UBS investment research estimate that natural gas prices need to be around $5.50-$6.00 to justify development of shale gas fields that likely hold massive quantities of the fuel.

NYMEX natural gas futures through the end of the year show prices hovering around $4.50 per million British thermal units, and quarterly natural gas prices at benchmark Henry Hub have not averaged above $6 per Mcf in over 2 years.

That has put many natural gas producers in a bind. To meet investor expectations for growth, they must spend heavily to increase their output, even though the fuel’s price doesn’t pay them back enough to cover their expenditures.

Companies such as Southwestern Energy, Petrohawk Energy, Cabot Oil & Gas and Range Resources, have been running negative cash flows, forcing them to issue new shares, take on debt, or find buyers and partners to help pay for drilling.

“The minute they have cash it burns a hole in their pocket; they go and lease more acreage and drill more. It’s all the same business model,” said Oppenheimer & Co analyst Fadel Gheit.

“Investors should be smart and be able figure this out, but they don’t seem to be bothered by that,” he added.

Many of these companies are shifting operations to areas where the gas has a high liquids content, or even oil. Natural gas liquids and crude both fetch a higher price than gas, but drilling those wells, which require hydraulic fracturing and other technologies, is expensive.

It could take as many as six years for demand for natural gas to catch up with supply and cause a rebound in prices, said Subash Chandra, analyst with Jefferies & Co.

“In our view, the next few years look pretty grim,” Chandra said.

Rising costs to tap into shale rock formations are also starting to strain budgets as companies compete to hire the crews and equipment needed for hydraulic fracturing that cracks the rock and releases the gas.

The cost of drilling a shale well is on the rise, as competition for services, tight labor and equipment markets and higher prices for steel helped push up the costs of building and operating oil and gas exploration facilities by the largest percentage since the recession, according to data from IHS Cambridge Energy Research Associates.

Costs of onshore exploration, driven by increased daily rental rates for powerful drilling rigs as well as the costs of hydraulic fracturing,  rose 5.2 percent in the first quarter, said Pritesh Patel, a director at IHS Capital Costs Analysis Forum.

Companies have put oil and gas properties on the market, using proceeds to do more drilling, a trend that John Malone, analyst at Ticonderoga Securities, expects to continue as long as natural gas prices remain depressed.

While the pace of joint venture deals between smaller companies and deep-pocketed partners is expected to slow, firms will still need to generate cash to drill by selling assets, Malone said.

Source: Reuters

In recent years, a combination of techniques – horizontal drilling and hydraulic fracturing or “fracking” — have made it possible to extract shale gas economically.

“This is an opportunity where we can use some home-grown energy sources to fuel our energy, versus having to import it and deal with all the issues you have in terms of national security,” according to John Pinkerton, CEO of Range Resources.

Range, a bigger player in the Marcellus shale, has a huge swath of prehistoric seabed that lies some 5,000 to 7,000 feet beneath Pennsylvania, West Virginia, eastern Ohio and southwestern New York.

The estimates vary widely, but depending on whose numbers are correct, there could be anywhere between 20 and 200 years worth of natural gas.

Cracking the shale to release the gas is a complex process. Drill bits reach deep into the ground and are then turned sideways to penetrate the rock. After explosives fracture the shale, millions of gallons of so-called “fracking” fluid (a mixture of water, sand and other chemicals) is pumped in under extreme pressure to expand the cracks, freeing the gas to flow back up the well.

The flood of companies pouring into once depressed areas has lit a fire under local economies. Towanda, Pa., population 3,000, has become a boomtown.

Pennsylvania’s new governor Tom Corbett says shale gas can become a cornerstone in his state’s economy. He estimates 40,000 jobs have been created so far.

But opponents of drilling charge he is in the pocket of the gas industry, and they have criticized his refusal to tax gas exploration – forsaking huge revenues that could help close his state’s $4 billion deficit hole.

Corbett is unapologetic.

“If we start taxing one industry because they’re bringing in a lot of money to Pennsylvania, what does that say to other industries outside of Pennsylvania that may look to Pennsylvania to come here?” Corbett told Fox News.

The shale gas industry is relatively new and loosely regulated and has faced problems.  Because of a government loophole, “fracking” is exempt from the federal Clean Water Act. Companies are not required to disclose what is in their fracking fluids, some of which contain toxic chemicals.

Range Resources however now fully discloses what is in their fluid and is attempting to lead the way with responsible drilling practices an non-toxic fluids.  Range was accused of contaminating ground water and at one time used toxic diesel fuel in the fluid.

Pennsylvania’s governor says with a new industry using new practices in such numbers, mistakes were bound to be made. The goal going forward, he says, is to minimize, even eliminate, mistakes.

Source:

Fox News

The sale by Range, which also reported a loss of $8.2 million, or 5 cents a share, is part of a strategy to invest more heavily in fields that can also produce crude oil or natural gas liquids, which are getting higher prices than natural gas.

Range has 360 producing wells and 1,000 drilling locations in the Barnett Shale, mostly in core, peak-producing areas, company President John Pinkerton said in an interview.

“Our theory is, we’ll take the money out of the Barnett and deploy it in areas” where production includes significant quantities of natural gas liquids, which track oil prices rather than dry natural gas prices, Pinkerton said. He declined to speculate on what the Barnett Shale properties might sell for, but said the Barnett accounts for about 25 percent of Range’s production.

Pinkerton said he expects a sale can be completed sometime in the first quarter. “We think we can make up the lost reserves by the end of 2011.”

Range’s move isn’t totally unexpected.

Forbes magazine recently speculated that Range, the largest producer and holder of drilling rights in some of the prime areas of the Marcellus Shale in the eastern U.S., would likely sell assets to raise cash to further develop the rich field. At the same time, other producers have been selling stakes in natural gas holdings to larger energy companies and investors.

Pinkerton said Range’s presence in Fort Worth, about 150 employees, is likely to grow even after it sells its Barnett holdings. Still, Range expects to double its Marcellus production this year, from 100 million to 200 million cubic feet per day, and then double it again to 400 million next year.

Pinkerton said the Marcellus, as well as oil and gas properties Range holds in South Texas and the Permian Basin in West Texas, all produce significant amounts of gas liquids such as propane and butane. Last week, Range said 23 percent of its third-quarter production was oil and gas liquids, up from 16 percent a year ago.

The low price of natural gas, held down by burgeoning production in the continental U.S. from fields like the Barnett, has weighed on Range and other gas producers. Natural gas futures have dipped below $3.50 per 1,000 cubic feet recently, down from around $6 in January.

Range’s third-quarter loss was a considerable improvement over a $30 million loss in the same quarter a year ago. Both figures reflect write-downs in the value of hedges, rather than cash losses. The company’s third-quarter results were affected by a 22 percent drop in realized prices, offsetting a 16 percent decrease in costs and a 15 percent increase in production.

Range produced an average of 503 million cubic feet of gas and gas equivalent in the quarter, a record, and generated $140 million in cash flow from operations.

Source: Newswires

Initial estimates say that there may be a decade’s worth of additional reserves in the Pennsylvania play which could be easily tapped by the existing drilling projects currently in operation.

One of the companies conducting these preliminary tests is Texas-based Range Resources Corp, who told Reuters it had successfully tested two wells in the Upper Devonian Shale above the Marcellus, and the Utica, below it.

“The results are very promising,” Range spokesman Matt Pitzarella wrote in an email. “Even though it’s still very early, the prospects are very good, indicating that either of these formations could be stand-alone gas fields.”

Cabout Oil & Gas Corp. also recently completed a successful test well into the Purcell Limestone, between the upper and lower Marcellus levels.

Current estimates by geologists say the Marcellus shale play holds about 489 trillion cubic feet of gas, enough to meet total U.S. needs for about 20 years at the current national consumption rate of some 23 trillion cubic feet a year.

READ THE FULL ARTICLE

Evidently there are at least 15 other such deals being discussed related to the Marcellus Shale. With Exxon, Shell and Total having made a move, can Chevron and ConocoPhillips be far behind?

The WSJ lists five of the big, publicly-traded players that may be in the sites of potential acquirers:

Cabot Oil & Gas operates 200,000 acres in the Marcellus Shale and has an active drilling program in the area, installing 12 wells in the first quarter. The company plans to drill a total of 81 wells in the Marcellus in 2010.

Chesapeake Energy leases 1.5 million acres, making it the largest leaseholder in the Marcellus. In the first quarter, its net gas production in the area increased 40% from the previous quarter. Chesapeake expects to operate a total of 170 wells in 2010.

Range Resources operates 1.3 million acres, with 900,000 of them located in what Marcellus buffs call the “Fairway,” or most productive area, of the shale in Pennsylvania. The company is predicting aggressive production growth to increase 19% this year form 2009 and increase 25% in 2011.

Rex Energy: In the first quarter, the company increased its holdings in Marcellus 21% from the third quarter to 60,000 acres. RBC Capital Markets analyst Leo Mariani wrote on May 6 that Rex had ramped up two Marcellus wells, and one was a “clear outperformer.”

Exco Resource Inc. The company has pemits to drill 60 wells in the shale this year. On May 10, Exco entered a JV with BG Group that will own 186,000 acres in the Marcellus. BG Group, a U.K-based energy company, paid Exco $950 million for a 50% stake in the JV

READ THE ARTICLE

The story of shale seems to be that however optimistic and seemingly over the top initial estimates, they end up being wrong. But this isn’t something to give shale deniers any help: the shale plays keep on getting bigger and bigger.

As big as the Marcellus Shale gas bonanza has become, it’s not the only Pennsylvania geologic formation yielding new and unexpected quantities of natural gas.

Two exploration companies have reported promising discoveries in rock formations layered around the Marcellus like a geologic parfait.

“The Marcellus has gotten a lot of great research and a lot of great results, and you might think it’s the only shale play up here of any magnitude,” William Zagorski, Range vice president of geology in Appalachia, said in an interview Friday.

But Zagorski said two new shale formations – the Utica Shale deeper below the surface and the shallower Upper Devonian Shale – were “in the same ballpark” as the Marcellus.

Without going into too much detail, the shale parfait emerging in Pennsylvania can exist geologically in other areas The prime part of the Marcellus in West Virginia and Western PA was originally the US coal belt. Similarly, previous coal production can be an indicator of future shale gas activity. But even more importantly, previous gas production, as we have seen in Texas and Louisiana is precursive of shale production. In Europe, we are already seeing this in the Netherlands and Northern Germany, where gas production was thought to be declining only a year or so back.

If the UK would get shrug off it’s obsession with impending disaster and take a rational optimist view of Southern North Sea gas production, we might find the future less bleak.

In Europe the situation is no different than in Pennsylvania in that we are both in land grab phase. The pessimists say that European shale doesn’t exist, and the smart money is keeping quiet.

Gas operators declined to offer many specifics about the test wells for competitive reasons.

“There’s tremendous amounts of gas in place and potentially a large amount of recoverable gas there,” John H. Pinkerton, Range’s chief executive, told analysts. “So we’ll be coy there.”

Shale deniers often say that the technology is too expensive and/or intrusive. But in the Marcellus and similar parfait plays, the news just keeps on getting better:

In southwestern Pennsylvania, where the gas-rich shales are layered in a column, Range’s Zagorski said the additional strata could be accessed by new wells drilled from existing locations. That would reduce surface disturbances and allow the industry to maximize pipelines and infrastructure built for the Marcellus.

“In southwestern Pennsylvania, there are areas where all three of these shale plays exactly stack over the same well bore, over the same leases,” Zagorski said. “That’s extremely valuable. You’re not having to disturb new ground or to build new pads to access some of these formations.”

As old wells go into decline, new wells could be drilled from the same site, satisfying the industry’s need to constantly develop new sources to maintain price stability.

SOURCE:
No Hot Air: “Marcellus Plus: The Parfait Shale Play”

Range Resources CEO John Pinkerton said in an interview yesterday his company may be a partner or target for oil companies, like Apache Corp. and Occidental Petroleum Corp., seeking to expand shale holdings in North America.

Exxon said last month it would buy XTO Energy Inc., a Fort Worth, Texas-based gas producer, for about $37 billion in stock and debt. Petroleum companies are “clearly sniffing around,” said Pinkerton, who declined to identify companies that have approached him.
Oil companies, previously focused overseas, are now “seeing that natural gas is half the carbon footprint of coal, it’s a third cleaner than oil, and now you’ve got these gigantic shale plays in the U.S.,” said Pinkerton.

Natural gas produces less carbon dioxide, the heat-trapping gas blamed for accelerating global warming, than crude oil or coal, according to the U.S. Environmental Protection Agency. Shale gas is produced from rock formations using water, sand and chemicals.
Range Resources, based in Fort Worth, Texas, holds 1.4 million acres of leases for the Marcellus Shale, a formation that may hold 20 years’ worth of U.S. gas supplies. Improvements in shale-gas extraction technologies have helped U.S. gas reserves reach a record 1,836 trillion cubic feet, according to the Potential Gas Committee.
Shell, based in The Hague, wants Marcellus Shale acreage, said David Todd, onshore asset manager for the company’s U.S. unit.

‘Very Interested’

“We currently are very interested in the Marcellus and are looking for an entry,” Todd said in June at the Bentek Energy Market Fundamentals Symposium in Houston. “We do not have a sizeable position.”

Total SA, Europe’s third-largest oil company, agreed this month to pay as much as $2.25 billion for a 25 percent stake in Chesapeake Energy Corp.’s Marcellus fields. Chesapeake Energy, based in Oklahoma City, has raised $10.8 billion in the past two years by selling joint-venture interests in its shale-gas properties.
Partnerships may be more common than takeovers because they cost less, Range Resources’ Pinkerton said.

“The idea that you’re going to have a rash of these is a little bit naïve,” Pinkerton said. “There aren’t many Exxons and there aren’t many XTOs.”
Range Resources, which increased gas output for 27 straight quarters, has its most promising holdings in the Marcellus Shale with its leases in Pennsylvania, Pinkerton said.

Breaking Even

Wells in the Marcellus Shale break even with gas prices at $3.19 per million British thermal units, the third-cheapest break-even rate among the most productive U.S. gas fields, Bentek Energy LLC Chief Executive Officer Porter Bennett said at an investor conference in New York this month.

The Marcellus probably will yield 489.2 trillion cubic feet of gas, equivalent to a 20-year supply for the U.S., Terry Engelder, a Pennsylvania State University geologist, said in an Oct. 21 interview. Chesapeake Energy, holder of 1.5 million Marcellus acres, predicted last year it will be the largest U.S. gas field.
Gas stocks are less expensive because the price of crude oil on commodities markets is 58 percent higher than natural gas based on the amount of energy each can produce, Pinkerton said.

Oil, Gas Prices

Crude oil futures fell 3 cents to $73.64 a barrel yesterday on the New York Mercantile Exchange. An energy-equivalent price for gas would be $12.27 per million British thermal units. Natural gas fell yesterday 14 cents to $5.14 per million British thermal units.

Exxon affirmed the economy and productivity of shale-gas wells by paying a 25 percent premium to XTO’s previous closing price, Pinkerton said. Devon, based in Oklahoma City, is selling as much as $7.5 billion of offshore and overseas assets this year to cut debt and focus on U.S. shale-gas production. “We had an opportunity to get into the Marcellus in a big way a couple of years ago,” Devon President John Richels said in response to a question during in a Nov. 18 conference call. “Maybe it was a mistake, but we chose not to.”

Devon spokesman Chip Minty and Occidental spokesman Richard Kline said yesterday the companies don’t comment on merger speculation.

By Jim Polson BUSINESS WEEK