American Oil and Gas Reporter - November 2015 - 66

SpecialReport: Finance & Logistics
The facility, which achieved first production on April 16, 2015, has a peaking
capacity of 100,000 barrels of oil a day and
240 million cubic feet of natural gas a day.
Eight Delta House wells now have been
brought on production to the FPS, with
each anchor field and additional tieback
field dedicated to the facility for life-oflease.
LLOG is operator of Delta House, and
along with Blackstone Energy Partners
(LLOG's joint venture partner in the
Gulf), is the largest working interest
owner of the wells. Project co-owners are
Red Willow Offshore LLC, Calypso Exploration, Deep Gulf Energy II, Houston
Energy Inc., and entities managed by
Ridgewood Energy.
Financing Delta House
The producer group desired to use
third-party financing to construct the
Delta House midstream infrastructure in
order to focus their capital on exploration and production, which typically has
a higher expected economic return profile.
The primary hurdle facing the producers
was that none of them was rated investment grade, a status financing sources typically require in order to support performance requirements and to guarantee sufficient fixed revenues to generate adequate
return on invested capital for midstream
investors.
LLOG thus sought a more creative,
nontraditional financing solution. In mid2012, ArcLight Capital Partners LLC

agreed to finance the Delta House project
without a guaranteed, or take-or-pay,
stream of payments from its producers.
ArcLight's early commitment to finance
Delta House allowed the producers to focus their time and capital on developing
the underlying resource and sanction the
project significantly earlier than otherwise
possible.
In addition to the strong underlying
Delta House reserves, the geology and potential of the Mississippi Canyon region
as a whole attracted ArcLight to the project. The Boston-based private equity firm
also noted a lack of available infrastructure hubs in the Delta House area. The benefits for ArcLight are a reasonable risk-adjusted investment return with upside, if
known fields exceed P50 reserves, and incremental upside from additional subsea
tiebacks. To date, two additional tiebacks
(beyond the three original anchor fields)
are planned for Delta House. These additional fields will be brought on line in
2016.
As a result of its bottoms-up analysis
of the underlying Delta House reserves and
high regard for LLOG, ArcLight ultimately was able to underwrite the Delta House
infrastructure investment principally on the
basis of volumetric contracts (i.e., fees calculated on a dollar a barrel of oil equivalent basis for the oil and gas processed on
the FPS). ArcLight and LLOG believe this
type of third-party infrastructure development to be the first of its kind in the deepwater Gulf of Mexico. ArcLight and

The Delta House semisubmersible floating production system
is stationed in 4,500 feet of water at Mississippi Canyon Block
254. LLOG Exploration Company LLC and its partners utilized
a nontraditional private equity
solution to finance the host platform and export lines, enabling
the multiple-field project to
achieve first production within
36 months of discovering the
anchor field.

66 THE AMERICAN OIL & GAS REPORTER

LLOG are working to potentially replicate
Delta House's financing and commercial
structure, along with certain key elements of the project's EPC approach, in
other Gulf locations.

Guiding Principles
Early on, ArcLight and LLOG established a set of guiding principles that
proved critical in negotiating and executing the transaction. At the core of these
principles was the concept that the parties
would be completely transparent with
each another. That meant ArcLight and
LLOG regularly shared their working financial models, internal reserve analyses,
real-time drilling results, and third-party
due diligence reports and contractual
arrangements. At any point in the process,
each party could see exactly how much
capital the other party was investing,
what revenues and fees it was earning,
what costs and risks it was bearing, and
what its projected return was.
At the time negotiations began, the
project had a wide range of potential outcomes since the discoveries were not delineated fully. To address this uncertainty, the parties established an explicit
spread of investment returns that the infrastructure capital provider should earn,
based on what ultimately would be known
at the time of financial closing. The
arrangement had the following key characteristics:
* Capital preservation, even in the
more draconian downside cases;
* An appropriate investment return associated with a mutually determined base
(or approximately P50) case; and
* The opportunity for the producers to
enjoy very attractive fees in the long run.
This shared understanding, bolstered by
the transparent working relationship, allowed ArcLight and LLOG to recalibrate the tariff structure a number of
times during the 12 months of negotiation
as facts on the ground changed, whether
as a consequence of new drilling results
(including reserve reports performed by
third-party engineering firms), updated
capital budgets, or otherwise. ArcLight and
LLOG were able to accomplish this without the drama that usually attaches to
repricing junctures within negotiations.
Last, the parties agreed that Delta
House would be designed, both operationally and commercially, to encourage
and attract not only additional development
by LLOG and the anchor producers but
also third-party tiebacks. This was the ul-
American Oil and Gas Reporter - November 2015

Table of Contents for the Digital Edition of American Oil and Gas Reporter - November 2015
