The industry has just "scratched the surface" of the unconventional gas potential of Appalachia, according to the head of one of the first companies to operate in the play, but producers need to partner if they hope to realize its full potential.
"The good news is that the wells are better and more of our acreage looks like it's productive. That's the good news. The bad news is it's going to take a whole lot more money," John Pinkerton, CEO of Range Resources, told a Pittsburgh audience on Tuesday.
The Marcellus currently produces 2 Bcf/d. Pinkerton believes it can hit 10 Bcf/d in five years and peak at 20 Bcf/d. "There's enough return in it that you don't have to get greedy," he said. "You can share that return with your partners."
The geology of the basin is "mind boggling," Pinkerton said. Range recently sold its Barnett Shale assets to fund operations in the Appalachian Basin, where it can develop the Marcellus, Utica and Upper Devonian shales, often with a single well (see Shale Daily, March 7).
"That's one of the thing that drove us to spend a half a billion dollars in the play before we knew what we had," Pinkerton told attendees of Hart Energy's Midstream Marcellus conference, presented by Midstream Business magazine.
Range is already a major player in the Marcellus and recently drilled its first Utica and Upper Devonian wells. Pinkerton said each produced at 5 MMcf/d and added, "I would be surprised if those are going to be the best wells that we drill."
He said that the economics of the Appalachia Basin are already good because of its liquid potential, particularly in southwestern Pennsylvania and West Virginia, but they can only improve. The major infrastructure projects under way in the region will eventually become fixed costs, covering 30% to 40% of the cost of development for all three shale plays.
"That's really what's going to make the play outstanding, in my opinion," he said.
Pinkerton recently told Bloomberg that Range plans to spend $1.4 billion this year, another $1.4 billion next year and more in 2013, and will likely sell "lower-end" assets across its portfolio to help fund additional Marcellus Shale activities.
Range started operating in Appalachia almost three decades ago and kick-started interest in the Marcellus Shale in October 2004, years before the boom that made it one of the most prospective unconventional gas plays in the world. From that drilling, the company digitized more than 100,000 well logs in a state that didn't require sharing well data for a long time.
"It does give you a technical advantage," Pinkerton said.
Specifically, it told Range precisely where to buy (and not buy) acreage. Range has been involved in many unconventional gas plays across the country, including several unsuccessful ventures, and "one thing we learned early on before we even got up here is: where your acreage is really matters." Of the 11 North Texas counties that overlie the 10 million-acre Barnett Shale, he said only five are "high quality" and only two are economic at current prices.
The Marcellus Shale, by comparison, covers 65 million acres.
"If you run around and start buying trend acreage at $1,000 an acre and up, you'll go broke in a hurry because a bunch of that acreage is not going to be productive," Pinkerton said. Range currently holds 1.3 million acres in the Marcellus Shale at an average cost of less than $1,000 an acre, and "there's a lot of good acreage that we don't own."
The scope of the play means that companies need to be willing to partner. "We realized pretty early on that the play was a lot bigger than our capital resources," Pinkerton said.
Despite that economic fact, Appalachia is one of the few basins where Range mostly drills its wells alone. "This basin, for some reason, hasn't embraced that partnership concept, where you join together and you do it for the benefit of everybody. I think that needs to really take off. Because if it doesn't, the play is not going to take place as fast as it should," he said.
That said, the play is growing quickly now.
When Range first started exploring the Marcellus Shale, Pinkerton said, "it really was like a third world country" where technical expertise needed to be imported. When Range needed a coil tubing unit, it had to truck one up from Oklahoma - and figure out what to do when it got stuck under a low overpass in Kentucky -- and then fly up a guy to run it.
"That's largely been solved in a big way, but it's still a huge deal for the industry," Pinkerton said.
In 2007 Range employed just one person in Pennsylvania. Today it employs 350 at its offices in Canonsburg, PA, and expects to increase that to 800 in the next few years. Last month alone Range hired 28 employees, all from Pennsylvania.