Acreage dedications are a fundamental component of midstream oil and gas agreements, playing a crucial role in facilitating the transportation of hydrocarbons from production sites to market. These dedications involve the commitment of a specified area of land or leasehold to a midstream service provider for the exclusive use of its infrastructure. This article aims to dissect the concept of acreage dedications, analyze their significance, and delve into their practical applications within the oil and gas industry.

What is an Acreage Dedication?

An acreage dedication refers to a contractual arrangement wherein a producer grants exclusive rights to a midstream service provider for the transportation and/or processing of hydrocarbons extracted from a designated area of land or leasehold. Essentially, it entails a commitment from the producer to deliver oil or gas from the dedicated acreage to the midstream infrastructure for a specified duration. Acreage dedications can include commitments from a producer to:

• Transport crude oil through pipelines owned and operated by the midstream company;
• Transport natural gas and natural gas liquids through pipelines owned by the midstream company; or
• Deliver natural gas to be processed at a gas processing plant owned by the midstream company.

These dedications typically appear in crude oil dedication agreements, crude oil transportation agreements, crude oil gathering agreement, gas gathering agreements and gas gathering and processing agreements and many of these dedications can be combined into one or more agreements. 

Acreage dedications have also been expanded to encompass the water used in oil and gas operations. This can include producer commitments to:

• Use a particular supply of fresh water, or particular pipelines for the delivery of fresh water, for hydraulic fracturing;
• Transport produced water and flowback water (water that was used for hydraulic fracturing and is recovered) through pipelines owned by the midstream company;
• Dispose of produced and flowback water in saltwater disposal wells owned by the midstream company; or
• Recycle produced and flowback water at facilities owned by the midstream company.

These dedications typically appear in fresh water supply agreements, produced water gathering and disposal agreements and produced water recycling agreements and can also be combined into one or more agreements. 

Why are Acreage Dedications Important?

Infrastructure Access and Efficiency 

Acreage dedications ensure that oil and gas producers have access to essential midstream infrastructure, such as pipelines, gathering systems, and processing facilities. Without dedicated access, producers might face logistical challenges and increased costs in transporting their hydrocarbons to market. By committing to dedicate acreage, producers allow midstream companies to guarantee the availability of necessary infrastructure, thereby streamlining operations and optimizing efficiency throughout the supply chain.

Revenue Stability and Predictability

Midstream infrastructure is tremendously capital intensive with even small midstream systems costing tens and even hundreds of millions of dollars to construct. Acreage dedications provide midstream companies with a reliable revenue stream over the long term. These dedications typically involve contractual commitments from producers to receive fresh water, deliver hydrocarbons and or deliver produced water over a specified period. Midstream companies utilize experts to determine the amount of water or hydrocarbons dedicated to them over the contract period and the determine a per unit (barrels of water or oil; mcfs or Btus of gas) fee for delivery, transportation, processing, and or disposal that allows them to earn a reasonable return on their capital investment.

The revenue stability from an acreage dedication allows midstream companies to plan investments, expand infrastructure, and maintain operations with confidence, ultimately fostering financial resilience and sustainability.

Risk Mitigation for Producers

For oil and gas producers, acreage dedications can serve as a form of risk mitigation. By dedicating acreage to a midstream service provider, producers transfer certain risks associated with transportation and processing to the midstream company. This includes risks related to infrastructure maintenance, throughput fluctuations, and market volatility. Additionally, dedicating acreage can provide producers with access to economies of scale and operational expertise offered by established midstream companies, further enhancing risk mitigation efforts.

Enhanced Marketability of Midstream Assets

Acreage dedications can increase the marketability and value of midstream assets. The exclusive rights granted by acreage dedications make midstream infrastructure more attractive to investors and lenders, as they offer a guaranteed source of revenue over the contract term. This increased marketability can facilitate financing for infrastructure expansion and development projects, ultimately driving growth and competitiveness within the midstream sector.

Long-Term Planning and Investment 

Acreage dedications often involve long-term contractual commitments between producers and midstream companies. These agreements provide both parties with greater certainty and predictability regarding future cash flows and operational requirements. With a clear understanding of future demand and revenue streams, midstream companies can make informed decisions about capital allocation, infrastructure investments, and operational optimization, enabling sustainable growth and value creation over the long term.

Operational Efficiency and Optimization 

By dedicating acreage, producers and midstream companies can collaborate more effectively to optimize operational processes and maximize efficiency. This may include strategically locating infrastructure to minimize transportation distances, implementing innovative technologies to enhance throughput and reduce emissions, or coordinating scheduling to ensure optimal utilization of assets. Acreage dedications create a framework for partnership and collaboration between producers and midstream companies, driving continuous improvement and innovation within the industry.

Covenant Running with the Land?

In the context of an acreage dedication agreement, the concept of a covenant running with the land is paramount. Essentially, when a covenant runs with the land, it means that the terms and obligations outlined in the agreement are inherently tied to the property itself rather than to the specific parties involved at the time of the agreement.

For example, in an acreage dedication agreement, certain commitments such as delivering a minimum volume of hydrocarbons or paying specified fees may be binding not only on the current oil and gas producer of the property but also on any subsequent producers, owners or lessees. This ensures that the obligations associated with the acreage dedication persist regardless of changes in ownership or control of the property.

The principle of covenants running with the land provides stability and predictability for both parties involved in the agreement. For the midstream company, it ensures continuity of access to the dedicated acreage and a reliable revenue stream over the agreed-upon term. Meanwhile, for the producer, it guarantees access to essential midstream infrastructure and mitigates risks associated with changes in ownership or control of the property.

In essence, the concept of covenants running with the land reinforces the long-term nature of acreage dedication agreements and underscores the mutual commitments and responsibilities of the parties involved. It serves to protect the interests of both producers and midstream companies by providing a framework for enduring cooperation and collaboration in the development and operation of midstream infrastructure.

Conclusion

Acreage dedications represent a cornerstone of midstream oil and gas agreements, facilitating the seamless flow of hydrocarbons from production sites to end-users. The multifaceted nature of acreage dedications necessitates a comprehensive understanding of their legal, economic, and operational implications, coupled with adept regulatory navigation.

As the oil and gas industry continues to evolve in response to shifting market dynamics and regulatory imperatives, stakeholders must remain vigilant, adaptable, and proactive in navigating the intricate landscape of acreage dedications. By embracing best practices in contractual negotiations, regulatory compliance, and risk management, stakeholders can optimize value creation, mitigate operational risks, and foster a more resilient and sustainable energy ecosystem.

In essence, acreage dedications embody not only contractual commitments but also strategic imperatives, underpinning the long-term viability and competitiveness of midstream operations. Through collaborative engagement, transparent communication, and prudent decision-making, stakeholders can harness the transformative potential of acreage dedications to drive innovation, enhance market efficiency, and deliver enduring value to all stakeholders across the oil and gas value chain.

If you are a producer looking to leverage an acreage position into safe, reliable midstream infrastructure dedicated to your operations, or a midstream company looking to ensure your investment is protected for the long-term, contact the expert attorneys at Newburn Law today. We have negotiated billions of dollars of acreage dedications covering water, gas and oil across the United States.