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'Weird' Gas Becomes Increasing Component of North American Supply

EOG Resources' CEO Mark Papa may call it "weird" gas, but coalbed methane (CBM), tight sandstone, biogenic gas and shale formations, otherwise known as unconventional natural gas resources, are an increasingly important component of the North American natural gas supply.

Just three years ago, unconventional gas accounted for about 20% of the total gas output in the Lower 48 and non-Arctic Canada, but by 2025, the National Petroleum Council is forecasting that these resources will contribute 42% of total gas output.

"Weird gas isn't just a passing fad," Papa told an audience at the Howard Weil Energy Conference in New Orleans last week. "Companies with the proper weird gas skill sets will likely exhibit long-term equity outperformance."

Papa stressed that there are only three organic growth options for North American producers today: drill deeper in existing basins, explore in new basins or pursue unconventional gas. He's betting on the latter. This year, EOG plans to invest 76% of its $1.6 billion capital budget in unconventional gas plays across North America.

According to the American Gas Association's "Preliminary Findings Concerning 2004 Natural Gas Reserves," published earlier this month, a lot of domestic gas production activity in 2004 was directed toward less conventional reservoirs, such as CBM, which it added small increments of gas production capability per well as exploration targeting higher-yield reservoirs languished (see related story).

Even Alan Greenspan, chairman of the Federal Reserve, believes unconventional gas resources are one key to increasing supply. In a speech before the National Petrochemical and Refiners Association Conference in San Antonio last week, Greenspan noted that "production from unconventional sources has more than doubled since 1990 and currently accounts for roughly one-third of U.S. dry gas production. According to projections from the Energy Information Administration, the majority of the growth in the domestic supply of natural gas over the next 20 years will come from unconventional sources. In many respects, the unconventional is increasingly becoming the conventional."

Declining natural gas supplies have compelled the search for new resources, and with the sustained high prices, more producers view unconventional gas prospects as an economically feasible way to expand because the wells offer low risks and predictable production.

Oklahoma City-based Devon Energy Corp. already classifies more than 35% of its North American gas production as unconventional. That figure is expected to increase as its mature properties in Texas, Louisiana and offshore in the Gulf of Mexico decline.

Devon is currently the largest shale producer in the Barnett formation of northeast Texas, holding half a million acres in core and noncore assets. It plans to spend about 10% of its 2005 capital budget, about $350 million, to drill 225 wells in the play.

"In the core and noncore areas, we and the rest of the industry are only recovering around 10% of the gas in place," CEO J. Larry Nichols told Dow Jones. "That says there's still a tremendous amount of gas left in that reservoir that today no one has the technology to get out."

Analysts point to recent acquisitions that have focused on building an unconventional gas profile. For instance, Pioneer Natural Resources Co.'s merger with Evergreen Resources last year opened up CBM fields in the Raton Basin that are clearly paying off. Encouraged by early drilling success from its new CBM fields, Pioneer expects to increase its gas production by as much as 6% this year, CEO Scott Sheffield said last week.

Sheffield said that most of the growth to between 70-74 MMboe this year will come from CBM fields acquired through the $2.1 billion purchase of Evergreen Resources last year (see NGI, May 10, 2004). The company will spend up to $950 million on exploration and production activities in 2005, with 21%, or about $200 million, focused on CBM and tight gas from sandstone formations in South Texas.

Howard Weil analyst Larry Benedetto said that many of the recent acquisitions have come in the Barnett shale region where producers are "chasing a shale-type unconventional gas." He noted that the Pioneer acquisition was primarily to acquire Evergreen's CBM assets. Meanwhile, tight sandstone gas in the Rockies makes that region another acquisition target.

EnCana Corp., the largest producer in North America, hopes to boost the amount of gas it recovers from the Jonah field, a tight gas formation in Wyoming, where it drilled 400 wells on 40-acre spacing in 2004. The producer recently was approved by the state of Wyoming to add three pilot wells on five-acre spacing, a dense well formation that should produce more gas for less money, said Roger Biemans, president of EnCana Oil & Gas (USA) Inc.

"The sands kind of talk to you as you drill," Biemans said. "The more wells you have in play, the more knowledge you have and drilling costs come down and flow rates increase."

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