Marcellus Shale Activity Updated

Where You Stand Depends on How You Sit

So far, this earnings season has provided some interesting insights into the Marcellus play. Pardon my above mild rework of Miles' Law but the frontrunner views of the Marcellus are generally gung-ho while those looking at the hind teat are considerably less so. We'll see if the trend continues this week with coming reports from Atlas, Exco, Carrizo and Rex. Highlights from the latest conference calls and presentations are below.

Anadarko and its partners commenced drilling operations on two wells in the Marcellus Shale play in the Appalachian Basin with encouraging results. The wells have been cored and further evaluation is under way. Anadarko has access to approximately 625,000 gross acres in the fairway of the Marcellus Shale play. This is an increase of 25,000 acres in the quarter. Responding to an analyst's question about the impact of increased drilling in the Marcellus, the company echoed the sentiments expressed in Chesapeake's call that the time required to develop the play will mitigate any over supply concerns now being bandied about.

Chesapeake has completed two horizontals in West Virgina with a combined current production of 7 mmcfd. These wells were announced one month ago with initial production of 9 mcfd. CEO McClendon viewed as "reasonable" Range Resource's announcement that it has boosted its EUR per well to the 3.5-4 bcfe range. Interesting that Chesapeake's EUR for the recently completed pair is 5.5 bcfe. In response to questions about the impact of Marcellus development on natural gas prices, McClendon noted that there "are way too many regulatory, topographic, water, and infrastructure issues that will keep the Marcellus from making a meaningful contribution to our country’s gas production until at the least 2013 to 2015 time frame." Acreage in the play increased by 400,000 acres during the quarter to 1.6 million. The company also restated its intent to monetize 25% of its Marcellus assets by taking on a partner in the same manner as in the Haynesville transaction with Plains Energy. During that conference call, CEO McClendon had placed a $12,500/acre on its Marcellus rights.

EOG Chairman & CEO Mark Papa reports having 220,000 net acres in the Marcellus and is operating one rig and will have some results by year-end. He said this will be a very slowly developing play in the macro sense because of the major infrastructure issues. He also estimates that the Marcellus, if it works, would not contribute meaningfully to the macro domestic gas supply picture until 2012 plus. He also noted that the thickness is an issue, in some cases pressure is an issue but probably the most unknown risk factor that we and others are dealing with right now is frac efficacy; frac barrier containment in the Marcellus itself. "The kind of results that we are hearing about in parts of Pennsylvania that are showing 3 Bcf to 4 Bcf really does not comport well with the kind of IPs that we are seeing in rest of the play and really, with the way we model the plays north of 1.5 Bcf to a 2 Bcf kind of play, particularly if you're looking at big program averages. It's really, really difficult to average 3 Bcf to 4 Bcf over the whole play." To another question he replied, "I think there are differences in the frac barriers throughout the play, from one geographic area to the next, and I think that's the biggest unknown in the play right now for most of the operators." Comparing it to the Barnett he noted that when you are "dealing with Marcellus, which is less geo-pressured and much thinner, it just doesn't make good reservoir engineering sense that you're going to get recoveries of 4 Bcf per well when that hadn't been average in Johnson County. So, we just think that that number is probably a number that's we believe is unrealistic. And then, you clearly do have a problem with containing the fracs within that relatively thin zone. You have more of a problem in the Marcellus than you do in the Barnett."

Equitable Resources reported having completed four Marcellus wells including three verticals in Northern WV and one horizontal in Greene County, PA. The verticals have been on line for less than 30 days but are expected to average 600 mcfd while the horizontal has averaged 1.9 mcfd for its first 30 days. The horizontal cost $6 million to complete. Expectations are for an average of $3-4 million to complete the remaining eight horizontals planned for this year and though still experimenting, the company plans to adapt its considerable experience with air drilling to the Marcellus and further reduce cost to $3-$3.25 million. Equitable raised capex from $1.2b to $1.6b with 55% of it going to the Marcellus and now plans to drill 75 wells by the end of 2009. Acreage stands at 400,000 acres, unchanged during the quarter. On infrastructure issues, the company announced plans to support other producers by building two 20 mmcfd stripper plants in the play and noted that "there are a bunch of other mid-stream players entering the area which will also resolve those concerns." Regarding water resource and disposal issues, it was noted that the SWPA-NWV is not regulated by a regional commission as is the case in the northeastern part of the play so that the issues facing development in the area are just "growing pains."

Penn Virginia continues its leasing effort in the Marcellus Shale, primarily in Pennsylvania, having acquired approximately 21,000 net acres to date at an average cost of approximately $400 per acre. Additional increases are expected during the balance of 2008 and beyond. One vertical Marcellus exploratory well was completed in southern WV and is currently being tested. Initial exploratory drilling is expected to continue during 2009, subject to rig availability, takeaway capacity and other potential constraints.

Transcripts available at http://seekingalpha.com/tag/natural-gas