Ontario-based Epsilon Energy Ltd., which is working with Chesapeake Energy Corp. in the Marcellus Shale, said Friday it ended 2011 with a "substantial" increase in Pennsylvania natural gas production, which was in line with its exit guidance.

2011 "was transformational for Epsilon Energy," the company said. A joint venture (JV) in Susquehanna County, PA, with operator Chesapeake "is beginning to yield significant production increases. After achieving initial production in June 2011, the JV is currently producing 82 MMcfe/d gross (17.5 MMcf/d net) of natural gas."

In early 2010 Epsilon brought Chesapeake on board to help develop the Highway 706 gas prospect in the Marcellus. Under the JV Chesapeake is earning a half-stake in the prospect after it paid Epsilon C$5 million in cash upfront and by carrying the first C$95 million of Epsilon's share of costs in the prospect.

The Highway 706 JV covers about 11,500 net acres in Susquehanna County. When the JV was set up, the prospect had 10 MMcf/d of output and related compression, pipeline and tap site facilities. The leasehold was estimated to be able to support a total of 120-150 additional drilling locations.

Epsilon's largest working interest (WI) pad, with an average WI of 46.2%, is currently being brought online, it said. Two of the six wells are currently producing at a combined rate of 9.7 MMcf/d (4.4 MMcf/d net).

"As the wells clean up and the remaining four wells are brought online over the next 10 days, the six-well pad is anticipated to produce 48 MMcf/d gross (22.2 MMcf/d net) on a restricted choke, which will result in total net production reaching and surpassing Epsilon's 2011 exit guidance," said the company. As of Friday Epsilon had 14.1 gross/3.1 net JV wells flowing to market and 53 gross/14.7 net wells in various stages of development.

The Canadian operator also said construction of a 400 MMcf/d gathering system in the Marcellus "has progressed substantially" and build-out will continue through the first quarter. Last Thursday Chesapeake Midstream Partners LP agreed to pay Chesapeake $865 million to acquire Appalachian Midstream Services LLP, of which Epsilon has a 35% stake (see related story).