Natural Gas

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A PROMISING START: Marcellus Shale exploratory phase
Gas abundant in test wells; firms begin investing in infrastructure to pipe commodity eastward
Cliff White- [e-mail]
September 20, 2010 8:20am EDT
Promising results from exploratory gas wells in Centre County have focused the interest of some energy companies on the area, making it likely the county will see increased drilling in coming years.


CDT/Nabil K. Mark

A natural gas well being drilled along State Line Road north of Snow Shoe, Pa. CDT/Nabil K. Mark May 22, 2008

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Anadarko Petroleum Corp. spokesman Matt Carmichael said his company recently drilled a well in the eastern end of Snow Shoe Township that has a peak 24-hour test rate of 7.8 million cubic feet of gas per day — well above the break-even profitability rates on horizontal wells in the Marcellus, estimated at 2 to 3 million cubic feet of gas per day. The find was significant enough to be mentioned in the company’s second quarter report to stockholders.

“It shows a level of prospectivity,” Carmichael said. “We may have found a prospective area in that part of Centre County.”

Anadarko has now drilled 21 wells in the county, the most of any company, said Sue Hannegan, assistant director of the county’s Planning and Community Development Office.

A total of 41 wells have been drilled to date in Centre County, all of them in the northern and eastern townships of Rush, Snow Shoe, Burnside and Curtin. Exco Resources has drilled 18 wells, while Range Resources and Carrizo Oil and Gas have each drilled one well. Two other companies, Williams and Enerplus, have purchased leaseholdings in the county but have not yet drilled any wells.

Hannegan said her office has seen increasing interest from gas companies, and based on that and what she has heard from those companies about the quality of the wells drilled so far, she predicated “a lot” more drilling in the future.

“It’s a trend, when you think we had nine wells in January and we have 41 now,” she said. “I would say we’re going to see an increase.”

In its second quarter shareholder report, Exco Resources Chief Operating Officer Harold L. Hickey said the company would focus the bulk of its Marcellus activity in the near future on its 20,000 acres of lease-holdings that straddle Centre and Clearfield counties. He said recent drilling results in that area had been positive.

“We are excited about those results, and we are going to continue to solidify our land position (t)here,” he said. “The big focus is going to be right in” central Pennsylvania.”

Since Hickey’s announcement Aug. 4, Exco has completed three additional wells in Centre County, with eight more planned, according to the Planning Office and the shareholder report.

Still exploring

While initial results have been positive, both Carmichael and Range Resources spokesman Matt Pitzarella cautioned not to interpret them as sure-fire indicators of future development.

“Centre County is in earlier phases,” Pitzarella said. “The process is very statistical in nature. We need to drill enough wells in a certain radius, and then we start combining that with data of the thickness of the shale, its thermal maturity, and compile that to get a really good picture of what the area will produce.”

Carmichael said even when the whole process — he called it “bracketing” — is completed, it still isn’t always a perfect prognosticator.

“One thing that’s clear is there’s not any level of consistency in the prospectivity of the Marcellus from one location to the other,” he said.

For Centre County or any other area of the Marcellus Shale to be considered a viable play, a number of variables other than the richness of the gas have to be considered, Pitzarella said.

“The gas is there, but for the economics of it to work, infrastructure like pipeline capacity has to be in place,” he said. “Without the pipeline, it would be like if you manufactured widgets and you didn’t have the trucks to take them to market.”

Centre County isn’t entirely devoid of pipeline infrastructure, or what gas companies call “midstream.” So far, much of the drilling activity in the county is occurring in relatively close proximity to large transmission pipelines. To expand its ability to drill in locations farther away from existing pipelines, Anadarko announced it will build a gas line that would run about 30 miles through Centre and Clinton counties.

In addition, Superior Appalachian Pipeline LLC plans to construct a natural gas pipeline about 14.5 miles long through Snow Shoe and Burn-side townships, and Exco CEO Doug Miller said the company would spend up to $100 million a year on developing “takeaway” infrastructure in Centre County and elsewhere.

The main question on many local landowners’ minds is what price they can get for leasing their land.

Miller reported to stockholders in Exco’s second quarter report that his company is aiming to lease up to 30,000 more acres in the area. So far, the company has paid in the range from $1,000 to $6,000 an acre, with most leases at five-to seven-year terms at about $5,000 an acre. Royalty rates have increased recently from 8 percent — the state’s mandated minimum — up to as much as 20 percent.

Gas prices a factor

Another major factor in the profitability of the play in Centre County is the price of gas. Because of Pennsylvania’s proximity to the major markets of the East Coast, the Marcellus Shale formation can be profitable for companies at $4 per Mcf (1,000 cubic feet). The price jumped as high as $6 per Mcf last Christmas, but it has hovered at around $4 per Mcf since May.

Each company’s break-even price point for gas depends on its methods of drilling and the expenses it absorbs for items such as leasing land, buying or renting and operating drilling rigs, paying employees and hiring subcontractors.

Even with the average completed well costs coming in around $4 million, Anadarko CEO James Hackett said his company could be profitable in Marcellus with gas prices as low as $3 per Mcf. However, at even slightly higher rates, Hackett said Marcellus has great potential to generate significant returns.

“I believe that this is one of the highest, if not the highest rate of return gas play in the United States,” he said.

Exco’s Miller also expressed confidence his company could be profitable in the Marcellus even if gas prices remain low.

“Gas price doesn’t have to go back to $7 next week. If gas stays at $4 or below for the next six months to 12 months, I think there is going to be a lot of opportunity,” Miller said in his company’s second quarter report.

Mike Arthur, a geosciences professor and co-director of Penn State’s Marcellus Center for Outreach and Research, said rates lower than $3.50 would cause many companies to rethink their strategy in the Marcellus region.

“It would become a question of taking a longer time to see returns, which could make a lot of difference in them deciding whether the investment is worth it,” Arthur said.

The fact that companies are continuing their push into Marcellus even with gas prices remaining low means companies have been happy with their initial drilling results, Arthur postulated.

“It all looks good so far,” he said.

DEP report: Nothing certain

A law passed in March required companies drilling Marcellus Shale wells in Pennsylvania to hand over all production data for the previous year to the DEP in August. The data was released to the public Sept. 8. Though not all companies handed in their results — putting themselves at risk of punishment — the collected findings reveal the potential volume of recoverable gas in Pennsylvania’s Marcellus Shale formation to be greater than industry executives had hoped.

“The data reported a much better performance than expected,” Arthur said. “The wells are more than meeting the expectations.”

The report listed 632 producing wells for the period from July 1, 2009, to June 30. Collectively, they produced about 180 billion cubic feet of gas, more than double Pennsylvania’s annual rate of gas production before the Marcellus boom.

The report shows why much of the gas industry development has so far focused on north-central and southwestern Pennsylvania.

The most productive well, in Susquehanna County, produced 2.8 billion cubic feet of gas over 270 days. Nineteen of the top 20 most productive wells are in the state’s northern tier, either in Bradford, Tioga or Susquehanna counties. Six of the top 10 wells in the state are owned by Chesapeake Energy, and the other four are operated by Cabot Oil and Gas.

Five Centre County wells are on the DEP list, including Anadarko’s C.O.P. 231A well, which is listed as producing 151.6 million cubic feet of gas over 36 days, ranking it 307th out of the 632 wells included in the report.

“It’s not huge, but it’s good,” Arthur said. “Huge would be the numbers some wells in the Northeast reported.”

When each well’s daily average is taken, Anadarko’s Centre County well is producing slightly less than half the amount of gas as the most productive well in Pennsylvania (4.2 million cubic feet a day versus just over 10 million per day).

The four other Centre County wells are owned by Exco Resources and rank 380th, 522nd, 527th and 594th in the state, with daily production volumes ranging from 24,452 cubic feet of gas to 225,931 cubic feet of gas. All four of Exco’s listed wells have been online for at least a full year.

Kristin Carter, chief of carbon sequestration at the Pennsylvania Geological Survey, said the survey was done mainly to give the government an idea of what revenues would be if a gas severance tax were enacted, and that “no quality control” had been done on the data.

“As a geologist, I don't know if I would trust any of the reported results,” she said.

As for how much money a tax would have generated for state coffers? The 180 billion cubic feet of gas reported recovered last year has about $720 million in value, which means a 5 percent severance tax would have collected an estimated $36 million.

What’s to come

The number of Marcellus Shale drilling permits active in the Centre County Planning Office has oscillated over the past year, but now stands at 30. Permits expire after one year, and it’s a frequent industry practice not to drill on all well sites that receive permits. Earlier this year, the Planning Office had 70 active permits. Hannegan expects the number of permits received by her office to increase drastically over the winter months, as drilling operations slow down with the cold weather and companies put more thought into strategic repositioning.

“At that time we can probably get a better feel for what the future holds,” Hannegan said.

In the meantime, Hannegan said she firmly believes shale gas production and exploration in Centre County will be “a very important industry to the county from an economic development standpoint.”

Arthur, of Penn State’s Marcellus Center, agreed, adding his thoughts on what he said was a drastically overlooked component to drilling in Pennsylvania. Just recently, he said, a few companies have begun testing the viability of other segments of Pennsylvania’s shale rock, which could prove just as lucrative than the Marcellus — or even more so. Arthur mentioned the Utica Shale, which lies below the Marcellus, as having great potential. He said Range Resources had tested the Utica with great success.

Marcellus or Utica, Arthur said he was certain more gas drilling is in Centre County’s future. “It's coming,” he said.

Cliff White can be reached at 235-3928.



Read more: http://www.centredaily.com/2010/09/19/2217898/a-promising-start.html#ixzz1BrjdgdVu