President’s Message
Dear Shareholders,
I would like to take this opportunity to address the progress of our natural gas leases in Morgan County, Tennessee. As our shareholders know, in late 2008, the federal government, through the agency FERC, mandated that any gas with a BTU count higher than 1100 is unsafe and should not be transported in interstate pipelines or sold to consumers. Gas originating from oil wells usually has a high BTU count, and this is especially true in the Burville area where the Anderson and Martin wells are located. As a result, Magellan, as well as many other area producers, had their wells shut in by Citizens Gas for a protracted period of time.
To resolve the issue, Citizens Gas placed a large compressor in its Burrville gathering system where it ties into a 350 lb. pressure line. Citizens Gas receives its gas supply from the east Tennessee gas pipeline and from various local gas producing wells in Scott, Morgan, Fentress and Anderson counties, and was to "blend" the gas from all other wells in these counties to lower the BTU levels to the acceptable level of 1100 BTU’s.
This system, unfortunately, has not been able to completely stabilize the high BTU issue in order to consistently meet the FERC requirements. It is a gathering and distribution system collectively, which means that after the gas has been gathered and blended, it is immediately distributed for sale to residential and commercial properties. The inconsistent BTU count has meant that this system cannot be safely utilized and an alternative method had to be found.
Area producers are in the process of disconnecting their lines and reconnecting them to an alternate system which is strictly a collection line. The gas will then be carried to a separate Citizens gas high pressure line where it will be blended. This will avoid having the gas distributed to residential and commercial properties prior to the collective BTU count being absolutely stabilized and maintained to acceptable levels.
It was only through the implementation and sustained operation of the initial solution that its inconsistencies were revealed. Magellan believes that the possibility of further disruptions have been addressed with this new solution. Magellan’s partner and operator of the projects, TMD Energy Inc., is continuing to work with Citizens Gas to rework the lines as quickly as possible so that revenues can be produced.
In additional news that has tremendous market potential for the Company, the Tennessee Valley Authority (TVA) has announced that a natural gas-fired electric plant in Rogersville is scheduled to come online in late 2011 and will require up to 160 million cubic feet of natural gas daily. The proposed natural gas plant is to be located beside the John Sevier coal fired power plant, which supplies electricity to upper east Tennessee. The purpose is to reduce the emissions from the existing plant. The large majority of the coal currently burned in the John Sevier Plant is imported from neighboring states.
Tennessee is now producing about 16 million cubic feet of gas, but has immense potential for to produce a great deal more, with the most potential coming from the Chattanooga Shale. Magellan and other area producers stand to benefit greatly from this enormous new demand source. The Lankford Lease wells have been drilled to the shale formation and the Company is confident that a significant amount of gas from the formation exists on their lease. The Company intends to frac at least two of the wells at the earliest opportunity to increase natural gas production and is considering additional horizontal drilling to maximize long-term gas production from the Chattanooga Shale.
In closing, we have been faced with another challenge and we believe that the correct solution has been undertaken. The Company remains very excited with the immense potential of its natural gas projects and is confident that the newest solution implemented to lower the BTU count for distribution and sale will be highly successful and natural gas revenues will once again commence. Magellan will continue to implement its acquisition strategy of acquiring formerly producing low-volume wells, refurbishing them and putting them back into production, particularly those located on the Chattanooga Shale.
Regards,
Apolinar V. Carcasona
President
Magellan Energy Ltd.
