Pennaco Energy increased its capital expenditure budgetWednesday from $18.4 million to $26.5 million in a move intended tocapture the “hottest domestic onshore play” in the country. All ofthe revised budget will be invested in Powder River Basinoperations.

“This is the hottest domestic onshore play,” said Paul Rady,Pennaco Energy president, “and we are one of the two largestproducers in the region. If the play doesn’t work out like we thinkit will, the worst case scenario is we end up with five years ofgas inventory. If it works out, then we’ll have 10 years ofinventory. The production is too good to resist.”

Pennaco plans to spend $18 million to drill 460 net wells in theplay during 1999, which represents an $8.4 million and a 130 wellincrease from the original budget for 1999. The new plan alsodedicates $8.5 million for additional lease acquisitions in thebasin. Pennaco said it currently has five rigs drilling in theSouth Gillette area and plans to increase to eight rigs by the endof June.

Current Pennaco working interest production is 12.4 MMcf/d from315,000 net acres of land. Rady said the company’s goal is toimprove into the 35-50 MMcf/d range by the end of the year.

Important factors in Rady’s production increase strategy are theFort Union Gathering System and the Thunder Creek Gathering System,which will start operating this fall (See Daily GPI, Oct. 27,1998). Each system has a capacity of 450 MMcf/d. Fort Union will beoperated by Western Gas Resources and has CMS Energy, Enron,Barrett Resources and Wyoming Interstate Company (WIC) as interestholders. Thunder Creek is 75% owned by Devon Energy and 25% ownedby KN Energy.

Drilling at a rate of one well per day since starting theprogram in November of 1998, Denver-based Pennaco has a total of197 wells, 178 of which are located in the South Gillette area.Approximately 47% of the company’s wells are producing while theremainder are undergoing completion, testing and hookup.

Pennaco’s joint venture with CMS Oil and Gas operates the other19 wells (See Daily GPI, March 31, 1999). The venture was agreed tolast fall, with CMS paying $28 million to co-operate a portion ofPennaco’s basin territory. Most of the Pennaco/CMS joint venturewells are in early pilot testing and evaluation.

Rady said future budgets will grow even larger. “I expect ouroverall budget to be bigger in 2000. Now I don’t think there isenough land left to spend $8.5 million on lease acquisitions likewe allocated this year, but I expect a lot more drilling will bedone.”

One recent decision effecting Pennaco’s future in coal-bedmethane production is the recent Supreme Court decision in favor ofBP Amoco, et al, against the Southern Ute tribe (See Daily GPI June11,1999) Rady said. “The Supreme Court ruling cleared the air. Itsgood for the future. Now everyone knows that the gas ownership isseparated from the coal ownership and we can move on from there.”He added that Pennaco followed the case closely, but most of itscoal bed methane assets were safe due to last fall’s federallegislation grandfathering coal-bed methane lease contracts andblocking the potential negative impact of the July appellate courtruling which favored the Southern Ute tribe.

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