National Fuel Gas (NFG) continues to bet more chips on the Marcellus Shale.

With an exploration and production capital budget between $685 million and $800 million planned for fiscal year 2012, the Williamsville, NY-based company expects to drill 115 to 140 gross horizontal wells in the Marcellus — 80 to 95 through its subsidiary Seneca Resources Corp. and the remainder drilled by partner EOG Resources, Inc.

Because of that drilling, NFG is forecasting production between 83 and 100 Bcfe, including 58-71 Bcfe in the Marcellus, for the upcoming fiscal year. The company operates in California, as well as in the Appalachian Basin.

Those targets would mean continued increases in Marcellus production for the company.

NFG’s fiscal year begins on Oct. 1.

Over the past year, the company increased net production to 120 MMcf/d from 15 MMcf/d from its Marcellus operations in Tioga and Clearfield Counties in northeastern and central Pennsylvania, respectively. Seneca currently gets production from 59 wells in the Marcellus, of which it operates 32 (see Shale Daily, Feb. 7).

Strategically, Seneca has been trying to get more out of fewer wells, according to President Matt Cabell.

Cabell believes that higher estimated ultimate recovery (EUR) rates will offset the higher cost of drilling longer laterals and performing more hydraulic fracturing stages (frac stages) at each well. Seneca is drilling wells with laterals longer than 6,000 feet and more than 20 frac stages at a cost between $5 million and $6.4 million per well.

With this approach, Cabell said Seneca expects EUR rates up to 8 Bcf at its “best wells” and said that pre-tax internal rates of return range from 20% to better than 65% at a natural gas price of $4 per MMBtu.

In the fourth quarter of 2010 Seneca reported an average weighted price of $4.11/Mcf ($5.26/Mcf after hedging) from its Appalachian operations, compared to $4.55/Mcf from the Gulf Coast and $3.92/Mcf from the West Coast.

With around 745,000 net acres, Seneca is the fourth largest leaseholder in the Marcellus, and the company said a “majority” of its acreage is held in fee, without royalty requirements or lease expirations.

The increased spending follows a larger strategy of divesting non-core assets to fund Marcellus operations.

In early March, Seneca sold its offshore Gulf of Mexico properties for $70 million in a deal expected to close in April. Last September NFG sold its landfill-gas operations in six states for $38 million, and in December it announced plans to sell Seneca Energy II LLC and Model City Energy LLC, two subsidiaries that generate and sell electricity from landfill gas, in a deal worth $28 million expected to close this month. In January Seneca bought producing Marcellus acreage from long-time partner EOG for $23 million (see Shale Daily, Jan. 11).

Those deals have translated to larger capital budgets, as well.

Just a few months ago NFG said it planned to spend $485-560 million on exploration and production activities this fiscal year, but following the sale of its Gulf of Mexico assets the company bumped up its spending plan to $600-655 million (see Shale Daily, Nov. 9, 2010).

Seneca is looking for additional joint ventures to help it accelerate Marcellus activities even faster.

NFG is also involved in several midstream projects in the Marcellus, primarily to connect its production to markets in Canada and the northeastern United States, as well as to larger regional transmission lines.