability of NGL pipeline capacity is limited; therefore truck and rail are
viable options. For example, the Bakken Shale play in North Dakota is an
area that faces NGL takeaway constraints via pipeline, so producers in this
region extensively use truck and rail services. NGL production is expected
to continue to increase in the Bakken, and it projected to reach levels high
enough to justify the capital investment required to build additional NGL
pipelines.

Conclusion

In conclusion, over the years, the midstream industry has gone through
major structural changes, and today is no different. The latest structural
change, the ‘shale boom,’ has made many new production areas feasible,
26 Petroluem Accounting and Financial Management

which in turn has created high demand for midstream infrastructure to

gather, process and transport the gas and natural gas liquids to market.
Thus, the shale plays are driving significant investment in new midstream
assets, primarily in the areas of 'rich gas' production. As a result, the
midstream industry is booming, and represents one of the bright spots in the
North American economy. With the price per MMBtu hovering around $3
in North America and $12 in Europe, this represents a significant advantage
not only for the North American consumer, but also for North American
manufacturing to compete in the world market with a significant
competitive advantage over other parts of the world. There also exists the
potential to export LNG to other areas where the price of natural gas is
abnormally high. Many are saying that the U. S. may be able to become
energy independent in the next few decades. To reach these goals,
midstream companies are working closely with producers to meet this
demand and provide options for energy, to reach the market. Along with
this cooperation, it is hoped that U.S. policy will follow along these lines
and allow these resources to be developed in a productive and
environmentally responsible manner.