“The land grab of 2008 is over” in many of the major natural gas shale formations across the United States, said an energy analyst with New York-based Jeffries & Co. Inc. last week.

“It was bound to collapse, never to return,” Jeffries analyst Subash Chandra told NGI. “It was an unsustainable model” as producers were paying $1,000-3,000 per acre and spending billions of dollars — a lot of it on credit and with equity financing.

“No one can afford” to continue buying leases in the shale formations at the frenzied pace of prior years, he said. Chandra expects producers to either swap their land or bring in partners to develop acreage. Chesapeake Energy has entered into joint ventures with BP America in the Woodford shale play in Oklahoma and Fayetteville shale formation in Arkansas, and is looking to partner with someone in the Marcellus formation in Pennsylvania (see NGI, Sept. 8, Aug. 4). It was reported last week that BP was exploring a “potential deal” to buy some gas assets from the once high-flying Chesapeake, but it was not clear whether this included Marcellus acreage (see related story).

The end to the buying spree preceded the turmoil in the financial and credit markets, but it was coincident with the slide in natural gas prices, he noted. Chandra said producers are “backing away” from their leases in all the shale basins. He cited XTO Energy and Chesapeake Energy as two of the producers that are pulling back in the Marcellus and other shale areas, but there are “plenty that I don’t know of.”

A Chesapeake spokesman said the observation was “probably accurate.” He noted that the energy company was retreating in certain areas of the country, including the Marcellus.

Denver-based Antero Resources was caught in the credit squeeze and was unable to finance all of a Marcellus shale package it had agreed to buy from Dominion in July. As a result, the company in September was forced to accept less drilling acreage but had to pay more money per acre (see NGI, Sept. 29).

Chandra put the current horizontal rig count in the Marcellus Shale in the teens, which is down from last year and the smallest level of all the shale basins in the United States. The horizontal rig activity in the Haynesville Shale formation in northwest Louisiana is approaching 60, while the activity in the Barnett Shale region in Texas is approximately 140, he noted.

The Marcellus Shale formation extends 575 miles through Pennsylvania, New York, Ohio and West Virginia. The U.S. Geological Survey estimated that the shale basin contained 1.9 Tcf of technically recoverable natural gas in 2002. A Pennsylvania State University geosciences professor has estimated the Marcellus Shale potential at 168 Tcf, which he called conservative, while a New York State University geology professor has calculated the potential at more than 500 Tcf. But at the present level of technology, he believes that only 10%, or 50 Tcf, could be recovered. In contrast, the Barnett is estimated to have up to 29-39 Tcf of natural gas resources.

“It’s too soon to tell if there’s been a slowdown” in permitting in the Marcellus formation as a result of the slide in gas prices and market upheaval, said Tom Rathbun, a spokesman for the Pennsylvania Department of Environmental Protection. If there has been, “it hasn’t been reflected in any of the numbers I’ve seen.” He said it would take at least two months before any downturn would show up in the state’s permitting numbers.

Of the 5,400 permits that have been issued so far this year for oil and gas activity in Pennsylvania, 257 have been for drilling in the Marcellus Shale formation, Rathbun said. He said the state just began breaking out the Marcellus permit numbers, making any comparison to previous years impossible.

In related action, the Pennsylvania Oil & Gas Association (POGAM) and the Independent Oil & Gas Association of Pennsylvania have formed a joint Marcellus Shale Committee to present a “unified voice” to state residents, government and regulators on issues related to leasing and drilling activities in the natural gas-rich shale formation.

“The Marcellus is a pretty significant opportunity…and the committee was formed to find a way to represent that significant opportunity to the public and government,” said POGAM President Steve Rhoads.

The Marcellus panel includes about 28 independent and major producers, half of which are active in the Appalachian region while the other half are involved in shale plays in other areas of the county, he said. The latter producers are bringing their experience from the Barnett and the Fayetteville shale plays to the Marcellus region.

Rich Weber, president of Pittsburgh-based Atlas Energy Resources, and Ray Walker, vice president of Appalachia Shale for Fort Worth, TX-based Range Resources, co-chair the committee. “With the potential for tremendous growth in this industry comes an immediate need for public information, policy review and cooperative efforts among producers, state and basin regulatory agencies, landowners and citizens,” Weber said.

The committee represents the vast majority of the producers that are leasing land and actively drilling in the Marcellus formation.

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