Steel Reef plans on spending $100 million a year on growth for the next five years

An in-depth look into Steel Reef, who has grown substantially in associated gas

North Portal – In recent years, Steel Reef Infrastructure Corp., a new entrant into natural gas processing in Saskatchewan, has built up a significant presence in Saskatchewan. Its founder and executive chairman, Lane McKay, was honoured with the Saskatchewan Oilman of the Year award at the Saskatchewan Oil and Gas Show on June 5.

McKay, in accepting the award, stressed it was a company award. So how did Steel Reef come about, and where is it going?

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Pipeline Newsspoke to McKay at length about this on April 10. His partners, president and CEO Scott Southward and vice president and COO Austin Voss, contributed by email.

The whole nature of Saskatchewan’s natural gas market has changed significantly over the last dozen years or so. As natural gas prices bottomed out, and stayed that way for over a decade, targeted drilling for gas in Saskatchewan went from thousands of wells per year to effectively zero. Saskatchewan is now a net importer of gas.

Additionally, regulations like Directive S-10 were driving gas conservation, and sought to crimp venting and flaring in the oil wells.

Most of Saskatchewan’s gas production is now from oil production associated gas, and that’s where Steel Reef comes in.

The company was launched in December 2012, after two years writing the business plan. Construction started in the spring on 2014 on the first phase of the North Portal plant.

Early 2013 they raised just over $65 million of equity, principally sponsored by PFM Capital of Regina. Rob Duguid, CEO of PFM, is a board member and major investor. Following a smaller equity issue, Instar/AGF, a major Canadian Infrastructure fund, lead by Greg Smith, made a major investment in the company.

Steel Reef’s start in Saskatchewan was near North Portal, where we built a new sour gas plant. It went into operation in early 2015, with a second phase completed in late 2015. A new plant was also built at Alameda that was completed in 2016. The next year Steel Reef bought ATCO’s share of the Kisbey gas plant and bought out TransGas’s share a few years later. They also picked up the Nottingham gas plant from NAL in 2016. In 2018, the venerable Steelman gas plant as well as the Glen Ewen gas plant, which were acquired from Plains Midstream.

In the meantime, Steel Reef built an oil pipeline and terminal in the Viking play, from Plato to Kerrobert. By 2018 they bought the Coleville gas plant and gathering system from TransGas. The company has a half share in a “clean products terminal” for oil and NGL storage with pipeline gathering and trucking loading/offloading access at Gordondale, Alta., and an oil battery at Kaybob built in 2014.

In 2019 Steel Reef bought the Lignite, North Dakota, gas plant and gathering system. The year before, they built a short one-kilometre pipeline from North Dakota to Saskatchewan at North Portal. This was a significant feat as they were able to secure a Presidential Permit to do so, something the Keystone XL pipeline struggled with for the better part of a decade.

“In November of 2018, we constructed and commissioned an international natural gas line between North Dakota and Saskatchewan, tying it into the North Portal plant. That was really cool,” McKay said.

“We hired the best law firm in Washington to help us navigate the complicated process. In the eyes of the U.S. government, this was a three-kilometre pipeline. They were excited to approve that, because it was a small scale project.

“Do you own the right of way? Yes. Do you have anyone complaining? No. Have you held your community events? Yes. Has anyone complained? What does the Canadian government think?

“It was check check, check, check, approved! And the Trump administration was very positive, ‘We just approved an international line!’” McKay recalled.

It was a three-kilometre, ten-inch line, but with a big web of gathering systems and gas plants on each end. 

In recent years, North Dakota implemented a policy where a well licence isn’t approved unless there is a gas capture plan in place, first. So expanding into North Dakota is key on the agenda. More on that later.

Doing it the hard way

A discussion about the refinery that never was at Stoughton led McKay to say, “Many people are promoters, they’re not builders. They don’t ever want to do it the hard way. We don’t mind doing it the hard way.

“We have over 600 investors. It takes a year to raise capital through current relationships and we are always starting new relationships.

“At companies like Steel Reef, you put your nose down, you work your ass off. You have good people. You work with the government. You work with the communities. We’ve built a really beautiful system of associated gas and liquids processing for Saskatchewan. To me, that’s why you have a company. You have it to enrich all the stakeholders and employees within the business plan. That provides the platform to build the company.”

Southward added, “The business plan was simple; smaller infrastructure can provide great service to customers. Associated gas capture in Saskatchewan was under-serviced, relatively small compared to the larger projects being contemplated in Alberta and gave us a chance to enter a market with a supportive regulatory regime and local stakeholders, and world class geology”.

Did S-10 factor in?

One might think the driving force in getting the company going was the Directive S-10 to limit venting and flaring in Saskatchewan. But that wasn’t the case.

“Our business plan’s move into Saskatchewan was and is predicated on the quality of the oilfield rocks, the geology, and the quality and economic competitiveness of the reservoirs. This area was led by Dean Potter and Neil Roszell, as they know these reservoirs better then anyone. We didn’t build our company because of the new government regulations. We had no idea that was going to happen.

“We had already started our company.”

McKay continued, “I think that legislation led to projects getting done quicker. The projects still have to be economic projects. They have to be economic to us, the producers, to everyone. But it makes everyone more aware that we have to be good stewards of all hydrocarbons. We can’t just burn some as waste.”

New federal methane regulations haven’t driven any new business to this point.

“It’s a commodity business. If oil prices go up, we’ll have more natural gas. Our business is driven by the quality of the reservoirs. These are the best rocks in Canada, you know,” McKay said.

The gas they collect is highly liquids rich, he said. They get about 72 barrels of liquids per million cubic feet at North Portal, for example.

Voss described their gas as “difficult to process.” He noted, “It is low pressure, liquids rich, and contains H2S. The small gas plants we build and operate in Saskatchewan are just as complex as some of the largest gas plants in Canada.”

McKay said, “We make our money by charging processing fees. The producer owns the hydrocarbons, in the form of gas and liquids that come into the plant. We charge them a processing fee. And when the different products come out of the plant – the sales gas goes to TransGas, the liquids go into bullets – the oil company owns them at the end of the plant. We don’t own any product. The oil companies own it all, and we charge a fee. We’re processors.”

Southward said, “The oil and gas sector is evolving in that all stakeholders are driving industry to be come more socially conscious through reducing emissions, recovery of associated gas and generally reducing its environmental footprint. The introduction of these regulations have helped Steel Reef establish our core focus and expertise around flaring reduction both in Saskatchewan and in North Dakota.”

Strategy and plans

Asked about their strategy going forward, McKay said, “Our strategy is to build an interconnected associated gas and liquids gathering and processing system. Call it a supersystem, in the Williston Basin, a fully interconnected system in Saskatchewan and North Dakota.”

That’s why they built that international pipeline and bought Lignite, as well as opened an office in Denver. “We will build and/or acquire. We worked on buying that for four years, and we took three years to put that international line in,” McKay said.

“We have an updated five-year plan. Our goal is to continue to develop the associated gas business in Saskatchewan, and to extend into the northern part of North Dakota. We’d like to invest $100 million a year for the next five years. That’s how much money we’ve organized between our equity, our available debt, and reinvestment of cashflow,” McKay said. “On our model, it would give us on our EBITDA of about $110 million per year, with an implied value of the company of about $1.1 billion down the road.

“We want to double our size over the next five years by acquiring and building smaller-sized associated gas plants and interconnecting them, and all the bells and whistles that go into the systems.”

McKay added, “In some areas there may be opportunities to do rail. Other areas might see fractionation. With a big supersystem, you’ve got economies of scale, and you can start throwing in the bells and whistles. It makes it more profitable.”

Steel Reef and Ceres Global Ag. recently reached a deal to ship product out of Ceres’ Northgate Terminal. The letter of intent is to form a joint venture (JV) with Ceres. Cere’s third quarter 2019 “management discussion and analysis” stated, “The potential JV would involve handling natural gas liquids and condensates at Northgate for movements by rail connecting Canadian and U.S. markets. The parties are currently negotiating definitive agreements. In order to capitalize on seasonal customer contracting opportunities, the corporation and Steel Reef have begun jointly marketing the anticipated service capabilities of the potential JV.” 

To that end, Voss said “Energy egress is an issue in Canada at multiple different scales. Everyone knows about Keystone XL or TransMountain’s hurdles, but at a smaller scale developing and marketing egress for oil and gas is a huge challenge and an amazing opportunity. This is what the focus of the Northgate terminal is – a supportive offering of egress services for our producer clients.”

“We’re in the Williston Basin, and we want to stick to associated gas,” McKay said. “We’re very focused.”

North Dakota has been pressing the industry to build more gas plants. In 2018, six were built in the state.

Skeptics told Steel Reef they would never be able to build an international pipeline. It was commissioned last November. Similarly, they were told they’d never be able to buy into the market there, but this spring they bought the Lignite plant and its gathering system covering Burke County.

Steel Reef has been both builders and acquirers of gas plants and infrastructure. “You have to do both,” McKay said.

Steel Reef employs 110 people, up from three when they started.

“We’ve grown to be a really good partner,” McKay said.

“We bought that plant at Coleville from TransGas. We got these hats that said, ‘Make Coleville great again,’” he laughed.

“We’ve spurred a lot of jobs, for great families. Associated natural gas is a thriving industry,” he said.

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