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Shale Revolution Upsets Status Quo, Says Devon Chief

Larry Nichols, who now chairs Devon Energy Corp., stood "on top of the Fort Worth Basin" on Tuesday and recalled the turning point for his company -- and the global natural gas industry.

Nichols wasn't standing near one of the hundreds of gas drilling rigs scattered across the basin's moneymaker, the Barnett Shale. But he was standing on top of the grandfather of the shale plays, speaking to an audience on the opening day of Pennwell's Unconventional Gas International Conference and Exhibition at the Fort Worth Convention Center.

The story surrounding the ability to tap domestic shale gas resources is legend today and perhaps worth repeating. Mitchell Energy & Development, helmed by the icon of the shale gas industry, George Mitchell, had been actively developing the Barnett Shale since the early 1990s and by 1998 it had drilled more than 350 wells in the play.

In 1998 the producer had gained approval from the Railroad Commission of Texas to more aggressively develop the Barnett reserves "on as little as 40-acre spacing." As NGI noted at the time, the amended rules allowed Mitchell to drill "as many as 100 wells with about 80 Bcf of estimated net gas reserves" that would be added to the company's proved undeveloped category (see Daily GPI, Dec. 9, 1998).

"The tighter well spacing will allow us to recover a lot more gas reserves from the Barnett Shale than we had originally expected," said CEO Mitchell at the time. "Results of a pilot program we started in mid-1996 have given us confidence that in-fill drilling is economically attractive. Over the next few years we'll be testing areas to the west, south and east of this core area to expand the economic limits of the field. This could lead to a major expansion of our natural gas reserves in Wise and adjacent counties."

Mitchell and his team thought they had "figured out how to do hydraulic fracturing [hydrofracking] in a small part of the Fort Worth Basin," Nichols noted. But the fracturing took a lot of money for a relatively small amount of output.

The company began to bleed, losing $3.7 million in 3Q1998. In December Mitchell said it would reduce its workforce (see Daily GPI, Dec. 11, 1998), and within a year the company was marketed for sale, advertising a development backlog of 1,000 wells, an "attractive" 3-D seismic prospect inventory, quality gathering and processing operations and a "sound" cost structure (see Daily GPI, Oct. 7, 1999).

But "not one company made an offer," said Nichols. In April 2000 the company publicly took itself off the auction block (see Daily GPI, April 7, 2000). However, months later Devon decided to buy the company, offering $3.1 billion in cash and stock offer (see Daily GPI, Aug. 15, 2001).

"Wall Street basically yawned when we made an offer," said Nichols. Undeterred, Devon engineers took the hydrofracking techniques perfected by Mitchell and combined them with Devon's horizontal drilling techniques. And the rest, as they say, is history.

"Look at us now," Nichols said, laughing. "Just seven years ago we drilled the first well that combined hydraulic fracturing and horizontal. Look where it's taken us. There's a geologic paradigm there...we are no longer drilling stratigraphic, structural tracts. We now are drilling the source rock itself. Anywhere we're drilling gas fields, it's massive.

"For consumers shale has been a game changer," he said. "Prices are more stable and forward...Shouldn't we want higher prices? Yes, to an extent. $11 gas crushes demand and in the long term crushes demand for the product...Stable prices allow us to build a long-term business."

And natural gas is here for the long term, Nichols noted. "We have a 100-year supply that gives consumers more certainty of supply...gives companies more confidence to invest their dollars in building power plants, etc., that use natural gas."

The gas industry is "going through a revolution. But like all revolutions, they are messy. We're upsetting the status quo. Natural gas is suddenly elbowing its way into the markets...Those that will lose market share don't want to lose market share...

"This messy period will end. It may be a graceful end, maybe not so graceful."

Gas producers, he said, need to "exercise capital discipline and only drill projects that make economic sense. Avoid being swept up in the demand of the moment, the excitement of the moment. Some plays are going to work and some are not going to work. It's not going to work just because it's shale."

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