First Reserve in $100m shale deal

First Reserve Corporation (First Reserve) has invested $100 million of equity in a shale gas gathering joint venture with Energy Corporation of America (ECA), the Denver, Colorado-headquartered energy operator with over 5,200 producing wells and 5,000 miles of pipelines in the Appalachian Basin.

The investment buys First Reserve a 50 percent interest in two newly constructed gas gathering systems located in Pennsylvania’s Greene and Clearfield counties. Both systems serve the Marcellus Shale, a huge natural gas resource in eastern North America.

The joint venture will operate under a ‘take or pay’ structure. This means that payment is per unit of gas that comes through the pipelines. But if no gas comes through the pipelines, a certain level of payment is still made, meaning that a base line of revenue is locked in.

According to managing director Mark Florian, First Reserve will consider injecting more equity and also some debt in due course. This is because the joint venture will explore the possibility of developing new or expanding existing gathering systems in the region. “ECA has been in the region for 40 to 50 years and has accumulated a million acres to explore, which is pretty substantial,” Florian told Infrastructure Investor.

Emphasising the size of Marcellus Shale, he added: “There are different estimates, but some suggest it is the second-largest gas field in the world. So it’s a huge new resource.”   

Shale is becoming an increasingly important source of natural gas in the US, with estimates suggesting it will account for half the natural gas production in North America by 2020. Florian says opportunities for infrastructure investors will arise in three main areas: gas gathering, processing plants and storage.

He adds that shale produces huge opportunities based on the fact that its newness demands new infrastructure. “The pipelines that currently exist in North America are based on conventional energy resources. The shale fields are in different locations and a different type of infrastructure resource is needed. Marcellus currently has nothing like the type and scale of infrastructure needed to move the resource. Gas in the ground is worthless if you can’t move it.”

The investment has come from First Reserve’s debut energy infrastructure fund, which it closed on $1.2 billion in May this year.

Other infrastructure and private equity fund managers have planted a flag in the shale sector recently. For example, in August Morgan Stanley Private Equity teamed with pipeline provider Sterling Energy Company to provide gas gathering infrastructure in shale deposits in North Dakota and Colorado. Shale investments have also been made in the last year by Kohlberg Kravis Roberts and Blackstone Group.