Midstream energy companies make money by charging customers to gather, process, transport, store, and handle oil, natural gas, natural-gas liquids, and produced water. Some contracts pay set or volume-based fees; others give the operator a share of commodity-sale proceeds or products. That mix means fee-based operations can be less directly exposed to commodity prices, but earnings still depend on throughput, contracts, costs, capital needs, and—in some cases—commodity prices and product spreads.
What midstream companies do
Midstream is the infrastructure and services between production and end markets. Gathering lines connect wells to processing plants, terminals, or larger pipelines. Processing makes raw natural gas suitable for sale and can separate natural-gas liquids (NGLs). Pipelines and terminals move or handle products; storage and fractionation provide additional services. Some midstream portfolios also gather and transport produced water, stabilize crude oil, or arrange its storage and onward transport.
A company may own several of these assets, or focus on a narrower set of services. For example, Kinetik describes gathering and processing alongside crude-oil and produced-water services and pipeline transportation; ONEOK reports multiple service and product segments. Their filings illustrate possible business models, not a universal contract mix. Kinetik’s 2025 Form 10-K and ONEOK’s 2025 annual report describe these activities.
How midstream companies earn revenue
Gathering and compression
A gathering system collects oil or gas from producing wells and moves it to a processing plant, trunk pipeline, terminal, or other delivery point. The operator may charge a fee per unit gathered, for compression, or for both. Revenue from a volume-based gathering fee rises or falls with the amount customers deliver.
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Treating and processing natural gas
Raw gas may require compression, dehydration, or removal of contaminants before it can be sold. Processing can also separate residue gas from NGLs. An operator may charge a processing or treating fee, or use a contract that ties compensation partly to the products or proceeds. ONEOK describes both fee-only and fee-plus-percent-of-proceeds arrangements; Kinetik describes fee-based, percent-of-proceeds, and percent-of-products arrangements in its 2025 filing.
Commodity-linked processing contracts
Not every processor is paid only a service fee. Under a percent-of-proceeds contract, the operator sells output and remits the producer’s agreed share of the proceeds; the operator’s compensation depends on the contract’s allocation of proceeds and any fees. Under a percent-of-products contract, the operator receives an agreed share of processed products. The details vary, including how sales are accounted for, so gross sales figures alone may not show the operator’s net compensation.
A keep-whole contract typically allows the processor to retain extracted NGLs while returning equivalent gas value or volume to the producer to compensate for gas removed during processing. The economics depend partly on the relationship between the value of the retained liquids and the gas used or returned. A company may hedge some price exposure, but that does not eliminate all contract or business risk.
Transportation, capacity, storage, terminals, and fractionation
Pipeline companies can charge for volumes transported, for capacity reserved by a customer, or for both. Storage operators may charge for reserved capacity and related services; terminals charge for handling, and fractionation plants charge to separate NGLs into individual products. ONEOK’s 2025 filing describes transportation, exchange, terminal, fractionation, and storage services, including firm transportation and take-or-pay structures.
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These charges do not all work the same way. A usage charge depends on volumes moved, while a reservation or demand charge pays for contracted capacity and may be due even when the customer uses less than the reserved amount, subject to the agreement’s terms. The exact payment obligations depend on the contract.
Crude oil, NGLs, and produced water
Midstream operators may gather and stabilize crude oil, store it, and connect it to takeaway pipelines or terminals. They may also transport and fractionate NGLs, or collect produced water and move it for treatment or disposal. These services broaden the sources of revenue beyond natural-gas gathering and processing; the way each is priced depends on the operator’s contracts.
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Why some revenue is steadier than others
Fee-based contracts generally link compensation to service volumes or agreed capacity charges rather than directly to commodity prices. Firm reservations, minimum-volume commitments, or minimum-dollar commitments can add contractual support. Under a minimum-volume or minimum-dollar commitment, a customer may owe a shortfall payment if deliveries fall below a threshold, but the protection depends on the agreement and the customer’s ability to pay.
Fee-based does not mean volume-proof. If producers reduce drilling or output, gathering and processing volumes can decline; shippers may also use less capacity. A fee that is not indexed to oil or gas prices can still produce less revenue when the volume on which it is charged falls.
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- Volume and utilization: Lower customer production or shipments can reduce fee revenue and leave expensive infrastructure underused. Competing systems or customers’ own facilities may also pressure utilization and commercial terms.
- Commodity and spread exposure: Proceeds-sharing, product-retention, and keep-whole contracts can change in value with commodity prices or the relative prices of residue gas and NGLs.
- Contract and customer risk: Minimum commitments depend on contract language, customer creditworthiness, enforceability, exceptions, and termination rights. Kinetik’s 2025 filing notes circumstances in which some customer obligations can be suspended, reduced, or terminated.
- Costs and capital: These businesses require substantial infrastructure and ongoing spending. Integrity management, maintenance, fuel and power, compliance, financing, and new construction all affect project economics.
- Regulation: Applicable rules vary with the asset and service; not all midstream facilities or revenues fall under the same regulator or rate framework.
When FERC regulates pipeline rates
FERC regulation is relevant to certain interstate natural-gas pipeline services, not to every midstream asset. FERC explains that interstate natural-gas pipeline rates must be just and reasonable and that cost-of-service ratemaking bases rates on the pipeline’s cost of providing service, including an opportunity for a reasonable return on investment. FERC’s cost-of-service rate-filing overview describes that approach. Intrastate pipelines are generally regulated by state agencies, although some services may fall under limited federal authority; FERC’s interstate and intrastate pipeline explanation outlines the distinction. Gathering lines, processing plants, crude-oil pipelines, and water systems should not be assumed to have the same rate regulation.
A company example is not an industry average
Western Midstream reported that for the year ended December 31, 2025, excluding equity investments, 97% of its wellhead natural-gas volume and 100% of its crude-oil and produced-water throughput were under fee-based contracts. Those percentages describe Western Midstream’s specified throughput, not its share of revenue and not the midstream industry as a whole. Western Midstream’s 2025 Form 10-K provides the company-specific figures.
How to evaluate a midstream company’s model
To understand how a particular operator makes money, look beyond the label “fee-based.” Its filings should help answer:
- What share of activity or revenue comes from fees versus commodity-linked arrangements, and are the measures comparable?
- Are charges based on actual volumes, reserved capacity, or minimum commitments? What conditions limit those commitments?
- How concentrated are the company’s customers and producing regions?
- How utilized are its gathering, processing, pipeline, storage, fractionation, or terminal assets?
- How exposed are margins to commodity prices and product-price spreads?
- What maintenance, compliance, expansion, and financing costs are needed to sustain the assets?
- Which regulatory regime applies to each important service or facility?
Use the same reporting period and comparable measures when comparing operators. A company’s percentage of throughput under fee-based contracts cannot be compared directly with another company’s percentage of revenue under fee-based contracts; those figures describe different things.
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