CNX Gas Corporation, because of its extensive coalbed methane growth, has had the luxury of being able to pursue a “fast follower” strategy with regard to the development of its 230,000 acres with Marcellus Shale potential. This strategy has proven very effective because as of July 2009, CNX Gas had flowing production from the Marcellus Shale of 16.3 MMcf per day.
This production is from eight horizontal shale wells, all of which have been drilled and brought online since October 2008. Total capital investment, including leasehold acquisitions, is estimated at less than $100 million.
CNX Gas has such a low initial capital outlay because the rights to about 161,000 acres with Marcellus Shale potential were obtained by deed from CONSOL Energy, which continues to own 83.3% of CNX Gas. This deeded acreage, because it is owned in fee, means that in addition to having no lease payments, CNX Gas has no drilling commitments, and does not pay a one-eighth royalty.
This means that, all other things being equal, CNX Gas should have very favorable economics relative to other Marcellus Shale producers.
CNX Gas was able to jump-start its horizontal Marcellus Shale program for two very important reasons. First, the company drilled over 200 horizontal coalbed methane wells before it drilled its first horizontal Marcellus Shale well. In effect, CNX Gas was “practicing” for the shale, when first drilling horizontally for coalbed methane. With the coal seam being only six feet thick, keeping the drill bit within an eighty-foot thick shale formation was not all that challenging.
Second, the importance of having an operational footprint in place can’t be over-emphasized. CNX Gas is drilling its Marcellus Shale acreage directly beneath where it’s drilling for coalbed methane in southwestern Pennsylvania. The same people and infrastructure are being used for both. This means that after a Marcellus Shale well is hydraulically fractured, it can be turned online in a matter of days, once the frac fluids have been retrieved. Since the shale gas is at a higher pressure than the coalbed methane, the two are blended after the coalbed methane undergoes the first stage of compression. The blending also eliminates the need to process the lower-Btu coalbed methane gas.
CNX Gas is also fortunate in that it is drilling in Greene County, Pa., where gas from the Marcellus Shale has (so far) lacked the heavier hydrocarbons – the butanes and propanes – that producers in some other areas have had to strip from their flowstreams. This means that CNX Gas has one fewer link in the chain to get gas from the wellhead to the interstate pipeline. It also reduces the company’s costs relative to some other producers.
The company has contracted for take-away capacity in southwestern Pennsylvania of about 279 MMcf, which will come on in stages, to coincide with potential production. This capacity will also handle the company’s coalbed methane production in southwestern Pennsylvania, which is currently about 40 MMcf per day.
CNX Gas has continued to reduce its drilling costs for its horizontal Marcellus Shale wells. The first well was drilled for over $6 million. The second and third wells cost around $4.7 - $4.8 million, while the latest well cost less than $3.5 million.
The company type curve for horizontal Marcellus Shale wells had shown expected peak production rates (for 24 hours) of 3.0 MMcf, and EURs of 3.0 Bcf. The first eight wells have averaged peak production rates of 4.1 MMcf over a 24-hour period. Based on peak and cumulative production, CNX Gas revised its expected EURs to 3.5 Bcf, pending a thorough review at year-end 2009.
Perhaps the most interesting statistic is the cumulative production from the first horizontal well. It came online on October 2, 2008. Through July 13, it had produced 681 MMcf.
As a result of conducting microseismic work in early 2009, the company believes –at least in Greene County, Pa. - that it will be able to space its horizontal wells on 40 acres. This is a huge change in expectations from a year ago when it was thought that one well might drain 160 acres.
CNX Gas expects to have at least one horizontal rig and two top-hole rigs in use for the remainder of 2009. The company expects to drill 6-8 additional horizontal Marcellus Shale wells during the second half of this year .
In the Chattanooga Shale, in Tennessee, CNX Gas ended 2008 with proved reserves of 11 Bcf, probable and possible reserves of 32 Bcf, and net unrisked resources of 1.1-2.5 Tcf. During 2009, CNX Gas will be testing a nine-stage frac in the shale. The goal is to make this play economic at $4.00 gas prices.
No significant activity in the other shale or conventional acreage held by CNX Gas is expected during the second half of 2009.