When does the unconventional become conventional? It’s a question gas shale developers ask because the natural gas produced by the “out of the ordinary” wells in the Barnett, Fayetteville, Woodford, Antrim and Appalachian shales — to name but a few — are becoming more routine every day.
U.S. conventional gas drilling is flat; Gulf of Mexico production is dwindling, and Canadian output is down 800 Bcf/d from this time a year ago, noted John S. Herold CEO Art Smith. Growing liquefied natural gas (LNG) imports to the United States will take care of some of the shortfall, but what will sustain and grow onshore supply is unconventional gas.
“You’ve got to wonder if they will start calling [gas shale] conventional when it’s 50% or more of gas supply,” Smith told attendees at Platts Second Annual Shale Gas Developer conference in Houston Thursday. “Shale is playing a very significant role in gas supply, and it’s growing very fast, and it will play an even more significant role in the future.”
Experts say gas shale accounts for about 8% of U.S. production, but that number is expected to grow to double digits in the next few years (see Daily GPI, June 4).
Smith and other energy pundits noted that it takes finesse and more than a little statesmanship for success in the unconventional resource fields.
“The project economics are very sensitive…you only get 35% of recovery [costs] the first year,” Smith said. “The projects are sensitive to cost; they are sensitive to technology capacity. There’s also huge competition for acreage…the competition is fierce, and the royalty rates are up. You are rewarded for efficiency and cost reductions.”
Producers also have to finesse the landowners and municipal governments where they operate, said EnerVest Management Partners Ltd.’s Phil C. DeLozier, vice president of acquisitions and divestitures (A&D). The issues have become especially vexing in the Fort Worth Basin, where Barnett Shale production is growing and growing and growing.
More than 6,000 wells have been drilled in the Barnett to date, and more than 100 rigs are operating there. But operators think they’ve only scratched the surface — as technology gets better, the reserves grow for each well. The field in total now produces 2 Bcf/d, and some developers are forecasting production could rise to as much as 6 Bcf.
The problem: Barnett’s most prolific wells are actually near or in the middle of urban areas. For instance, Chesapeake Energy Corp. began drilling for gas at Dallas/Fort Worth International Airport in May, the largest gas exploration effort at a major U.S. airport and the single largest lease in the Barnett (see Daily GPI, May 23).
“Land has really become a challenge in the Barnett, especially the split-estate issues,” said DeLozier. He noted that he had made similar remarks at last year’s Platts conference (see Daily GPI, June 6, 2006). However, he said the situation has become even more complex in a year’s time.
Fort Worth initially allowed gas wells within 300 feet of homes. However, the city received so many noise complaints about drilling that the boundary was extended to up to 1,000 feet, depending on the type of drilling permit. Fort Worth also set noise limits and established penalties of up to $2,000 a day for violators. And just this week, nearby Carrollton, TX, passed an ordinance modeled after Fort Worth’s gas drilling ordinance. Other cities and towns located in the Barnett fairway are considering ordinances as well.
“Access is always an issue, but it’s an issue that has to be handled carefully in the urban environment,” DeLozier said.
“Urban drilling is a big problem,” said Carrizo Oil & Gas President S. P. “Chip” Johnson. Carrizo holds about 87,000 net acres in the Barnett. “But that’s where the best wells are. Most of the expansion in the core [considered the Tier 1 area of the Barnett] will be increasingly in an urban setting,” and that means the personnel who are first on the ground have to build strong, working relationships with homeowners and municipal governments. “Urban drilling and permitting is a big issue for us, but for the most part, people are rational. But there are things that go along with that.”
For one thing, “there’s a land grab, a land rush going on,” and leases are exceptionally high and getting higher, said DeLozier. Some of the frenzy followed a move by Devon Energy Corp. last year when it paid $2.2 billion to purchase Barnett-focused Chief Holdings LLC (see Daily GPI, June 30, 2006). “People are paying for wildcat acreage, and they’re not sure if what they have will produce well. We see that all over our country.” Landowners are making tough deals, demanding higher royalties, higher lease bonuses and more stringent drilling commitments.
To quell the noise issue, operators spend more money on newer, quieter rigs, so there’s a big turnover in vintage rigs. Water is needed for gas shale drilling, but that, too, can be a big problem in drought-plagued Texas.
“If you are operating in an urban environment, you do what you have to do,” Johnson said. “If you want to be in the good stuff, you have to operate in subdivisions. Spending time with local communities will take care of the problems, and it helps to soothe over the frayed nerves.” Community issues “keep our operators busy. I’d say they spend half their time keeping folks happy. But it can be a way to avoid strict ordinances.”
DeLozier said A&D consolidation is expected to increase among Barnett operators. However, some of the more “intellectually inquisitive” with deeper pockets are simply taking their expertise to other gas-heavy shale basins. Leasehold fever spread from the Barnett into the Fayetteville Shale of Arkansas and then into Oklahoma’s Woodford Shale. It now is taking hold in Alabama’s Black Warrior Basin and throughout the Appalachian region.
“Not all acreage is created equally,” DeLozier said. “Having an early mover advantage is a big deal. And shale gas plays require a continuous technology feedback loop. Technology is what it’s all about.”
What panel members agreed upon was the value of technology, which they said will tell the tale going forward to unlock more “out of the ordinary” reserves.
Said Smith, “This is a new game. The rig count is increasing but production is holding steady, making resource plays the way forward.”
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