Executive Q&A Viewpoint

Don Sinclair, President and CEO, Western Gas Partners LP

Western Gas Partners LP (WES) was formed by Anadarko Petroleum Corp. to unlock the value of its substantial midstream asset portfolio. Since its initial public offering in May 2008, the company has grown to one of the largest gathering and processing entities in the US. Today, the company holds midstream assets in East, West and South Texas; the Rocky Mountains; north-central Pennsylvania; and the Mid-Continent. WES gathers, processes, compresses, treats and transports natural gas, condensate, natural gas liquids (NGL) and crude oil for Anadarko and third-party producers.

Gas Processing talks with Don Sinclair, president and chief executive of Western Gas Partners, about the state of the industry and the outlook for new opportunities in 2014 and beyond.

GP. Congratulations to WES for being one of the top 10 gas processing companies in 2013. To what do you attribute that success?

Sinclair. We are honored to be a member in that peer group. Our success is directly attributed to our parent company, Anadarko Petroleum Corp. Since they are our sponsor and a major developer of North American resources, it has created numerous opportunities for us in the midstream side of the business. Also, all of our employees are Anadarko employees, so we have quality employees, with various backgrounds and skill sets, who provide us with top-tier intellectual capital and technical expertise.

GP. You also have a partnership to expand your gas processing assets in Mont Belvieu, Texas. What is the status of that expansion?

Sinclair. Anadarko made a long-term transport commitment to the Texas Express and Front Range NGL pipelines, and, with that, commitment they were offered the opportunity to participate in Enterprise Products Partners’ Mont Belvieu fractionation trains 7 and 8. Train 7 went into service in September 2013, and train 8 went into service in November 2013. We are happy to have a partner like Enterprise. These assets are also a key part of Anadarko’s strategy to get their NGL barrels to the highest-value market.

GP. What are WES’ other major strategic plans for 2014 and beyond?

Sinclair. Right now, we are focused on two big facilities that were, or are, under construction. The first is our Lancaster 1 plant located in the Denver-Julesburg (DJ) basin in the Rocky Mountains. It is a 300-million-cubic-feet-per-day (MMcfd) cryogenic plant that was in service at the end of March. We are also constructing another 300-MMcfd cryogenic plant in the same location, known as Lancaster Train 2. We expect it to be in service during the second quarter of 2015. These plants are the majority of our processing focus in 2014. On the gathering side of the business, we are putting a lot of time, energy and capital into southern Wyoming and the DJ basin.

GP. Why southern Wyoming?

Sinclair. There is a lot of development around the older-resource plays that is being driven by the new horizontal drilling and fracturing technology, and it is creating a lot of opportunities for gathering and processing. We are focused on the producer and wellhead services because this is where our core business originated. We believe we can provide the right facilities, services and operating requirements for producers in those fields, and, as these plays develop, they create opportunities for us to build cryogenic plants.

GP. Are the shale plays continuing to drive growth projects?

Sinclair. Yes. The quality of the hydrocarbons that are coming out of the wells due to the new drilling and completion technologies, in addition to the amount of energy that comes out of each one of these wellbores, means that the original facilities that were in the field are now inadequate. Much more infrastructure has to be put in place for the gas, condensate and crude. All of this is creating opportunities in the gathering side of the business for WES and others.

GP. For these and for future expansions, does WES prefer to buy, build or partner?

Sinclair. When we think about the gathering and processing facilities, our first objective is always to try to build and operate it ourselves, as we know that is one of our core strengths. However, many times, due to where the producers are in the resource-development cycle, or due to the necessity of needing scale and scope to get a project done, you decide to do a partnership. We have done partnerships before, and we are willing to do them again. Our key metric is to be sure we get quality partners that we know have the same core values as Anadarko. When we elect not to operate, a quality partner who is the operator is critical. That is exactly what we did with Texas Express and Front Range, and we feel very good about our partnership with Enterprise. With respect to acquisitions, we believe we have the skill set and cost of capital to participate in that market. There have been a lot of assets for sale that we have looked at, but we have had limited success to date with third-party transactions. We are very fortunate that we have not been dependent on the third-party acquisition market, and can grow from drop-downs from Anadarko and the organic growth of our existing portfolio.

GP. Has WES not found the right type of acquisition targets on the market?

Sinclair. The majority of our gross margin is fee-based and/or hedged, so, when we look at assets for sale, we do not want to do a transaction that has a substantial amount of commodity risk that would put our model at risk and change our overall risk profile. A lot of the available assets on the market have had substantial direct commodity risk associated with them, so we have passed on those. Others have turned into bidding wars, and with our discipline of not acquiring an asset that is not initially accretive to WES, as I mentioned, our success has been limited.

GP. Do you have contracts that are not fee based?

Sinclair. Yes. Where we do not have fee-based contracts, we are fortunate that Anadarko has provided fixed-price swaps for us. Between the fee agreements and the swaps, less than 5% of our overall gross margin contains direct commodity risk.

GP. Has this past cold US winter affected gas processing operators?

Sinclair. It really has, especially in the Rockies. That area has seen the largest direct impact from the weather, and it has been a twofold impact. The ambient temperature has been extremely cold for long periods, which impacted the flow at the wellhead, so operators have had freeze-offs. Also, with the ambient temperature being so cold, the weather presented a challenge to liquids handling at some plants and compressors. None of the impacts have been material for us, but it has been a constant struggle since mid-to-late December.

GP. Has it affected construction efforts?

Sinclair. As we have been finishing construction and have begun commissioning Lancaster 1, we have had crews working 24/7. The severe weather has only made this process more difficult.

GP. Has the increased demand for heating fuel had any effect?

Sinclair. It has had a positive impact on the commodity markets. With this giving the producers higher wellhead prices, it should create the opportunity to see more capital utilized for the development of the resources—so, from that perspective, it can be beneficial.

GP. What is your present level of US gas processing capacity?

Sinclair. In February, we had a little over 1.9 billion cubic feet per day (Bcfd) of processing capacity. In March 2014, when our Lancaster 1 processing plant came online, we added another 300 MMcfd. When Lancaster 2 is completed in 2015, we will have more than 2.5 Bcfd.

GP. What areas of the US does that capacity cover?

Sinclair. Presently, it covers South Texas and the Rocky Mountains. Right now, the majority of our focus is on the DJ basin, where we are providing incremental processing capacity to serve Anadarko’s significant acreage position.

GP. Where might other opportunities be found?

Sinclair. We also see significant opportunities in West Texas. There is a lot of activity there, but there is also a lack of sufficient infrastructure in the region to get those resources to market. We are also seeing solid activity in East Texas and continued resource development in South Texas associated with the Eagle Ford shale.

GP. Overall, what has changed over time for gas processors?

Sinclair. We have seen a dramatic change regarding what is needed for infrastructure to get gas to processing plants. Companies are producing much higher gallons-per-thousand-cubic-feet gas streams, and these hydrocarbons are more volatile as they come out of the ground. In the initial development of these resources, gatherers could use a single pipeline system with compression to get the natural gas to a plant for processing and NGL extraction. Today, it takes more to get the gas to the plant in a form that allows for the most efficient gathering, and to get the maximum recovery from the processing facility. This change has happened during the past two to three years, due to the development of the shale plays. This has been a significant step change in the way we look at the business, and it affects what we need to do every day in the operations of our gathering systems and processing plants.

GP. How do you meet that challenge?

Sinclair. The solution is driven by infrastructure and the amount of capital we have to spend on the gathering side of the business, along with better integration with the producers in the field. It takes considerably more facilities in the field to handle all of these hydrocarbons. GP

Donald R. Sinclair is president and CEO of Western Gas Partners LP. Prior to joining Western Gas Partners, Mr. Sinclair was a founding partner and served as president of Ceritas Energy LLC, a midstream energy company headquartered in Houston with operations in Texas, Wyoming and Utah, from February 2003 to September 2009. Earlier in his career, Mr. Sinclair was president of Duke Energy Trading and Marketing LLC and was chairman of the Energy Risk Committee for Duke Energy Corp. Prior to joining Duke, Mr. Sinclair served as senior vice president of Tenneco Energy and as president of Tenneco Energy Resources. Previously, as one of the original principals and officers at Dynegy Inc., he served for eight years in various officer positions, including senior vice president and chief risk officer, where he was in charge of all risk-management activities and commercial operations.