Discoveries

According to the Pennsylvania Oil and Gas Association, the Keystone State’s Department of Environmental Protection issued 5,333 drilling permits this year, through October 23. Of those, 1,516 were for the Marcellus shale. Of the 1,944 wells drilled in Pennsylvania in 2009, 403 are Marcellus wells. That’s an enormous ramp-up since 2008, when 476 Marcellus shale permits were issued by the DEP and operators reported 195 drilled wells.

Present estimates are that some 500 million cubic feet of gas per day is being produced from the shale across the play, and volumes should reach 600 million by year-end. Currently, some 50-plus rigs are drilling Marcellus wells, up from about 10 at the beginning of 2008. If the rig count continues to climb along the same path into the future, production could conceivably break a Bcf per day at the close of 2010.

–Peggy Williams, Senior Exploration Editor, Oil and Gas Investor

pwilliams@hartenergy.com

The Appalachian Basin’s Marcellus shale is talked up as the best shale-gas play in the country these days, and attendance at Hart’s DUG East conference seemed to confirm that sentiment.

More than 1,300 people crowded the Pittsburgh convention center for a day-long Marcellus conference. High-profile operators spoke, interspersed with technical panels. Topics ranged from drilling plans to geology to midstream issues and economics.

For me, the conference was a tremendous validation of an old and familiar area. It is fun to see a widespread rejuvenation of interest in the Appalachian Basin, 150 years after Colonel Drake drilled the world’s first oil well.

Jeff Ventura, president and chief operating officer of Range Resources Corp., the kick-off speaker, highlighted a recent Penn State study that noted that by 2020 Pennsylvania alone will enjoy 176,000 jobs, $14 billion in economic impact, and $1.5 billion in state and local taxes from Marcellus shale development. Additionally, lease and royalty payments to Pennsylvania landowners are expected to reach $2.8 billion by 2020.

More broadly, Murry Gerber, chairman and chief executive of EQT Corp. noted in his presentation that the U.S. natural gas industry employs nearly 3 million people, and that 31 states have at least 10,000 industry jobs. Each year, natural gas accounts for $385 billion in annual economic impact.

To take a look at the Penn State study, go to this link: http://www.pamarcellus.com/EconomicImpactsofDevelopingMarcellus.pdf

–Peggy Williams, Senior Exploration Editor, Oil and Gas Investor

pwilliams@hartenergy.com

A new report by Ross Smith Energy Group notes that 40 horizontal rigs are currently at work in the Marcellus shale play in the northeastern U.S., and results continue to improve.

Operators currently expect to recover some 4.4 billion cubic feet of gas from the average Marcellus well drilled in southwestern Pennsylvania’s Washington, Greene and Fayette counties, and northern West Virginia’s Wetzel County. Similar per-well volumes are calculated in the northeastern slice of the play, in Bradford, Lycoming and Susquehanna counties, Pennsylvania.

It’s interesting that the two areas appear to deliver equivalent per-well recoveries, because the Marcellus is much thicker (by about two to three times) in the northeast hot-spot than in the southwest portion. But, porosities are apparently higher (by meaningful percentages) in the latter area.

Questions now swirl around the middle of the play, a neighborhood that seems not to have the advantages of either thick shales or high porosities. “It’s not known yet whether the central region of the play (Centre, Clearfield and Cambria counties) will produce comparable economics to the northeast or southwest areas,” say analysts Manuj Nikhanj and Brook Murray. More well results are needed to determine if the Marcellus’ midsection can be as commercial as its ends.

–Peggy Williams, Senior Exploration Editor, Oil and Gas Investor

Contact me at pwilliams@hartenergy.com

I visited the Granite Wash play this week, in the Texas Panhandle. The Wash is an unconventional play that has revitalized an old area.

The Granite Wash is a tight-sand gas reservoir that occurs in thick, stacked sequences of sands, siltstones and shales. The sediments are submarine fan lobes sourced from distant highlands. The lobes are piled on each other, to thicknesses of 3,500 feet in areas.

Today, operators are drilling both horizontal and vertical wells in the Wash sediments, which are Pennsylvanian in age in this play. Economics of the wells are attractive even at today’s low gas prices. Vertical players have refined completions and shaved well costs to yield solid rates of return and add proved and probable reserves. Horizontal players are drilling some stunning high-rate wells that flow gas in excess of 20 million cubic feet per day. Economically, these wells compete head-to-head with those in the big shale plays.

Several additional factors contribute to the popularity of the Granite Wash, which is prospective from the Texas Panhandle into western Oklahoma. Its gas is rich, pipelines are spread across the trend, and the regulatory environments are favorable. Also, there are few topography problems in this part of the Patch!

And, if you don’t like the weather, just wait awhile. We experienced blue skies, puffy clouds, towering thunderheads, heavy rain, lightening and awesome hail in the space of 24 hours!

–Peggy Williams, Senior Exploration Editor, Oil and Gas Investor

Contact me at pwilliams@hartenergy.com

I’ve been looking at natural gas prices lately, thinking about the future.  It seems to me that the worst is over and prices will certainly improve. Of course, that’s not much of a stretch because they are so low now.  But as Billy Crystal famously said in The Princess Bride, there’s a big difference between mostly dead and all dead.

And yet, bear-market factors are everywhere. Shale-gas production is burgeoning, and the recent Potential Gas Committee report details a substantial jump in the U.S. resource base.  It would appear that shale-gas technologies have unlocked copious new supplies.

Too, the volume of gas in storage is running well ahead of last year’s levels, and also above five-year averages.  We will likely go into the winter heating season with storage reservoirs chock full. At the same time, domestic industrial demand for natural gas remains soft.

Global LNG production and its potential impact on U.S. gas prices are additional wild cards. New supply trains are rapidly coming on stream around the globe, although worldwide gas demand is down. All this LNG has to go somewhere, and it might well come here.

Counteracting these forces, there are rumblings that production declines are already showing up in the Barnett shale and certain Rockies basins. Some companies have shut in gas production, reluctant to sell into current low prices. In my mind, the huge drop in drilling during the past year surely has to translate into less supply.  And, U.S. economic recovery could just possibly be under way.

For no good reason other than a generally optimistic outlook, my personal forecast is for a modest improvement in natural gas prices this fall and winter.  Mostly dead means slightly alive, after all.

–Peggy Williams, Senior Exploration Editor, Oil and Gas Investor

Contact me at pwilliams@hartenergy.com

It was for our own good, but we didn’t like it. In front of a crowded luncheon at the Colorado Oil and Gas Association’s meeting in Denver this week, former U.S. Senator Tim Wirth dressed down the natural gas industry.

Wirth was passionate in his speech, exhorting the natural-gas industry to get organized and get to Washington and lobby for its interests. The former Colorado senator now serves as president of the nonprofit United Nations Foundation, a charity created by Ted Turner in 1998.

Essentially, Wirth told the audience that global warming was undeniable and it was pervasive. He has no doubts about the science. He also believes that the world is heading toward potential disaster, and it’s in everyone’s interest to reduce greenhouse-gas emissions.

Natural gas should be the bridge to the future, said Wirth, but the industry was completely missing from the recent debate in the House of Representatives on the Waxman-Markey energy bill. Other groups, including coal producers, utilities, automotive manufacturers and solar and wind-energy providers, wangled special provisions or shaped terms of various programs contained in the proposed legislation.

“Every major industry was deeply engaged except for the natural-gas industry,” he said.  “The natural-gas industry needs to get organized. It can lead the country toward a better economic and environmental future.”

And, according to Wirth, it’s our duty to advocate for increased use of natural gas, and we have precious little time to do that. Senate hearings on the energy legislation will be held within the next two months, so there’s no time to waste.

To see a video clip on Wirth’s speech, click  here

–Peggy Williams, Senior Exploration Editor, Oil and Gas Investor

pwilliams@hartenergy.com

Shale-gas production now accounts for approximately 7% of annual domestic production, noted John Curtis, professor at Colorado School of Mines, in a presentation I attended at the recent AAPG Annual Convention in Denver.

The U.S. Energy Information Administration estimates that shale-gas production will overtake coalbed-methane production by 2025, and will grow from current volumes of more than 1 Tcf to 2.3 Tcf annually by 2030. A good part of today’s shale-gas production flows from the Barnett play in North Texas. Indeed, U.S. gas production as a whole grew by 9% from the first quarter of 2007 to the first quarter of 2008, in large part thanks to the Barnett.

Going forward, various forecasts call for shale-gas supply to grow to 10% or more of daily U.S. production. Some experts have even pegged eventual shale-gas contributions at levels as high as 50%. There are many constraints, naturally, including environmental and regulatory issues and pipeline capacities. But one area that does not appear to offer limits is the sheer size of the technically recoverable resource.

The industry’s understanding of the shale-gas resource base has grown tremendously in the past few years, noted Curtis. From older plays such as the Ohio shale in Appalachia to the Antrim in Michigan, the shale-gas universe has grown to encompass such powerhouses as the Barnett and Fayetteville and Woodford shales in the Midcontinent. Now, the Haynesville, in East Texas and North Louisiana, and the burgeoning Marcellus, in New York, Pennsylvania and West Virginia, are delivering on their great promise. And, plays like the Eagle Ford in South Texas continue to emerge.

“The good news is that the technically recoverable resource base is sufficient to support increases from the 10% level on up,” he said.  

Truly, that is good news! Curtis is Director of the Potential Gas Agency; the Potential Gas Committee’s 2009 report details the striking growth in U.S. gas potential.  To learn more, click here.

–by Peggy Williams, Senior Exploration Editor, Oil and Gas Investor

 pwilliams@hartenergy.com

In a conference call devoted to its activities in the Haynesville shale and Deep Bossier plays in Louisiana and East Texas, Calgary-based EnCana Corp. also dropped a few nuggets about its thoughts on the Middle Bossier shale.

The company noted that the Middle Bossier shale, which lies just above the Haynesville, achieves a thickness of about 180 feet across much of its Louisiana acreage position. Gas-in-place numbers are similar to the Haynesville.

EnCana said that production rates from vertical wells in the Middle Bossier shale are very good, and that it has a horizontal well that is producing 3- to 4 million cubic feet per day from a lateral stimulated with eight stages. It expects the well’s performance will compare favorably with its Haynesville completions.

This year, the company will drill a number of tests across its acreage position to probe the Middle Bossier shale. In EnCana’s view, this shale has the potential to parallel and be as significant as its Haynesville position.

–Peggy Williams, Senior Exploration Editor, Oil and Gas Investor

Contact me at pwilliams@hartenergy.com

Hart recently held a Marcellus shale webinar, featuring three speakers. I thought the entire broadcast was intriguing, but I wanted to share one nugget in particular.

Randy Wright, president of Wright and Co., offered vertical and horizontal well models, with rates of return plotted against Nymex base prices.

Wright modeled a vertical Marcellus well using assumptions of 100% working interest and 85% net revenue interest; $1.5 million D&C costs; $1,250 per month LOE; and $7 a barrel for water hauling and disposal. No lease costs were added, and the prices were not adjusted upward for Btu or basis premiums. Additionally, a 5% severance tax that is being considered in Pennsylvania was not added. He ran four EUR dry-gas base cases: 300 million, 600 million, 900 million and 1.2 Bcf.

 The horizontal well model employed similar assumptions, but used $4 million D&C costs and $2,000 per month LOE. Its EUR base cases were 2 Bcf, 3 Bcf, 4 Bcf and 5 Bcf.

Results showed that at a Nymex base price of $5 per thousand, a vertical well needed to recover at least 900 million cubic feet of gas to hit a 10% ROR. That’s a pretty hefty vertical well. Horizontal wells, with their greater reservoir contact, fared much better. At $5 gas, a 2-Bcf Marcellus producer can deliver a ROR just below 10%, a 3-Bcf well hits a bit below 20%, a 4-Bcf well reaches 40%, and a 5-Bcf well, 60%.

Wright noted that these well models were not intended to represent typical Marcellus wells, or wells in any specific area. Rather, they illustrated sensitivities to EURs and base Nymex prices. To me, they showed why the horizontal Marcellus continues to attract investment even as other U.S. plays are withering.  

–Peggy Williams, Senior Exploration Editor, Oil and Gas Investor

Contact me at pwilliams@hartenergy.com

Natural gas prices are terrible, due to waxing supply and waning demand. The U.S. Energy Information Administration just released its first energy consumption estimates from a 2006 survey of manufacturers, and since factories and electric power plants consume nearly 60% of the nation’s gas, I was curious to see which manufacturers relied most heavily on the vaporous fuel.

U.S. manufacturing firms burned 14,428 trillion Btus of fuel in 2006, and natural gas was the largest single fuel source. It accounted for 32.8% of total energy consumed, followed distantly by electricity, at 19.6% of consumption.  Other sources of manufacturing fuel included residual fuel oil, distillate fuel oil, LPG and NGL, coal and coke.

So, as U.S. manufacturing goes, so goes natural gas demand. The sectors that used the most gas were chemicals and petroleum and coal products. Together, these sectors accounted for 43.8% of all gas used in U.S. manufacturing.  Food manufacturers consumed 13.2% of the sector’s gas.  The three categories of primary metals, fabricated metals and nonmetallic mineral products combined for 20.9% of gas use, and wood, paper and printing products took 10.1%.

This back-of-the-envelope calculation leads me to believe that we must await a broad-based recovery to restore natural-gas demand.  It is a fundamental fuel source for our factories, and these factories produce the basic building blocks of our modern lives.

Click on this link to review the EIA table!

EIA Manufacturing Energy Consumption Survey

–Peggy Williams, Senior Exploration Editor, Oil and Gas Investor

Contact me at pwilliams@hartenergy.com