Continued from Local News and Commentary
The Most Popular Shale Play in America? The Marcellus!
And more recently, the play has generated a great deal of interest, with a handful of transactions occurring over just the past few months. For instance, Southwestern Energy more than doubled its net acreage in the play, taking advantage of distressed seller Chesapeake Energy’s need to divest non-core assets to raise much-needed cash.
Shortly thereafter, Chesapeake offloaded another asset package, this time to Pittsburgh-based EQT. The $113 million transaction was for 99,000 net acres in southwestern Pennsylvania and 10 horizontal Marcellus wells in Washington County, Pa.
Natural gas prices — though they’ve risen appreciably over the past couple of months — are still very low by historical standards. So what’s the reason behind the recent flurry of acquisition activity in the play?
Low costs of production
The Marcellus’ popularity is due largely to its superior economics: It boasts some of the lowest all-in production costs of any U.S. shale gas play, as well as a relatively high proportion of natural gas liquids relative to other gassy plays.
According to Bentek Energy, an energy market analytics provider, the Marcellus can deliver a sufficient internal rate of return, or IRR, of about 20% with a gas price of roughly $4 per MMBtu. By comparison, other natural gas-supported plays such as the Haynesville, Fayetteville, and Barnett shales require a gas price of around $5 per MMBtu to deliver the same IRR.
Another major reason the play is so popular is its ideal location. The Northeast hosts some of the largest gas-consuming cities in the country, including New York City, Boston, and Philadelphia, giving Marcellus producers a convenient outlet for their production. Jeff Ventura, CEO of Range Resources, one of the most active drillers in the play, explained:
“Gas from the Marcellus will not only supply in Northeast United Sates, but gas from the Marcellus will move into the Midwest and Southeast markets. It’s also strategically located relative to existing pipeline infrastructure as well as the export facilities in harbor in the Philadelphia area.”
Going forward, production growth in the Marcellus is likely to outpace most other shale gas plays in the country. Bentek Energy projects that production volumes in the Northeast region of the country will increase to more than 10 billion cubic feet per day this year and rise to 17 bcf/d in 2017, with the Marcellus and Utica shales expected to account for the vast majority of this growth.*
Natrium, WV NGL Processing Plant Start-up Close
The $500 million Natrium plant was due to be finished last December. Then the start-up date was changed to be “late spring” of this year (see Natrium, WV NGL Plant Behind Schedule, Will Open “Late Spring”). It’s almost summer and the plant is still not open. However, the signs point to an imminent start:
Those driving by the $500 million Dominion Resources plant that is still under construction may see some natural gas flaring, but officials said this is part of the normal startup process.
“Under normal operating conditions, flaring will be very minimal – emphasis on very,” said Dominion spokesman Dan Donovan. “Flaring will also be intermittent and part of normal operations once the plant is in service.”
According to the National Geophysical Data Center, flaring is a widely used practice for the disposal of natural gas in areas where there is no infrastructure to make use of the gas. These officials believe the practice unloads unnecessary amounts of carbon emissions into the atmosphere.
At the Natrium plant – which is now part of the $1.5 billion processing and transportation venture between Dominion and Caiman Energy known as Blue Racer Midstream – once the wet Marcellus and Utica shale gas travels to the plant, the ethane, butane, propane and other natural gas liquids will be separated from the dry methane gas so that all the products can be individually marketed.
Upon separation from the gas stream, the propane and butane will be kept in tanks on the Dominion site to be marketed.
However, this cannot be done with ethane because of the product’s volatility, so the Blue Racer venture plans to ship the ethane to the Gulf Coast for cracking.
Some natural gas producers also flare off some volatile gases at drilling sites. Others burn off ethane because of the absence of an ethane cracker in the Marcellus and Utica shale regions.
Though the site buzzes daily with construction activity, the Natrium plant is already five months behind schedule.
It was initially set to open in December.
Throughout the plant’s construction along the Ohio River and W.Va. 2 in Marshall County, members of the Affiliated Construction Trades Foundation have been at odds with Dominion – as well as the company building the plant on Dominion’s behalf, Chicago Bridge & Iron – for not hiring more local workers to build the facility.
Total on-site worker numbers have fluctuated from about 84 to around 1,000 over the past year.
Workers also have installed railroad lines that will connect the Natrium plant to the CSX Corp. line, which is part of the historic Baltimore & Ohio Railroad. The company will use rail service to move its product.
The Natrium facility should employ 40-45 full-time, permanent workers in jobs at the plant itself upon completion.
Officials have said these jobs will pay $20-$30 per hour.*
What America is Thinking on Energy Issues – Poll: 71 percent of American voters agree exporting domestic natural gas will create U.S. jobs
"American voters know that exporting more of America's domestic energy would lead to more jobs, help the economy, and reduce the nation’s trade deficit," said API Chief Economist John Felmy. "The United States has the opportunity to get it right and use its abundant supplies of clean-burning natural gas resources to meet the president’s goal for doubling U.S. exports by 2015.”
The telephone poll of 1,006 registered American voters found that in addition to supporting the U.S. economy and job creation, more U.S. natural gas exports would help reduce the U.S. trade deficit (63 percent), helps keep energy dollars here in the U.S. rather than being sent to other regions of the world (66 percent), and increase the nation’s energy security (64 percent).
Positive support for exporting U.S. natural gas by a majority of American voters is reinforced by facts reported in a recent study produced by ICF International. The study finds that U.S. LNG exports could spur strong domestic economic and job growth.
“Industry advancements in hydraulic fracturing and horizontal drilling have led to a dramatic increase in the estimated recoverable shale gas resources here in the U.S.,” said Felmy. “The American people get it. The U.S. can be a global energy superpower as long as our leaders pursue smart energy policy. We are also the global leaders on clean air. Technological advances that have enabled us to reach natural gas from shale have also helped the U.S. lower its carbon dioxide to 1994 levels.”
API is a national trade association that represents all segments of America’s technology-driven oil and natural gas industry. Its more than 500 members – including large integrated companies, exploration and production, refining, marketing, pipeline, and marine businesses, and service and supply firms – provide most of the nation’s energy. The industry also supports 9.2 million U.S. jobs and 7.7 percent of the U.S. economy, delivers $85 million a day in revenue to our government, and, since 2000, has invested over $2 trillion in U.S. capital projects to advance all forms of energy, including alternatives.
# # #
The study was conducted May 10-15, 2013, by telephone by Harris Interactive on behalf of the American Petroleum Institute among 1,006 registered voters across the country, with a sampling error of +/- 3.0%. A full methodology is available upon request. Harris Interactive is one of the world’s leading custom market research firms, known widely for the Harris Poll. For more information, visit www.harrisinteractive.com.
"What America is Thinking on Energy Issues" is a public opinion series provided by API, offering data to inform policy discussions and ensure policymakers and others know Americans' perspectives on key energy issues
3 Marcellus Midstream Companies Top Customer Satisfaction Survey
Today EnergyPoint Research announces that MarkWest Energy, Williams and Sunoco Logistics captured the top three rankings, respectively, in the EnergyPoint Research’s 2013 Midstream Services Customer Satisfaction Survey. The biennial survey is the leading independently conducted benchmark study focusing on the oil and gas industry’s satisfaction with midstream service providers.
Overall, first place in the survey was again won by MarkWest Energy, which also took the top honors in EnergyPoint’s last midstream survey conducted in 2011. The Denver-based company’s strong showing was led by first-place rankings in several key categories, including onshore gas gathering, project development and operations. The company also took top honors in both the fast-growing Appalachian Basin / Marcellus and Ark-La-Tex regions.
Doug Sheridan, managing director of EnergyPoint Research, commented: “Midstream services within the domestic U.S. remains one of the most dynamic and hotly contested segments within the oil and gas industry. MarkWest Energy’s commitment to quality and customer service, exemplified by this year’s survey results, continues to resonate with customers, who are progressively looking for more reliable operations and deeper project-development capabilities from midstream service suppliers.”
Midstream Services is one of five major oil- and gas-supply segments rated as part of EnergyPoint Research’s industry-wide benchmark studies. This year’s survey consisted of over 800 in-depth evaluations by qualified professionals at more than 200 customers of domestic oil and gas midstream service providers. The survey succeeds a similar midstream study conducted and published by EnergyPoint Research in 2011, as well as other biennial surveys dating back to 2006.
Runner-up Williams, which rated third overall in EnergyPoint Research’s 2011 survey, saw its ranking boosted in part by a first-place ranking in the area of systems and administration. The company also posted strong marks in personnel and corporate capabilities. Sunoco Logistics, a newcomer to the survey this year, rounded out the survey’s top three overall and captured the number one ranking in onshore crude gathering and in the Mid-continent region. Other providers placing first in at least one category in the survey include:
CenterPoint Energy Field Services in gas compression;
DCP Midstream in gas processing and treating;
Eagle Rock Energy in gas and NGL purchasing;
Energy Transfer in the Texas Intrastate region;
Enterprise Products in NGL fractionation, offshore crude gathering and transportation, the Onshore Gulf Coast, and the Gulf of Mexico;
Kinder Morgan in gas transportation;
ONEOK in gas storage and the U.S. Rockies;
Plains All American in crude storage and terminaling, and crude transportation;
Targa Resources in NGL transportation and storage and in the Permian Basin region.
Other midstream service providers rated in the survey, listed alphabetically, include Anadarko Midstream / WGP, Atlas Pipeline, Buckeye Partners, Crosstex, Enbridge, Enogex and Regency Energy Partners.
For the first time, this year’s survey included ratings for oil-related categories such as crude transportation and storage & terminaling. “Sustained price signals in oil markets, along with successful transference of horizontal drilling and shale-related completion techniques, have resulted in significant activity in crude-producing regions of the U.S.,” said Sheridan. “Many midstream suppliers who previously specialized only in natural gas- and NGL-related services have, in some cases out of necessity, transitioned well to providing crude-related services as well.”
A total of 19 major domestic U.S. midstream service suppliers received the minimum number of evaluations needed to be included in the survey’s final rankings. Suppliers were evaluated in various areas, including total satisfaction, pricing and contract terms, operations, project development, service and professionalism, personnel, systems and administration, and corporate capabilities. They were also evaluated across multiple natural gas and crude oil service segments and producing regions.
For categories and suppliers in which ratings existed, 2011 ratings were included in the final 2013 category-winner calculations at lesser weightings. In no case were these historical ratings assigned a weighting of more than 20 percent for the purposes of calculating 2013 final category winners.
Visit EnergyPoint Research’s web site at http://www.energypointresearch.com, or contact the firm at info(at)epresearch(dot)com or +1.713.529.9450, for more information concerning the survey and EnergyPoint Research’s suite of detailed research products and services related to the survey.*
Moody’s Report: Shale is Here to Stay, Gives U.S. Huge Advantage
The Moody’s press release announcing the study:
North America’s shale drilling revolution is now permanent and will keep natural gas selling at historically low prices for at least the next decade, Moody’s Investors Service says in a new report. And while low natural gas prices will have long-term benefits for some sectors and companies, they will hurt other types of businesses, the agency says.
“A surplus of natural gas production will give North American refiners and chemical producers a long-term competitive advantage over their peers worldwide, while the shale boom also improves the credit profiles of US electric and gas utilities,” says Managing Director Steven Wood, lead author of the new report, in “Chemicals, Refining and Utilities Among Sectors Seeing Biggest Benefit from Shale.”
Natural gas currently sees little trade in the international marketplace, Wood says, with various difficulties in developing shale resources elsewhere keeping North America ahead of the game.
Among the many refiners set to benefit are Phillips 66, Marathon Petroleum and Valero. With lower natural gas costs, they should enjoy strong cash flows in the intermediate term from North American crude oil selling below international benchmark prices.
Makers of commodity chemicals will also enjoy lower input costs and therefore a significant cost advantage for the foreseeable future – especially companies that produce ammonia and methanol, including CF Industries, Agrium, Methanex and Rentech Nitrogen Partners.
For regulated utilities in the US, the shale revolution reduces the cost of fuel and purchased power, which represent their single largest expense. And since the utilities usually pass their fuel costs on to rate payers, lower input costs reduce customers’ bills and improve their relations with regulators. Indeed, the currently more amicable environment has helped the utilities improve their cost recovery through base-rate increases, with little impact on overall customer bills.
The shale boom has also been good business for US and Canadian Class I railroads, as new pipelines struggle to keep up with oil production in new locations. The western railroads Burlington Northern and Union Pacific Railroad will see the most advantage, since they are close to the Bakken and Eagle Ford shale regions.
“Conversely, the natural gas glut from shale production poses formidable competition for the US coal industry, as power producers switch from coal to natural gas and increasingly strict environmental regulations discourage coal consumption,” Wood says.
Low input costs will mean lower power prices, a significant drawback for merchant power producers, or those exposed to wholesale power prices. Only Calpine will be less affected, since it specializes in gas-fired generation.
Moody’s research subscribers can access this report at http://www.moodys.com/research/North-Americas-Shale-Revolution-Chemicals-Refining-and-Utilities-Among-Sectors–PBC_153822.*
Chevron to Build New (Big) Regional HQ in Pittsburgh Suburb
Here’s the details that are known:
A discount superstore and a large vacant tract of land on a bluff overlooking the Parkway West could become the latest symbols of the region’s growing energy identity.
Global energy giant Chevron has reached agreements to acquire 61 acres of land in Moon, including a Kmart targeted for closing in July, as a potential site for a regional headquarters.
The San Ramon, Calif.-based company made the announcement Wednesday, only days after Sears Holdings Corp. confirmed it would be closing the Kmart. It made no mention at the time that the store was closing to make room for the first major global driller to build a regional campus.
In its statement, Chevron said it expects to close on the acquisitions in the next few months. No terms were disclosed. It said a decision on the use of the properties would be made later this year.
“Chevron is pleased to have been offered the opportunity to acquire this land, which provides us with a potential location as we continue to evaluate our options for a regional headquarters facility,” said Bruce Niemeyer, Chevron’s regional vice president. “We are committed to this community, to contributing to a vibrant regional economy, and to producing energy supplies that will fuel this region and our nation for generations.”
The company has been scouring the region for a potential site for a regional headquarters for at least a year. It now leases space in two buildings in Moon, including one in the Cherrington office park.
In addition to the Kmart site, Chevron is acquiring a 43-acre parcel of land behind it known as Marketplace Landing, owned by Roy F. Johns Jr. Associates. Both sites sit on a bluff above the Parkway West and can be seen from the highway and the giant retail complexes nearby. Pittsburgh International Airport is about five miles away.
Chevron provided few details on the size of the development Wednesday, but one local real estate broker said he had heard the company was considering a campus as large as 350,000 square feet — enough room to house 1,750 employees in a traditional office setting.
Nathan Calvert, a Chevron spokesman, said the firm could not confirm information on square footage, the number of buildings or how many employees it might hold. A timeline on groundbreaking and construction was not given.
The company has about 650 workers in the region and the new facility “is going to be developed to help us as we grow,” Mr. Calvert said
EQT & Gas Utility Company Deal Gets Federal "Approval"
The announcement today from EQT about the FTC “approval”:
EQT Corporation today announced completion of the federal antitrust review under the Hart-Scott-Rodino Antitrust Improvements Act for the pending transfer of its gas distribution business, Equitable Gas Company, LLC, to Peoples Natural Gas. The waiting period expired on April 22, 2013, without a request for additional information, which indicates the Federal Trade Commission has not objected to the transaction and that the parties may proceed.
This is a positive milestone and the first step in the approval process. EQT has also submitted filings with the Pennsylvania Public Utility Commission, West Virginia Public Service Commission, and the Federal Energy Regulatory Commission; and will soon file with the Kentucky Public Service Commission – each must approve the transaction as part of the regulatory process. As the commissions consider and evaluate the many facets of a transaction involving a utility, it is not uncommon for the review process to extend over a longer period. EQT and Peoples continue to work collaboratively with the remaining regulatory agencies and expect to receive all necessary approvals by year end.
As part of the transaction, announced in December 2012, EQT will receive cash proceeds of $720 million (subject to certain purchase price adjustments), and select midstream assets and commercial arrangements, which are expected to generate at least $40 million in EBITDA (earnings before interest, taxes, depreciation, and amortization) per year. The monies from the transaction are expected to be reinvested in EQT’s rapidly growing natural gas production and midstream businesses, which are strategically focused in the Marcellus Shale and across the Appalachian basin.
UPS to Grow NG Fleet with Additional 700 LNG Tractor Trailers
LNG is different from CNG, or compressed natural gas. LNG is natural gas cooled to the point it becomes a liquid and is typically used in long haul vehicles, like tractor trailers. CNG is typically used in passenger vehicles and short haul trucks. Here’s the announcement from UPS about growing their long haul fleet using LNG:
UPS today announced the accelerated growth of its alternative vehicle fleet with plans to purchase approximately 700 liquefied natural gas (LNG) vehicles and to build four refueling stations by the end of 2014. Once completed, the LNG private fleet will be one of the most extensive in the U.S.
“LNG will be a viable alternative transportation fuel for UPS in the next decade as a bridge between traditional fossil fuels and emerging renewable alternative fuels and technologies that are not quite ready for broad-based long-term commercial deployment,” said Scott Davis, UPS Chairman and CEO.
UPS has been operating natural gas vehicles for more than a decade. With natural gas prices 30-40 percent lower than imported diesel and U.S. production gearing up, the logistics company is investing more aggressively in the natural gas infrastructure necessary to make it part of the UPS delivery network here. Beyond favorable fuel cost and domestic resource access, the industry cites 25 percent less CO2 emissions.
Worldwide UPS has more than 1,000 natural gas vehicles on the road today. UPS’s alternative fuel and advanced technology fleet of more than 2,600 vehicles also includes a wide array of low-emissions vehicles, including all-electrics, electric hybrids, hydraulic hybrids, propane, compressed natural gas and biomethane. Since 2000, the fleet powered by alternative fuels and technologies has driven more than 295 million miles.
New UPS-built fueling stations in Knoxville, Nashville and Memphis, Tenn., and Dallas, Texas, will serve its heavy-weight rigs traveling into adjacent states. With the addition of accessible LNG fueling stations, UPS also will add LNG trucks on routes from Dallas, Houston and San Antonio to further extend territory.
An initial investment of more than $18 million to build fueling stations will be supported by the purchase of these 700 LNG tractors and continued expansion of the natural gas fleet in the U.S. UPS already operates 112 LNG tractor trailers from fueling stations in Las Vegas, Nev.; Phoenix, Ariz., and Beaver and Salt Lake City, Utah, and has its own LNG fueling station on its property in Ontario, Calif.
“Public-private partnerships and legislative action can remove disincentives from fuel taxes on natural gas as well as offset the higher incremental costs of the vehicles to create the favorable conditions for companies like UPS and others to broaden deployment,” Davis added.
As a global sustainability pioneer, UPS was a founding Interstate Clean Transportation Corridor (ICTC) fleet partner, a group that established publicly accessible LNG fueling stations in California, Las Vegas, and Utah. The ICTC steering committee includes eight government and regulatory agencies at the local, state and national levels.
“When other shipping and logistics companies are talking about possibilities, we are putting alternative fueled vehicles on the highway,” said Davis. “LNG is a good alternative to petroleum-based fuel for long-haul delivery fleets as it is abundant and produces reduced emissions at less cost. At UPS, we are helping to knock down some of the biggest hurdles to broad market acceptance of LNG in commercial transportation by continuing to establish vehicle demand, fuel and maintenance infrastructures.
“We plan expansion through infrastructure partnerships and a broader fleet in states that are leading the way to make alternative fuel vehicles economically feasible,” Davis said.
For more information on UPS’s sustainability initiatives, review the company’s 2011 Corporate Sustainability Report at responsibility.ups.com/Sustainability with the new 2012 report coming this summer
Big Money Spent on Marcellus & Utica M&A Deals for 1Q13
Mergers, acquisitions and partnerships that happened across Appalachia’s gas fields were enough to make the Marcellus Shale and the Utica Shale the country’s second- and third-most popular formations for big-ticket deals in the first quarter of 2013, according to an analysis released Wednesday by PwC.
The report found three transactions totaling $882 million in the first three months of the year related to development in Pennsylvania’s Marcellus Shale gas fields, about the same amount spent during the same quarter one year ago.
The analysis studied energy mergers and transactions nationwide worth more than $50 million. Those deals can include acquisitions, investments or partnerships that allow companies to split the costs associated with oil and gas development.
Two deals in Ohio’s Utica Shale formation were worth $283 million, more than double the $112 million spent there in the first quarter of 2012.
Only the Eagle Ford formation in Texas saw more transactions during the quarter, with five deals worth $5.1 billion. The Bakken Shale of North Dakota had one deal worth $513 million.
Overall, the quarterly report prepared by the New York-based firm found a nationwide total of 39 oil and gas deals each worth more than $50 million. In total, the energy sector spent $27 billion on deals in the first quarter — a slight year-over-year increase from 2012's $25.7 billion.
But on a sequential basis, the amount spent dropped about 52 percent from the fourth quarter of 2012. Researchers said the fourth quarter is traditionally a busy one, and last year was a unique case as companies rushed to make deadlines related to the fiscal cliff legislation.
Foreign interest in American oil and gas development dropped during the first quarter, with nine deals worth a total of $4.1 billion involving international buyers. That’s down about $1.8 billion from last year.*
New Interior Secretary Jewell Says BLM Fracking Rules Coming Soon
Newly minted Interior Department Secretary Sally Jewell gave a nod Monday to oil-and-gas industry concerns about pending federal rules on hydraulic fracturing, or fracking.
In speaking about those rules, which she said would come “fairly soon,” the former chief executive for outdoor gear retailer noted, “One thing that’s clear to me from my own experiences is that one size doesn’t fit all.”
That comment — made during a video chat hosted by Interior, which amounted to some of Jewell’s first public comments since taking over the department earlier this month — might please the oil-and-gas industry.
Oil-and-gas interests have worried that federal fracking rules would not account for geological differences across the country, an issue Jewell’s statement appeared to directly address.
Fracking involves injecting a high-pressure mixture of water, sand and chemicals into tight-rock formations to tap hydrocarbons buried deep underground. The drilling method has been credited with the domestic energy boom in the United States.
Industry wants to keep fracking regulated at the state level, noting states have done so [for] years. Oil-and-gas interests contend states have a better understanding of the best fracking methods to use on their own lands.
Jewell alluded to that sentiment Monday, referencing her past experience as a drilling engineer with Mobil in Oklahoma.
“Fracking as a technique has been around for decades. … I have performed the procedure myself very safely,” Jewell said.
The Obama administration pulled back on finalizing the pending rules early this year amid industry pressure. The rules are expected to address several issues, including managing so-called flowback water and maintaining well integrity.
Still, Jewell noted the technology has evolved since her days with Mobil. She said the new practices have invited “concern” that require federal oversight.
Green groups have been the primary opponents of fracking. They contend the practice pollutes groundwater, and that it releases heat-trapping methane into the air
MDN Goes to NAPE East in Pittsburgh
MDN editor Jim Willis attended and hung out at the NGI Shale Daily booth for most of the event, chatting with passersby. We already brought you links to stories about the event from several Pittsburgh media outlets (see Marcellus & Utica Shale Story Links: Fri, Apr 12, 2013). Below, Jim provides his thoughts on the event, and the comments (gossip!) he heard at the event. More importantly, he took pictures! We’ve created a “virtual tour” of the event, so you get a feel for what such an event looks like, and what happens…
The NAPE East event is all about landowner groups (or organizations that own large tracts of land) “shopping” their land for a deal–in hopes of finding a driller or party interested in acquiring the lease rights to drill–or in acquiring royalty rights–or both. It is a bit like an open bazaar market where people are meeting to swap, trade, buy and sell. All done within the context of a trade show with rows and rows of booths.
NAPE East was held at the David L. Lawrence Convention Center, a massive building that spans several city blocks sitting along the Allegheny River. When Jim arrived at the registration area, he was greeted with a spectacular view of the Allegheny (see the pics below). Pittsburgh is a beautiful city, known as the city of “three rivers” (the Allegheny, Monongahela and Ohio). Lots of rivers and lots of bridges in Pitt.
After getting the Shale Daily booth set up on Wednesday (Jim was there to help “man the booth”), he attended the afternoon sessions of the Business Conference hosted by research company IHS. Jim snuck in part-way through a session called “A Discussion of Present and Future Geologic Exploration Trends in the Appalachian Basin,” moderated by Andy Burne, a senior director with IHS, featuring two very sharp panelists: Bill Zagorski, VP of exploration for Range Resources and Pete Sullivan, VP of ECA. Lots of maps of the Marcellus and Utica–very interesting maps showing things like IP Breakdown vs Thermal Maturity, drilling locations, the ubiquitous Total Organic Carbon maps and more. (Jim would have gladly given his eye teeth for copies of those maps!)
Some of the interesting statements heard during the session…
- Industry has not yet come to grips with how to develop both the Utica and Marcellus layers in the same well and well pad. Industry is still climbing the learning curve on this one.
- Pete Sullivan said Marcellus decline curves–the speed with which production from a Marcellus well “tappers off” over time–is a lot like the decline curves for other Appalachian wells, except “on steroids.” We’re not exactly sure what he meant, but thought he was saying that Marcellus wells become much less productive much quicker than conventionally drilled wells in the same geography.
- Sullivan also said the industry needs more and better seismic data, and they need to “judiciously use” micro-seismic data to better know where to aim the frack–to where the gas is located. (As a side note, MDN heard an astonishing factoid while at dinner with friends: seismic data costs around $100,000 per square mile. Wow! Maybe we’re in the wrong business!)
- Bill Zagorski from Range was asked a question about the viability of restimulating early Marcellus wells for more production. He responded that they have only restimulated “a few” early wells and they are generally happy with the results. According to Zagorski, restimulating has great potential, but its success depends on the geography where it’s done. Sullivan chimed in that the political reality is that investors demand their money be used for drilling new wells as opposed to restimulating (redrilling) existing wells.
After a short break, the final session of the day began, titled “Prospect Presentations.” The best way we can describe it is a combination of speed dating and beauty contest for landowner groups. Pete Stark, senior research director and advisor at IHS, moderated this session in which a series of 10 landowner groups/organizations took 10-15 minutes each to present their deals–the properties they came to the show to “shop” to see if they can sell the mineral rights for drilling.
As an example, CX Energy kicked things off with the example that they recently went from zero acres in an area to 27,000 acres signed in a 3-day mass signing–all in under six weeks’ time. CX has done deals for 135,000 acres in the past 22 months, and they have another 439,000 acres available that spans the entire Marcellus and Utica plays–mostly in northwest PA and southern NY. Many of the groups presenting were landowner groups (non-profit) there to get the best possible deal for their members, touting how the groups formed, their cohesiveness and willingness to work with industry, etc. Each group presented the benefits of leasing with them.
Moving to the show floor on Thursday and Friday…
Many, many conversations. Among those of note: Jim stopped by the Green Hunter booth to ask about any potential news with the Coast Guard approving shipments of frack wastewater by barge. The GH rep confirmed what we already know: A proposal is with the Office of Management and Budget (OMB), i.e. The White House, and awaiting approval as part of the budget process. So, nothing new. We wait and hope the proposal from the Coast Guard (which presumably is that it is safe to go forward) will be adopted by Obama.
Jim stopped by the Carrizo Oil & Gas booth to see what’s new and newsworthy. The Carrizo rep said that this year, in 2013, Carrizo will drill their very first Utica Shale well. Cool.
When Jim disclosed that he is from the Binghamton, NY area to passersby and people he ran into (at lunch, on the show floor, wherever), the inevitable question he got was, “When in the world is New York going to allow fracking?” Unfortunately, there isn’t a good response. Jim also heard from several sources that any kind of deals for New York properties at the NAPE event were non-existent. No one is interested (right now) in purchasing lease rights in New York–not until the state moves forward. In fact, New York was (embarrassingly) a joke at NAPE East. Several speakers Jim heard said things like “we don’t have people like Yoko Ono living in our state to make trouble.” We don’t believe Gov. Cuomo and other politicians in New York understand the damage to their own reputations they’ve already done–lasting damage. People in other states are watching. More than one person said, “He thinks he can run for president?” with an incredulous voice.
It is Jim’s sincere hope that next year’s NAPE East event (already scheduled for April 9-11, 2014), will be focused on New York land deals–that by that time fracking will have been approved and perhaps even the first well or two drilled. We know, we’re dreaming! So we’ll leave you with the words of John Lennon’s “Imagine”…
I’m a dreamer, but I’m not the only one
I hope some day you’ll join us
And the world will be as one
IRS Provides Helpful Tips on Reporting Shale Drilling Income
From lease bonus payments to royalties to "depletion deductions," the IRS has it covered…
Taxpayers who own land that contains valuable natural resources should be aware that arranging for the development of the resources by means of a lease creates tax consequences.
Landowners may make complex financial agreements to receive royalty, bonus or other income in exchange for access to the resources on their land, such as natural gas and oil from shale deposits. Here are some important facts from the Internal Revenue Service about these transactions.
Natural resource extraction agreements involve payments for extracting resources such as oil and gas. Payments can include delay rental, royalty and lease bonus payments.
Taxpayers who receive these payments are royalty owners who do not have a working interest in extraction operations. Taxpayers should normally report these payments as income on Part I of Schedule E (Form 1040), Supplemental Income and Loss. Income reported on Schedule E is usually not subject to self-employment tax.
Taxpayers who do have a working interest in the extraction operations are subject to self-employment tax, and must file Schedule C (Form 1040), Profit or Loss from Business.
Leases and Lease Bonuses
Taxpayers/lessors typically receive a lease bonus from a lessee — the party that extracts the natural resource — in consideration for granting the lease. A lease bonus may be paid in a lump-sum or multi-year payments. The lessee should provide the taxpayer with a Form 1099-MISC, Miscellaneous Income, listing the amount of bonus payments as “Rents” in Box 1. Taxpayers usually report their lease bonus income as rent on Schedule E.
Taxpayers/lessors may receive periodic payments for their share of the natural resource. These payments are commonly known as royalty payments. They must be based on natural resource production on a recurring or intermittent basis, per the terms of the lease.
The lessee should provide the taxpayer with a Form 1099-MISC reporting the payments as “Royalties” in Box 2. Most taxpayers report royalty payments received as royalty income on Schedule E.
Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. The depletion deduction allows a taxpayer who owns an economic interest in a mineral deposit or standing timber to reduce their taxable income and account for the reduction of reserves.
There are two ways of figuring the depletion deduction: cost depletion and percentage depletion. A taxpayer who owns an interest in a mineral deposit must use the method that yields the greater deduction. The percentage depletion rate for federal tax purposes varies depending on the mineral being produced.
A taxpayer must be an independent producer or royalty owner to use percentage depletion for oil and gas. A taxpayer who owns an interest in standing timber can only use cost depletion.
Taxpayers claim depletion and other allowable deductions in the “Expenses” section in Part I of Schedule E. See IRS Publication 535, Business Expenses, for more information.
Taxpayers who own working interests may be able to deduct expenses to reduce their natural resource income. This applies to taxpayers who have working interests in extraction operations. Expenses may include overhead, dry holes, certain legal and administrative fees and county health department water testing fees. Severance tax and operation expenses should be detailed on an Authorization for Expenditures (AFE) statement provided by the exploration company.
Only taxpayers who have a working interest in the extraction operations may deduct business expenses such as depreciation, tangible or intangible costs, utilities, car and truck and travel from their natural resource extraction income.
Free Natural Gas
Taxpayers may receive natural gas from a lessee oil and gas company. The receipt of gas may be taxable income if the gas is not from the taxpayer/lessor’s retained ownership interest. In general, the ownership of raw gas extracted by a lessee is based on the lease terms and state law.
Reporting Rental and Royalty Income
Rental and royalty income or loss is calculated on Schedule E. That amount is then transferred to Line 17 on Form 1040 to be combined with income received from other sources such as wages, dividends and interest to determine total income. Net income from royalty and lease payments is not considered passive income.
Since federal income tax is not typically withheld from these payments, taxpayers may want to consider making estimated tax payments on their natural resource income. See Publication 505, Tax Withholding and Estimated Tax, for more information.
Income from leasing mineral property and royalty payments for the extraction of natural resources can be significant. Taxpayers who receive this type of income should familiarize themselves with the tax rules to avoid an unexpected bill at tax time. More information is available in Publication 525, Taxable and Nontaxable Income, and the Instructions for Form 1040, Schedule E and Form 1040, Schedule C.
CONSOL’s Detailed 1Q13 Operations Update for Marcellus/Utica
Gas Division Operations
During the first quarter, CONSOL Energy had a strong start to its 2013 drilling program by drilling 14 horizontal Shale wells: 12 Marcellus Shale and 2 Utica Shale wells. The average drilled lateral length for the Marcellus Shale wells and the Utica Shale wells was 5,838 feet and 6,111 feet, respectively. CONSOL initiated completion operations on 17 wells consisting of 274 frac stages during the quarter. In the Marcellus Shale, 13 wells, consisting of 207 frac stages on two separate well pads, were completed, or are currently underway. In the Utica Shale, four wells, consisting of 67 frac stages, were completed on three separate pads in the first quarter. Production results for the new drilling and completion activity is just getting underway. CONSOL expects to report results in subsequent quarterly releases.
The following significant events are expected to take place in the second quarter: completion activities on CONSOL’s first horizontal Upper Devonian well, the NV 39F; multiple productive wells turned-into-line at North Nineveh in Southwest Pa.; the completion of an additional multi-well pad in Central Pa.; drilling a six-well pad in the Philippi Field in West Virginia; and CONSOL’s first Utica Shale multi-well pad that is located in Mahoning County, OH.
Marcellus Shale Dry Gas (CONSOL Energy-operated):
Southwest Pa.: During the first quarter, CONSOL drilled seven wells: the fourth and final well on the MOR 20 pad in the Morris Field in Greene County and the final six wells on the NV 36 pad in Washington County. The seven wells ranged in lateral lengths from 2,843 feet to 8,006 feet. Of particular note, 99.97% of the combined lateral lengths of the seven wells were drilled within a 10 foot target zone, within the lower Marcellus Shale. Completion and flowback results from the North Nineveh Field, which extends the successful Nineveh Field northward into Washington County, Pa., have started to come in at the end of the first quarter. Early results indicate that the North Nineveh wells will be as productive, if not more productive, per foot of lateral compared to the original Nineveh wells, which average 1.1 MMcf/d per 1000 feet of lateral during their first 60 days of production and 1.7 Bcfe expected ultimate recovery per 1000 feet of lateral. Also, some of the North Nineveh wells have the added advantage of minor condensate production. During the first quarter, five wells and 61 stages were completed on the NV 41 pad, and the eight-well NV 42 pad with 146 stages is currently underway. All of the North Nineveh Field wells will be immediately turned into the sales pipeline upon completion of flowback. Also, at least one frac crew will be continuously working in North Nineveh during the first three quarters of 2013 to complete the backlog of 5 pads from 2012, which were delayed due to obtaining centralized impoundment permits during the second half of 2012.
In Southwest Pa., CONSOL has one horizontal rig operating and plans to drill an additional 16 wells throughout the remainder of 2013.
Central Pa.: Within the Central Pa. district, CONSOL drilled all five wells during the first quarter at the Kuhns 3 pad in the Mamont Field, located in Westmoreland County. The lateral lengths ranged from 4,768 feet to 10,684 feet. No wells were completed in Central Pa. during the first quarter. Completion work is expected to begin late in the second quarter on the five Kuhns wells and on the four-well Bowers pad located in southern Jefferson County, which is located at the northern end of CONSOL’s Central Pa. leasehold.
CONSOL Energy does not currently have any horizontal rigs drilling in Central Pa.
Northern W.Va.: CONSOL did not drill any wells in West Virginia during the first quarter. One horizontal rig is currently mobilizing from Mamont Field to drill the six-well Philippi 13 pad in Barbour County. The Philippi 13 wells are expected to have an average lateral length of approximately 8,200 feet. After drilling the Philippi 13 pad, the company plans to drill a single well at the delineation pads in the Audra Field in southern Barbour County and the Century Field in northern Upshur County to test the productivity of CONSOL’s extensive leasehold between the Philippi Field and the Alton Field in southern Upshur County. CONSOL expects to begin the completion work for all eight wells in the third quarter.
Marcellus Shale Wet Gas (Noble Energy-operated):
In the wet gas portion of the Marcellus Shale, Noble Energy (NYSE: NBL) drilled thirteen wells during the first quarter. Twelve of the thirteen wells were drilled in Marshall County, W.Va.: the final well of the eleven-well WEB 4 pad; seven wells on the eleven-well SHL 8 pad; and four of the seven wells on the WFN 1 pad. Also, Noble Energy drilled one of the six wells on the NORM 1 pad located in Gilmer County.
Completion operations have commenced on the eleven-well WEB 4 pad where 106 of 228 frac stages, and five of the eleven wells, have been completed. Noble Energy expects the WEB 4 wells to be on-line by the end of the second quarter.
Noble Energy is currently operating three horizontal rigs and expects to add a fourth rig during the second quarter. Noble Energy expects to add two more rigs later in the year to support drilling a total of 85 wells in the Marcellus Shale wet gas area in 2013.
Ohio Utica Shale (CONSOL-operated):
In the Utica Shale joint venture with Hess Corporation, CONSOL Energy drilled the first two of three wells on the NBL 11 pad in Noble County: The Noble 11A and 11B with a lateral length of 6,236 feet and 5,986 feet, respectively. Drilling is ongoing at the Noble 11C well.
During the first quarter, completion work was finished at the MAH 2A well, located in Mahoning County, where the 2,785 foot lateral, with nine frac stages, tested at a 24-hour flow rate of 1.4 MMcf/d and 240 barrels of oil/day after a 60-day shut-in period. Also, the 7,568 foot TUSC 8A well in Tuscarawas County was stimulated with 24 stages and shut-in for 60-days for frac water dissipation. Flowback operations are expected to begin in late April and results will be reported at the end of the second quarter. CONSOL’s first multi-well pad in the Utica Shale was recently completed at the two-well MAH 7 pad where the 5,411 foot lateral MAH 7A well and 5,290 foot MAH 7C well were stimulated in 18 and 16 frac stages, respectively. Both wells are currently shut-in for frac water dissipation and flowback is expected to begin late in the second quarter.
CONSOL currently has two horizontal rigs drilling in the Utica; however, one rig will be released after drilling the third and final well at NBL 11, which is expected to take place within the month. Thereafter, CONSOL will operate one rig in the Utica to drill the three-well NBL 33 pad, followed by the three-well NBL 19 pad, and then the five-well NBL 18 pad, of which the first two wells are expected to be drilled in 2013. CONSOL expects to drill eleven wells, all in Noble County, during 2013.
Ohio Utica Shale (Hess-operated):
Our joint venture partner, Hess Corporation (NYSE: HES), drilled one well during the first quarter, the Cadiz A 1H-23 in Harrison County and is currently drilling JV wells at the Oxford A 2H-8 in Guernsey County and the Athens A 2H-24 in Harrison County.
Stimulation operations were completed at the 15 stage Jeffco 1H-6 well in Harrison County, which tested at 7.4 MMcf/d with flowing tubing pressure of 3,882 psi. The Cadiz A 1H-23 well was completed with 22 stages. Drillout and flowback operations are currently underway prior to a planned 90-day shut-in period for frac water dissipation.
In the Utica Shale, Hess finished the first quarter with two horizontal rigs operating on JV acreage and plans to drill 16 joint wells during 2013