Pennaco to Expand Powder River Presence

Pennaco Energy increased its capital expenditure budget Wednesday from $18.4 million to $26.5 million in a move intended to capture the "hottest domestic onshore play" in the country. All of the revised budget will be invested in Powder River Basin operations.

"This is the hottest domestic onshore play," said Paul Rady, Pennaco Energy president, "and we are one of the two largest producers in the region. If the play doesn't work out like we think it will, the worst case scenario is we end up with five years of gas inventory. If it works out, then we'll have 10 years of inventory. The production is too good to resist."

Pennaco plans to spend $18 million to drill 460 net wells in the play during 1999, which represents an $8.4 million and a 130 well increase from the original budget for 1999. The new plan also dedicates $8.5 million for additional lease acquisitions in the basin. Pennaco said it currently has five rigs drilling in the South Gillette area and plans to increase to eight rigs by the end of June.

Current Pennaco working interest production is 12.4 MMcf/d from 315,000 net acres of land. Rady said the company's goal is to improve into the 35-50 MMcf/d range by the end of the year.

Important factors in Rady's production increase strategy are the Fort 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 be operated by Western Gas Resources and has CMS Energy, Enron, Barrett Resources and Wyoming Interstate Company (WIC) as interest holders. Thunder Creek is 75% owned by Devon Energy and 25% owned by KN Energy.

Drilling at a rate of one well per day since starting the program in November of 1998, Denver-based Pennaco has a total of 197 wells, 178 of which are located in the South Gillette area. Approximately 47% of the company's wells are producing while the remainder are undergoing completion, testing and hookup.

Pennaco's joint venture with CMS Oil and Gas operates the other 19 wells (See Daily GPI, March 31, 1999). The venture was agreed to last fall, with CMS paying $28 million to co-operate a portion of Pennaco's basin territory. Most of the Pennaco/CMS joint venture wells are in early pilot testing and evaluation.

Rady said future budgets will grow even larger. "I expect our overall budget to be bigger in 2000. Now I don't think there is enough land left to spend $8.5 million on lease acquisitions like we allocated this year, but I expect a lot more drilling will be done."

One recent decision effecting Pennaco's future in coal-bed methane production is the recent Supreme Court decision in favor of BP Amoco, et al, against the Southern Ute tribe (See Daily GPI June 11,1999) Rady said. "The Supreme Court ruling cleared the air. Its good for the future. Now everyone knows that the gas ownership is separated from the coal ownership and we can move on from there." He added that Pennaco followed the case closely, but most of its coal bed methane assets were safe due to last fall's federal legislation grandfathering coal-bed methane lease contracts and blocking the potential negative impact of the July appellate court ruling which favored the Southern Ute tribe.

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