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Horizontal Drilling Holds Promise for Conventional Gas

Horizontal drilling into shale rock using multiple fractures (fracs) has "clearly" changed the game for the U.S. natural gas industry, but the drilling process also has the potential to give conventional gas formations, like tight gas sands, an economic boost, Raymond James & Associates Inc. said last week.

Shale gas production, up to now the primary user of horizontal drilling, accounts for only about 11% of current U.S. gas output, wrote Raymond James analysts J. Marshall Adkins and Kevin Smith. "Therefore, a vast amount of the U.S.'s natural gas production still comes from vertical wells." However, "we expect to see the horizontal rigs continue to grow as a percentage of total rig count as more and more operators develop their nonshale asset base with horizontal rigs."

The domestic horizontal gas rig count has begun to crowd out vertical rigs, noted the duo. "In early 2007 horizontal rigs made up less that 20% of the rig count. Today of the 1,017 rigs working, 43% are horizontal rigs."

To confirm the potential of horizontal drilling over vertical drilling, the Raymond James team recently studied "hundreds of public company reports" to ascertain how much the economics may have improved.

"We found that, on average, the horizontal wells cost two to three times more than verticals and ultimately recovered three to five times more gas," wrote Adkins and his colleague.

More important, they said, "it appears that the horizontals are recovering the reserves faster," with average initial production rates three-and-a-half times higher for the horizontals, "which should improve the net present value of the horizontal wells. The scary thing is that more than one of these plays is in early stages (like the Haynesville and Marcellus shales), which gives a prelude of the amount of gas set to enter the markets."

Petroleum engineers have known that horizontal drilling could outperform vertical wells "in almost all situations," but it took gains in technology to make it more economical, and "horizontals with multiple frac jobs should outperform their vertical counterparts with just one frac job," they wrote. "The next logical step is an increase in horizontal drilling on traditional reservoirs...

"Now that the early obstacles of compliancy and expensive horizontal rig rates have been removed (down roughly 40-50% from the peak in 4Q2008), we are starting to see more operators develop their traditionally vertical plays on a horizontal basis." Two plays likely to benefit from the horizontal techniques in tight sands are two plays in Texas: the Cotton Valley in East Texas and the Granite Wash in the Texas Panhandle, said the analysts.

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