US’ Western Midstream announces renegotiated Occidental deal, new ConocoPhillips agreement

Western Midstream Partners announced this week that it had renegotiated its natural gas-gathering and processing contracts with Occidental Petroleum in the Permian Basin’s Delaware sub-basin. At the same time, Western also entered into new agreements with ConocoPhillips for the delivery of gas volumes.

In a January 20 statement, Western said that it had agreed to replace the legacy cost-of-service structure of its gathering contract with Occidental with a “simplified, fixed-fee structure”, which would continue to be supported by an acreage dedication. The original agreement was previously the most significant cost-of-service agreement between the two companies. Western described the updated agreement as “effectuating an earlier transition to a fixed-fee structure than previously provided for under that agreement, aligning interests and further positioning [Western] as a standalone midstream enterprise”.

Under the renegotiated agreement roughly 9% of Western’s total revenue will remain subject to cost-of-service rates, with around 1% of total revenue subject to cost-of-service rates expiring in the late 2020s. The remaining cost-of-service rate provisions are due to extend into the mid-to-late 2030s and include provisions to convert to fixed-fee structures at that time, Western said. It added that all “significant” fixed-fee contracts with Occidental, including the contracts being amended, were effective until the mid-to-late 2030s.

As part of the renegotiation, Occidental has agreed to transfer 15.3mn Western common units back to Western, representing around $610mn of limited partnership interests. Western described the transfer as being structured on “terms intended to represent a value-neutral exchange for the economic concessions reflected in the agreements” and corresponding decrease in its operating cash flow over time. Following the transfer, Occidental's ownership in Western will decrease from around 42% to roughly 40%.

Under the new gathering and processing agreement with ConocoPhillips, meanwhile, Delaware Basin gas volumes will be delivered to Western under a new dedication arrangement for existing volumes on its system. Western said this would further diversify its revenues by reducing total related-party revenue by more than 10%. The contract with ConocoPhillips is also a fixed-fee one, it added, includes an acreage dedication and is due to run until the early 2030s.

"These changes represent a significant step in [Western’s] continuing evolution after becoming a standalone midstream enterprise,” stated Western’s president and CEO, Oscar Brown. “The cost-of-service model was instrumental in safeguarding cash flows during our substantial investment in building [Western’s] Delaware Basin gathering system. As the basin has matured, transitioning to a simplified, fixed-fee structure is both logical and timely.”