Independendents Gearing Up with Renewed E&P

Oh, to be an independent today holding properties with discovered natural gas! Two years ago, you may not have been able to use that collateral for much, but those days are gone. Natural gas prices have skyrocketed, coupled with consumers' thirst for it, and if you have properties ready to be tapped for natural gas, these are the days.

According to Houston's Baker Hughes Inc., which reports international and domestic rig counts, rig counts have rebounded big time. In the United States, soaring energy prices and a tight supply market is keeping producers drilling on and offshore. In August, the U.S. rig count was 987, up 45 from July and 348 from August 1999. The Canadian rig count, artificially low because of bad weather, saw its rig count rise to 319 in August, up 11 from July and 49 from August 1999.

But even if producers have the properties, it's not full steam ahead yet. The Independent Petroleum Association of America (IPAA) estimates it takes three to 15 months for a "relatively routine project" to be completed, depending on government permitting, availability of drilling equipment, labor availability, time to drill the well, infrastructure to connect to natural gas pipelines and the weather at the drilling site. The larger and more complicated sites take even longer.

Still, it has been a remarkable summer for many North American independents. In just the past few weeks, some of the smaller companies, which sat on many of their properties through the downturn, now are primed for production, and are pushing new production through the end of the year.

The future never looked so bright for San Diego-based Royale Energy, which has successfully drilled and completed two new wells in its Victor Ranch/East Rice Creek field, and now is producing at a cumulative rate of 3,800 Mcf/d. A third well was logged on Sept. 2, with more than 30 net feet of natural gas-filled sands. The company is now drilling a fourth well in the field, and expects to drill three more wells there before the end of the year.

"We're taking advantage of the current strength in commodity prices and the resulting cash flow generated to increase our capital expenditures and drilling schedule through the remainder of the year," said Royale President Don Hosmer. Despite the downturn in prices, Royale made an investment in seismic data in 1998 and 1998, and Hosmer said that the recent success has "validated our exploration strategy."

Calgary's Tusk Energy Inc. has seen a dramatic rise in its production since the beginning of the year, too. During the third week of August, including a recent well success at Saddle Lake, production was 684 boe/d, or 26% higher from the average levels of the entire second quarter. (Tusk uses a 10:1 ratio to convert gas to oil equivalent; using 6:1; Tusk's boe would be 835 boe/d.)

"The focus on the second half of the year will be on adding production and cash flow through drilling," said the company in a statement. Since June 30, the Canadian independent has been involved in five wells, including a gas well at Saddle Lake (40% ownership) and oil wells at Silverdale. Current plans call for the drilling of at least two more wells at Silverdale and up to four more in the Saddle Lake/Whitefish Lake areas before the end of the year.

The increased cash flow to operations also is allowing a lot of the independents to do more exploration and take chances. Houston's EEX Corp. invested nearly $36 million in the first six months of this year to increase production and add reserves in its onshore producing assets. Tom Hamilton, CEO, said that the investment is providing a "solid base for our long-term growth strategy."

By all accounts, the strategy is paying off. Following a recent success at its Llano No. 3 in the Gulf of Mexico, EEX now is drilling a well to test the Jason Prospect in water depths of up to 18,000 feet. It also has an interest in a second well drilling in the Mason Prospect on Garden Banks 562.

"We believe that these two wells are important steps to define the potential of the area surrounding the Llano discovery," said EEX's David Henderson, COO. "Additional discoveries would enhance the value of our major leasehold and infrastructure holdings in the area."

Clayton Williams Energy Inc., based in Midland, TX, has completed and is testing the bottom 104 feet of reef in its fourth Pinnacle Reef well, the McGrew Unit #1, in Robertson County, TX for 9.9 MMcf/d with 4,000 psi flowing tubing pressure and 465 barrels of water per day. After the testing, the company plans to complete the drilling and begin production.

Just this week, Houston's Beta Oil & Gas Inc. announced two new successful wells in the Expanded Yegua/Frio trend in Jackson County, TX. One well tested at a rate of 2.8 MMcf/d with nearly 30 barrels of condensate/day. The other tested at a rate of 1.2 MMcf/d .

Also this week, Osprey Energy Ltd., based in Bridgewater, NS, began production on an additional six wells in its Northern Louisiana Cotton Valley field. Three more wells are expected to be in production by the end of the year. All of the wells there now were drilled in 1997 and 1998 by a major producer, and 11 of the 12 wells are fully equipped and tied to gas pipelines. Osprey said that it would continue to "pursue opportunities in the oil and gas marketplace to enhance shareholder value by increasing cash flow and building reserves."

United Heritage Corp., based in Cleburne, TX, said that its wholly owned subsidiary UHC New Mexico Corp. will begin an infill well drilling program in the northwest portion of the Cato unit in Caves County, NM on Oct. 1. The program will consist of as many as five wells, drilled on 20-acre spacing. The first phase of the project calls for production of up to 1 MMcf/d of gas by Dec. 31 and up to 1,000 b/d of oil.

Irving, TX-based Magnum Hunter Resources Inc. has participated on two natural gas discoveries in the shallow water shelf of the Gulf of Mexico, and estimates that its net daily production should reach 9 MMcf of natural gas by the end of summer, and exceed 25 MMcf/d by early 2001 from just its latest discoveries.

Chieftain International Inc., based in Edmonton, has brought in eight new fields that will begin production in the last few months of this year and first quarter of 2001. So far this year alone, Chieftain has participated in drilling 16 wells in the Gulf of Mexico and onshore South Louisiana --- nine have been successful.

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