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Talisman: Impact Fee Timing Stinks

Talisman Energy Inc. said Wednesday it will decrease its Marcellus Shale exploration activities and cut its capital spending budget for the play in half this year.

The Calgary-based company now plans to run as few as three rigs in Pennsylvania this year, down from a January estimate of five-to-seven rigs (see Shale Daily, Jan. 11). The previous decision was based on low natural gas prices, but a recently approved impact fee on unconventional gas development in Pennsylvania "couldn't have come at a worse time," according to Executive Vice President for North American Operations Paul Smith.

Talisman ran around 10 gas rigs in the Marcellus in 2011. The company now plans to spend $600 million in the Marcellus, down from $1.2 billion in 2011, with significant capital going toward infrastructure in the region. Although drilling will be roughly a third of 2011 rates, the company expects to maintain its current production level of around 500 MMcf/d without losing any leases because of the productivity of its wells.

"I really see no value in chasing unprofitable growth while gas prices remain so low," CEO John Manzoni told analysts in a fourth quarter conference call.

Operators across the North American shale gas scene have been scaling back spending in dry gas plays and shifting spending to liquids this year in response to low gas prices (see Shale Daily, Jan. 24; Jan. 18). Talisman is aiming to more than double production from the liquids-rich Eagle Ford Shale of South Texas this year, from 31 MMcfe/d in 2011, by increasing its rig count in the play from 10 rigs in 2011 to 14 rigs.

Asked what price it would take to return to a double-digit rig count in the Marcellus, Manzoni said $4.00/Mcf. That price "used to feel really low. From $2.50/Mcf it feels like a great price." Although Talisman is taking a hatchet and not a scalpel to its Marcellus activities this year, it appears to simply be waiting out the markets.

"Today's prices are unsustainable in the medium term, but we believe they may last 12 months anyway," Manzoni said. Talisman does not have any gas hedges in place for 2012.

As of Tuesday, Marcellus gas in northeastern Pennsylvania where Talisman predominately operates traded for a combined average price of $2.61/Mcf, up 6 cents, according to NGI's Shale Price Index.

While its Marcellus acreage is not on the chopping block as Talisman looks to divest $1-2 billion in noncore and conventional assets this year, the same cannot be said for its midstream assets in the region.

Talisman took an unusual approach in the Marcellus by building midstream infrastructure to support its drilling and by signing long-term supply contracts early, allowing it to quickly become one of the largest producers in the play, but "as we go through 2012, I think there's a legitimate question on whether that's something we think about monetizing or not," said CFO Scott Thomson. "But it's not as easy at first sight because it plays into how much capital you're putting into the upstream as well. So it's something that is actively being debated internally."

That debate comes as Pennsylvania counties are deciding whether to impose a fee on drilling that could add between $190,000 and $355,000 to the cost of each well over its first 15 years (see Shale Daily, Feb. 15).

"The main decision to go down to as low as three rigs was clearly driven by the external environment," Smith said. "I have to say that an impact fee coming in at a time when gas prices are $2.50/Mcf clearly doesn't help in any way shape or form as the industry is looking to make returns in a very difficult environment. Our personal view is: it's done. The impact is relatively modest. But it does impact all of us producers in the Marcellus."

While Smith said that Talisman "very much supported" the structure of a county-level fee that keeps revenue local, the company was not supportive of "the timing and the magnitude" of the impact fee.

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