A public and private play

Marcellus Making East Coast Buzz

American Association of Petroleum Geologists (AAPG)

Each time there’s a decline of even a buck or two in oil and gas prices, the naysayers are quick to say “that’s it, it’s all over.”

A look at the frequent upticks in the stock price of public companies that are heavy into the shale gas and shale oil plays popping up with increasing frequency suggests a lot of folks aren’t listening to the cynics.

The seemingly-ubiquitous shale plays, including the familiar Barnett Shale in Texas and the recently announced Haynesville Shale in north Louisiana, have become the new darlings of the industry as well as the Wall Street crowd.

One of the year’s top stories remains the surprising Marcellus Shale play, which has brought activity and interest to the eastern United States. Photo courtesy of Chief Oil and Gas
One of the year’s top stories remains the surprising Marcellus Shale play, which has brought activity and interest to the eastern United States. Photo courtesy of Chief Oil and Gas
If the operators aren’t already proceeding at full-tilt once a new shale play is announced publicly, it doesn’t take long before they are running at warp speed.

Look at the Marcellus Shale in the northeastern United States, for example.

Until early this year, Range Resources pretty much had the Marcellus to itself – and after a few years spent drilling and evaluating Marcellus wells, the company released information to the public last December that provided initial test rates between 1.4 and 4.7 Mmcf/d for five horizontal wells drilled in this Devonian-age black shale.

One of the year’s top stories remains the surprising Marcellus Shale play, which has brought activity and interest to the eastern United States. Photo courtesy of Chief Oil and Gas
One of the year’s top stories remains the surprising Marcellus Shale play, which has brought activity and interest to the eastern United States. Photo courtesy of Chief Oil and Gas
The announcement was followed by a press release from Pennsylvania State University, triggered by the work of Penn State geosciences professor and Devonian black shale expert Terry Engelder, a past AAPG Distinguished Lecturer, which was picked up by the major newswires.

Engelder, working in conjunction with Gary Lash, geoscience professor at SUNY Fredonia, noted the Marcellus play likely will increase the Potential Gas Committee’s probable resource numbers by 50 tcf.

Being Prepared

Not surprisingly, the play, which spans a distance of approximately 1,200 miles from West Virginia to New York, quickly acquired legs.

“The maximum price for acreage in Pennsylvania on February 1 was a $750 signing bonus,” Engelder said. “We saw an immediate rise in the value of property, which was about $2,000 on March 15 and I’ve heard is now about $2,500 an acre.

“Also, at the time of the press release, royalty was the standard rate of 1/8, or 12 ½ percent,” he noted. “Now royalty rates are at 16 percent and about 18 percent for a high.”

The number of horizontal drilling permits in Pennsylvania climbed to more than 100 in only a few months.

“There was a huge jump at the time the Marcellus became well known,” Engelder said.

“This means there were a number of operators well positioned before the news came out to the public arena.”

Private Investigations

The play may be one of Wall Street’s current love interests, but the Marcellus is not the exclusive domain of publicly traded companies.

In fact, privately held Chief Oil & Gas has a commanding presence in the play where it is ranked among the top four operators, Engelder noted.

Chief has budgeted $150 million for Marcellus drilling this year after investing $100 million in 2007, according to Kristi Gittins, vice president of communications at the company.

Gittins noted about 35-40 wells will go down using the 2008 budget.

“We have 500,000 acres, and we’re still leasing up a storm,” said Tony Carvalho, senior vice president of geology at Chief. “We love the play and think there’s a lot of upside.

“We were in the Barnett Shale for 10 years,” Carvalho noted, “and even though technically this is not like the Barnett, it’s big and it’s exciting, and we’re optimistic it will be something like the Barnett in the sense of that magnitude.”

Chief recently opened an office in the Pennsylvania town of Wexford in the Pittsburgh area to manage its Marcellus operations. The company currently has 180 people – including outside contractors and consultants – focused entirely on the play.

It is noteworthy that many landowners in the region are banding together to make larger contiguous blocks available for leasing. This is a real plus for operators given that Pennsylvania acreage is fragmented by numerous owners, according to Engelder.

It also can be a plus for the landowners who can present a united front to the companies to negotiate lease bonuses and royalty commitments.

To Market, To Market…

As with any domestic hydrocarbon play, the excitement of going after the resource is tempered by the omnipresent regulatory issues.

In Pennsylvania, the secretary of the Department of Environmental Protection (DEP) has indicated the agency will be taking a careful look at the consequences of water use in the state.

“They recognize that the Marcellus play will require significant amounts of water that needs to be acquired, treated and either recycled or disposed,” Engelder said. “A lot of people are now thinking carefully about water use in the state.

“We’ve moved enough further along in the play that some of the day to day operational issues are being examined very carefully,” he noted. “I would look for a fairly close collaboration between operators and licensing agencies like DEP – the two of them need to be on the same page in terms of permitting for using water for fracturing.

“You need a lot of water for stimulation of the wells.”

The issue of product delivery looms large in the play.

“Delivery issues are being discussed in how to get the gas to market and especially the target market which is the New York City area,” Engelder said. “There’s the transcontinental pipeline REX (Rockies Express Pipeline), and the question is whether it will be constructed all the way to the New York City market or diverted to the Chicago market.

“Other high pressure lines are being considered for construction that will connect the Marcellus play directly to big markets like New York City.”  

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