Economic Merits of Private Equity Infrastructure Ownership

Abstract

By mid-2012, LLOG Exploration Company, LLC ("LLOG") and its working interest partners (the "Producer Group") had secured leasehold interests and successfully drilled appraisal wells in the vicinity of Mississippi Canyon 254. In total, the Producer Group had identified two discoveries and a prospect with an offset discovery, which were combined to anchor what is known as the Delta House project. Given Delta House's sizable reserve estimates and the lack of proximate, available host capacity, LLOG and its partners sought a new-build gathering, processing, and takeaway solution, with the ambitious goal of achieving first production in mid-2015. Typical FPS developments take [5–7] years and cost well over $1 billion. Thanks to the innovative financing structure and commercial arrangements described herein, the Delta House semi-submersible FPS and associated oil and gas laterals ("Delta House," or the "Facility") were ultimately built and deployed within three years for approximately $850 million. The Facility, now complete and expected to achieve first production by April 2015, has peaking capacity of 100,000 bopd and 240 MMcf/d and will process volumes from the three anchor fields and at least two additional tie backs that were discovered after the Delta House construction began. Two additional prospects are also dedicated to the Delta House hub. Each Anchor field and additional tie back field is dedicated to the Facility for life-of-lease. LLOG and its working interest partners desired to use third party financing to construct the Delta House midstream infrastructure in order to focus their capital on exploration and production, which typically has a higher expected economic return profile. The primary hurdle facing the producers was that none was rated investment grade, which is typically required by financing sources in order to support performance requirements and to guarantee sufficient fixed revenues to generate adequate return on invested capital for the midstream investors. LLOG thus sought out a more creative, non-traditional financing and, in the course of doing so, was introduced to ArcLight Capital Partners, LLC ("ArcLight") in late 2011 through a mutual professional acquaintance. ArcLight is a leading energy infrastructure private equity firm based in Boston with a mandate to acquire and develop strategic and critical infrastructure assets throughout the energy sector. ArcLight agreed to finance the Delta House project without a guaranteed, or take-or-pay, stream of payments from the Delta House producers. ArcLight's early commitment to finance Delta House allowed the producers to (i) focus their time and capital on developing the underlying resource, and (ii) sanction the project significantly earlier than otherwise attainable. In addition to the strong underlying Delta House reserves, ArcLight was attracted to the geology and potential of the Mississippi Canyon region as a whole, and noted a lack of available infrastructure hubs in the Delta House catchment area. The benefits for ArcLight are a reasonable risk-adjusted investment return, with upside if known fields exceed P50 reserves, and incremental upside from additional subsea tie backs. Due to its bottoms-up analysis of the underlying Delta House reserves and high regard for LLOG, ArcLight was ultimately able to underwrite the Delta House infrastructure investment principally on the basis of volumetric contracts (i.e., fees calculated on a dollar per barrel of oil equivalent basis for the oil and gas processed on Delta House). ArcLight and LLOG believe this type of third party infrastructure development to be the first of its kind in the Deepwater Gulf of Mexico. ArcLight and LLOG are working to potentially replicate Delta House's financing and commercial structure, along with certain key elements of the project's EPC approach, in various Gulf of Mexico locations in the future.