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Seneca to Audit Appalachia Holdings, Consider Midstream Investment

The exploration and production (E&P) arm of National Fuel Gas Co. (NFG) plans to hire a third-party consultant to analyze the reserve potential of its Appalachian Basin holdings, executives said Tuesday. Seneca Resources Corp.'s current proved reserves total about 83 Bcfe, or 13% of its total consolidated reserves. However, Seneca apparently wants to test the potential of its 935,000 net acre play after partnering with EOG Resources Inc. on some horizontal wells.

NFG reported on Tuesday that Seneca's production also rose 7.5% to 12 Bcfe in fiscal 1Q2007. Part of the gain in output resulted from the resumption of Gulf of Mexico production following hurricane shut-ins in late 2005. However, an "18.5% increase in Appalachia production is organic growth attributable to the ramp-up in drilling activity over the past two years and production from those newer wells," the company said in a statement.

NFG and EOG announced last November year they would jointly partner on exploration of Appalachian property this year. NRG said the companies will drill four to six horizontal wells in 2007: NFG will provide 200,000 acres of leasehold positions in northern Pennsylvania, and EOG will provide the capital in exchange for a 50% interest in the wells. Five more wells are expected to be drilled in 2008. EOG has about 130,000 net acres in Pennsylvania and New York.

The companies will target Devonian black shale for exploration, a shale that has similar characteristics to the Barnett Shale in Texas, where EOG is one of the leading producers. EOG and Seneca also plan to team up to explore other holdings.

A.G. Edwards & Sons analyst Michael C. Heim said the decision to audit the Appalachian reserves was a good move for NFG.

"Companies that have given initial estimates of probable and possible reserves have performed well in recent years," Heim wrote in a note to clients. "Examples include El Paso Corp., Energen Corp., Equitable Resources, Questar Corp. and Williams Cos." Heim said NFG also is "exploring the possibility" of investing in midstream assets in the basin. "Appalachia production takeaway capacity has been constrained, frustrating efforts to increase production through the drillbit...To handle increased production volumes, new gathering lines, processing plants and transmission pipelines must be built...We would expect to see an announcement toward the end of fiscal 2007 or early fiscal 2008."

The E&P subsidiary accounts for about 31% of NFG's annual net income. NFG's gas distribution utility, which serves parts of New York and Pennsylvania, accounts for 24% of net income, and the transmission and storage division accounts for 33%. NFG also has an energy marketing arm and a timber business.

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