Executive Q&A viewpoint

Wouter van Kempen, Chairman, president and CEO of DCP Midstream LLC, and chairman and CEO of DCP Midstream Partners LP

Today, the DCP Midstream enterprise is the top gas processor and NGL producer in the US. Refusing to halt there, however, the company continues to grow by leveraging its focus on customers and its philosophy of operational excellence.

Recently, the company announced plans to add almost half a billion cubic feet per day (Bcfd) of natural gas processing capacity in two of the most prolific, liquids-rich basins in the US—the Denver-Julesburg (DJ) basin in Colorado and the Eagle Ford shale play in Texas—and that’s only the start. DCP’s chairman, president and CEO, Wouter van Kempen, talks with Gas Processing about focused growth, industry challenges and what keeps him up at night.

GP. Congratulations to DCP Midstream for being the top US gas processor in 2013.

van Kempen. Thank you. We’re the first company ever in the history of these rankings to be the largest gas processor as well as the largest NGL producer. Also, we are the largest gas processor in the Permian basin and the Mid-Continent, and the No. 2 gas processor in the Eagle Ford.

GP. Overall, what is your current market share?

van Kempen. We process more than 12% of the nation’s gas supply. At the end of 2013, we processed approximately 6.4 Bcf of gas. Our total capacity is about 7 Bcf now, but that will grow nicely in 2014. By 2016, we are aiming for 7.2 trillion Btu per day. That is possible due to our tremendous footprint, meaning a lot of gas is going through each one of our plants.

We have 67,000 miles of pipelines in the ground. To put that into perspective, if you fly from New York to Los Angeles about 16 times, that would be the same distance you would have to fly to cover all of our pipelines. We continue to grow organically around that footprint. We achieve that with focused growth, and it’s been a tremendous amount of growth, especially during the past few years.

GP. What do you mean by focused growth?

van Kempen. There are some companies—those I refer to as “fly-by-night” companies—that have entered this industry with a “build it, and they will come” strategy. That’s not our strategy. Instead, we work closely with our producer customers in the different regions in which we operate, such as in Oklahoma, New Mexico, Colorado, Wyoming and Texas. We’ve been in this business for more than 80 years, and we are very deliberate in how we do things.

GP. That must require a lot of coordination among your assets.

van Kempen. We have to run our assets really well. Every company talks about growth, but we spend a lot of time on what we call operational excellence. That means running the assets extremely well to be sure we are always available to our customers.

Sure, there are many companies that are really good at growth. There are a lot of companies that are really good at operating their assets. But there are very few companies that can operate their assets really well and execute a large growth program, and we aspire to be one of those companies.

GP. Recently, you’ve announced your intention to add 500 MMcfd of processing to the DJ basin and the Eagle Ford shale. Why those plays?

van Kempen. The shale plays are driving these expansions, and many of those plays happen to be right in our backyard. Last year, we put the O’Connor plant in the DJ basin into service, and we immediately expanded that plant. Now we’ve announced that we’re going to build the 200-MMcfd Lucerne plant there, which will build on the tremendous position we already have in the DJ basin.

Also, we have been in the Eagle Ford for a very long time. There, we installed our 200-MMcfd Eagle Ford plant in 2013, and we completed our 200-MMcfd Goliad plant in February. In the Permian basin, we’ve undertaken a number of expansions and restarts of plants during the past 18 months, and we’ve added a new 75-MMcfd plant there.

In addition to the 500 MMcfd of capacity in the DJ basin and the Eagle Ford, we also recently announced the Zia II plant, which will add 200 MMcfd of sour processing capacity in the Permian basin by the first half of 2015. We’ll continue to add a lot of capacity in the broad footprint of our assets.

GP. Do you plan any major changes to your operational tactics?

van Kempen. Yes. In 2013, we put our Sand Hills and Southern Hills NGL pipelines into service, and we participated in the Front Range and Texas Express pipelines. Those represent nearly $1 B of investments for us. We connected the NGL from all of the basins in which we operate to the Mont Belvieu, Texas market center. That represents a major change for our company.

GP. Do you think any region will be overbuilt to the point of excess processing capacity?

van Kempen. It’s all about plant utilization. Many companies can build plants, but the goal should not be to build a processing plant. The goal should be to fill up that processing plant really quickly. For example, we’ve installed about 1 Bcf of new processing capacity among all the regions where we operate during the past two years. As of today, that capacity is 85% utilized. We put steel in the ground and we fill it up immediately. For us, it is about capital efficiency, so we provide great returns to our owners, shareholders and unit holders.

GP. Regarding these increases in capacity, do you prefer to buy or build?

van Kempen. We look at anything and everything. If you look at the history of our company, we are an amalgamation of transactions. About 15 years ago, a lot of companies were bought and put on top of each other, which is how we built what we are today. We did buy a plant recently, about a year ago, in a small deal. However, when we have a choice of whether to do something organic or to go out and buy something, building organically brings better returns than acquiring.

I feel that, in the industry right now, there are people “going over their skis” a little bit. There are companies that have a big appetite, but some of them have bit off more than they can stomach. That might provide opportunities for us during the next year or two to do something on the mergers and acquisitions (M&A) side. The great thing about the DCP enterprise, however, is that we don’t have to do M&A. Some companies don’t have growth opportunities in their footprints like we have, so they are forced to go into the M&A market to buy growth. That’s not always easy, and we’ve seen a number of transactions during the past year or two that probably won’t work out as promised.

GP. Have you ever built a plant, thinking that it would be adequate for the region, and then been surprised?

van Kempen. Occasionally, a plant will fill up quicker than expected. You wish you could turn back the clock a couple of years and design the plant for something different. Hindsight is always 20/20. The difficulty that we have is not so much about how large to build a facility—because you can, in many cases, build another train fairly easily. It’s really more about the permitting phase of a project.

Depending on the type of plant you want to build, and where you want to build it, the permits can take a long, long time. There have been times when we permitted a plant and then wished we would have gotten the permit to build it a bit bigger. However, I’d rather look at it from the other side, knowing that we filled up the plant, and maybe wished that we had built it bigger, and that’s a luxury problem. The opposite event—when some companies want to build really big, and then they find that the gas is not going to be there because producers have moved on to other basins—that’s a problem we don’t have.

GP. Has DCP Midstream considered putting its experience and operating excellence to work outside of the US?

van Kempen. Not at this time. The Lower 48 market is phenomenal. Ten years ago, when I worked for General Electric, I remember sitting in a meeting where we were discussing our gas turbine business. We were discussing how we planned to continue the business if the US began to run out of natural gas.

Now, a decade later, we are looking at gas reserves that continue to grow and could be sufficient for more than 100 years. There is always an attraction to consider taking our show on the road, but the domestic footprint that we have here is so terrific that this is the best place to operate, as a midstream company, anywhere in the world. We are going to continue to focus on the Lower 48.

GP. What keeps you up at night?

van Kempen. There are three things that keep me up at night. First of all, people. We have 3,200 employees, so that means 3,200 families that we serve. In this industry, there is a lot of demand for people, and there is a finite amount of qualified workers. The entire energy industry is thinking about how to replace people who are going to retire. That is difficult for everybody. I believe that if you have the right people, things will work out. You can have the best assets in the world, but if you have mediocre people, then, at best, you will have a mediocre company. If you have average assets, but you have terrific people, you can still have a terrific company. People are the cornerstone of anything and everything that we do.

Second, and it’s related to people, is safety. Energy can be a difficult industry, so making sure your employees go home in the same shape they entered the building or the field is very important to us. We focus on having a tremendous safety culture, and we have the best safety record in our industry. We continue to work on it and improve it every single day.

Third is our focus on operational excellence. Growth is really exciting. Everybody loves growth and wants to talk about it all the time. But growth only works if you earn the right to grow with your customers, and you can only do that by operating your assets really well. The operational excellence mindset means coming to work every day and trying to do the absolute best that you can do for your customers. We ingrain that into our workforce while we continue to grow the asset base. GP

Wouter van Kempen is the chairman, president and CEO of DCP Midstream LLC, and the chairman and CEO of DCP Midstream Partners LP. Previously, he served as president and CEO of DCP Midstream, leading the gathering and processing business unit and the marketing and logistics business unit, including NGL and gas marketing; NGL, gas and crude logistics; and corporate functions. Mr. van Kempen was president of DCP Midstream’s gathering and processing business unit, and, before 2012, was president of DCP’s Mid-Continent business unit and chief development officer for the combined enterprise. Prior to joining DCP in 2010, Mr. van Kempen was president of Duke Energy’s Generation Services. He was born in The Netherlands and graduated from Erasmus University in Rotterdam with a master’s degree in business economics, and he has extensive business and financial training from General Electric, IMD International Switzerland, Harvard Business School and Kellogg School of Management at Northwestern University.