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Shell Follows Independents into Fayetteville Shale

Royal Dutch Shell plc appears to sneaking into one of the largest new natural gas plays in the United States, after quietly signing a series of transactions in 2005 to explore 70,000 acres of the Fayetteville Shale in north-central Arkansas. Shell is the first major to enter the region, following independents that include Southwestern Energy Co., which considers the play its bread and butter.

Shell, which confirmed it acquired the rights to explore acreage in the shale play, did not disclose the financial details of the transactions to acquire Fayetteville acreage. However, spokeswoman Kelly Op de Weegh said Shell plans to drill its first well in the new play this year. Shell's move into Fayetteville is similar to a decision in 2004 to lease 25,000 acres in the prolific Barnett Shale field near Fort Worth, which is now the biggest gas play in Texas (see NGI, Jan. 16; Nov. 21, 2005).

The Fayetteville Shale, which begins in north-central Arkansas and runs east to the Mississippi River, is an unconventional gas reservoir, ranging in depths from 1,500 to 6,500 feet. It is considered a Mississippian-age shale, similar to the Barnett play and the Caney Shale on the Oklahoma side of the Arkoma Basin. One of the first horizontal completions showed its potential by initially flowing at the rate of 3.7 MMcf/d. In the first half of 2005, about 500 MMcf of gas had been produced in the Fayetteville, compared with 89 Bcf in all of north Arkansas, where most of the gas was pumped from wells using traditional drilling technology, according to the Arkansas Oil and Gas Commission. At year-end 2005, 29 wells were currently permitted to drill, and 71 wells were drilled, spudded, or completed and 41 wells were producing in the play.

Southwestern, which entered the play three years ago, remains the leading operator in the eastern portion of the shale through its subsidiary SEECO, and as of September 2005, it held 724,000 acres in the formation. CEO Harold Korell said the "part of the basin we were focusing on was a very rural area" that had no "real production, so we were able to lease without attracting wide attention." Based on tests to date in the emerging trend, Southwestern now estimates ultimate recoveries for each horizontal well in a range of 1.3-1.7 Bcfe. It plans to spend about $300 million this year in the play, drilling between 175-200 wells.

Chesapeake Energy, the Mid-Continent's leading producer, also is becoming a major stakeholder in Fayetteville, acquiring about 600,000 acres by 3Q2005. An initial six-well drilling program is under way.

"This is just an opportunity for a swath of the state that just, I don't think, ever had any suspicions that oil and gas was something that was going to be meaningful in their area," said Tom Price Jr., senior vice president of corporate development at Oklahoma City-based Chesapeake. Price said 20,000 total wells by various operators could eventually be drilled in the play.

XTO Energy, the largest gas producer in Arkansas, already has acquired about 100,000 acres in the Fayetteville play but has yet to begin development. A host of smaller independents are muscling in as well, including Contango Oil & Gas Co., which leased about 37,000 acres last year. Edge Petroleum has acquired about 5,000 net acres and plans a drilling program this year. And Maverick Oil and Gas leased 11,000 acres in December and has gathered commitments for another 70,000 acres.

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