2010 DUG Conference: Drilling to Hold Acreage and A Search for Oil

2010 Developing Unconventional Gas Conference (DUG)
March 30-31, Fort Worth. TX

I had the privilege of attending the 2010 Developing Unconventional Gas (DUG) Conference this past week in Fort Worth, Texas. For those of you wondering what “unconventional gas” means; simply put, it is a term used for the various gas shale plays that are spread across the United States. This was my second DUG rodeo, and this year’s conference was bigger and better attended than my first (2009). An estimated1000 industry professionals were in attendance to talk shale and share the latest trends and ideas with industry peers. Everyone from BP, CHK to the smaller independents were there. I even ran into a guy from the UK with a t-shirt on that read "Seeking shale advice". I will try and summarize some of the key ideas and information that is pertinent to you shalers out there in the paragraphs below.

Admittedly, I showed up to the conference a day early by accident. After driving to Fort Worth early Monday morning, I soon realized that Monday was the technical workshop day, not the primary DUG conference. I chastised myself for not looking at the conference agenda more closely, but figured perhaps I could gain some outside knowledge in certain areas I’m not too familiar with (I come from a land background in the business). After sitting through two or three of the technical sessions and having little to no idea what the geologist/ engineer types were talking about, I figured that my efforts were futile and I hit the road back to Dallas. Hence, I have nothing to report on day one.

Tuesday held the promise of the big show though. The Haynesville, Marcellus, Barnett, Eagleford, Aubrey McClendon, Dick Stoneburner; these were what everyone had come to hear about.

After grabbing a few breakfast burritos and a coffee at the Fort Worth Convention Center, I sat down to hear the opening speaker of the conference, a Mr. Richard Kolodziej, President, Natural Gas Vehicles for America, whose topic was “Driving Natural Gas Into the Future.”

NGVAmerica is a national organization dedicated to the development of a growing, sustainable and profitable market for vehicles powered by natural gas or hydrogen. NGVAmerica represents more than 100 companies interested in the promotion and use of natural gas and hydrogen as transportation fuels, including: engine, vehicle and equipment manufacturers fleet operators and service providers natural gas companies and environmental groups and government organizations. Richard was able to provide a national perspective and give an update on the growing number of OEM heavy duty suppliers.

Most companies involved in the natural gas industry realize the vital importance of increasing demand for natural gas in the future to keep business models economical in the shale plays. Exploration & Production (E&P) companies have done an outstanding job tapping into new gas reservoirs in these unconventional plays. However demand has lagged, which is why we have seen lower gas prices in the past 2 years.

Kolodziel shared with the audience that there has been some ground gained over the past year in terms of the future of NGV’s and there place in US industry. The government is finally beginning to recognize the value of NGV’s and natural gas. In 2009, the Federal Natural Gas Caucus was formed. This is the first Federal Caucus formed specifically to target promotion of natural gas in the US. In short, after 5-6 years of unprecedented growth in natural gas production by E&P companies, the folks in Washington seem to be finally waking up and smelling the coffee; realizing that perhaps, one of the key ingredients to weaning ourselves from Middle East imports might be sitting under our feet here in the US.

Next, Jen Snyder, Head of North American Gas Research, Wood Mackenzie, spoke on “The New Big Picture” of natural gas and shale plays in North America. Wood Mackenzie is a research and consultant group to many major independents in the petroleum industry.

Wood Mackenzie’s research has found that each respective shale play ranks differently in terms of the economics on gas wells. Here is how the shale plays stack up against each other in terms of the economic potential (#1 means most economical).

1. Marcellus & Barnett

2. Fayeteville

3. Haynesville
4. Woodford
5. Eagle Ford

6. Horn River (Canada)
7. Barnett (non-core)

8. Haynesville (non-core)

The next speaker was Michael Hall, Sr. Analyst & Vice President-Exploration & Production Research, Wells Fargo Securities, LLC. Highlighting his talk were the following evaluations of each of the unconventional plays:

Fayetville Shale: Steady as she goes

Woodford Shale: Improving Underdog
Haynesville Shale: Unsurpassed Growth Engine
Marcellus Shale: A full bore ramp is in progress
Eagle Ford Shale: QuicklyRising star

As time had progressed most of the shale plays are becoming more and more economical with drilling experience and innovation, however, one thing remains certain according to Mr. Hall in the long term economics of these gas shale plays:

“$4 gas won’t cut it.”

Olivier Lazare, VP of New Ventures and Business Development for Shell Upstream Americas, spoke on some of the new deals being cut in the shale plays by many of the large independents with majors from across the globe.

An example of this type of deal can be seen in Chesapeake’s deal with Total executed in 2009 in the Barnett. Essentially, a company like Total buys into CHK’s acreage position for up front cash and certain carried drilling interests. This is beneficial to CHK as it spreads out their risk and gives them cash to drill new wells. It is beneficial to Total, as they are able to learn the technologies needed to drill in unconventional areas which they can take back home in the years to come and see a return on their investment.

It appears there will be more and more of these deals popping up in the future, as many foreign companies are eager to learn what the pioneering American companies are doing to have so much success. On the flip side, the large American independents need the additional capital to execute their drilling programs with the massive amount of acreage they currently have under lease. It is a win-win most of the time for the groups involved.

On a side note, I also learned through his talk that Shell has recently made a deal with China to explore the shale plays of China. With this in view, I would not be surprised to see China getting more involved in our shale plays here in the US.

Next, Richard K. Stoneburner, President and COO of Petrohawk Energy Corporation and Tim Dove, President and COO of Pioneer Natural Resources talked about the Eagle Ford Shale with attendees.

Some of the highlights from Stoneburner’s talk include:

-Only a year ago Petrohawk discovered its “Hawekville Field” in South Texas

-3 years ago Petrohawk made its first shale acquisition in its KCS merger
-Today, Petrohawk has 31 TCF (Trillion Cubic Feet) in net risked resource potential.

Both CEO’s touted the Eagleford as being “drill friendly” with a good infrastructure already in place, making it an attractive area to drill for operators.They feel the Eagle Ford has
a great deal of potential in the years to come.

After their formal talk, I followed the pair into the press room for some follow up questions. I asked Mr. Stoneburner if Petrohawk’s strategy had changed in the past year regarding the choke sizes they were using in the Haynesville. He told me that they were finding that choking wells back to certain levels could actually increase overall Estimated Ultimate recoveries (EUR’s) in units. This strategy appears to be working well for groups like Petrohawk and Chesapeake in the Haynesville.

After lunch break, Chesapeake Energy Corp.’s CEO, Aubrey McClendon, sat down with Hart Publishing’s chief editor Leslie Haines, for a "Shale-Side" Chat.

McClendon’s interview had the following highlights:

-Rig Counts today reflect $6 gas, not $4 gas

-Hedging has been a very important strategy for CHK in keeping profits healthy

-McClendon feels that about one-half of the drilling we are seeing now in the shale plays reflects the need to hold acreage

-When asked if CHK had plans of laying down rigs, McClendon said they planned on moving 20 rigs to some of their newer oily areas, not lay them down

-McClendon admitted that CHK has become active in the Rocky Mountains area to look for oil.

-CHK appears ready to move into more oil rich areas to help hedge against
gas prices in the future

-He stated that currently, economics compel companies to immediately look for oil as opposed to gas

-Companies can take the technology learned from the gas shale basins and use them in some of the new oil shale basins

-McClendon talked about CHK’s partnerships formed with Plains, BP, StatOil and Total. Was quoted as saying “You can’t have too many rich friends…and these guys are rich.” Which

got a big laugh out of the crowd

-McClendon said that currently the Granite Wash play (Texas Panhandle) is the biggest “return” play in terms of its economics. CHK has over 190,000 acres in Washita County and moving 10-16 rigs into the Granite Wash.

-Next, McClendon talked about Natural Gas Exploration Company’s relationship with Utility Executives.

-He believes this is a key area in creating demand. They are in talks with utility companies regarding building more and more natural gas powered generations plants.

-He stated “Natural Gas is the crack cocaine of the power industry...” And he got a good laugh when he said “to compare coal to heroin would probably be an insult to heroin.”

After his talk, Mr. McClendon then headed back to the DUG press room and went on a live interview with CNBC. We were not able to sit in for this, but watched most of the live broadcast on televisions outside the main hall. The CNBC anchor asked a few standard questions, and seemed a bit out of touch with what is actually happening in the petroleum industry.

The remainder of Tuesday’s talks were filled with more technical data and drilling techniques across the various shale plays.

Wednesday morning’s chat started off with an Operator Spotlight on the Haynesville Shale. Gerry Blackshear, Geosciences Manager at Comstock Resources Inc. and Hal Hickey, Vice President and Chief Operating Officer of EXCO Resources, Inc. spoke on their company’s positions in the Haynesville Shale. EXCO has had tremendous success in its position in the Haynesville in Louisiana, with average IP’s coming in around 23 MCF. Comstock is having similar success in its areas, which include some of the more southern portions of the play on the LA side.

Mr. Hickey and Mr. Blackshear sat down in the press room to answer questions for the public.

Mr. Hickey was asked about EXCO's current spacing strategy and he stated that they “are sticking to 80 acres spacing in their Louisiana Units at this time.”

He spoke on how
EXCO has been successful using new “micro frac” techniques which allow for a better fracture of the rock formation.

When asked if EXCO is still drilling to try and hold acreage, Mr. Hickey said “We are
fortunate to have all of our legacy acreage effectively held. We are nearly past that mode. We are in a mode to pad drill.”

When asked “Given low gas prices, can, or should you relax?” Hickey stated “In areas where we are meeting our minimum rate of return, we’ll keep drilling.”

Question: “Is there a gas price that would be a trigger point to shut down operations?”

Hickey: “Depends on which part of the play you are talking about. In our Harrison County acreage, I think you need to have at least $5 gas to make it work. In DeSoto Parish, low $3 gas still works for us.”

Question: “Gas prices have been hammered lately, why are companies still growing so much in terms in their production (up to a BCF a day in the industry)?

Hickey: “The market tends to correct itself. Companies will do what makes economic sense at the time.”

Question to Mr. Blackshear: “Why is Comstock still only booking 5 BCF per well in the Haynesville? Isn’t that a bit conservative?”

Blackshear: “We have always
wanted to stay conservative on our ER’s (Estimated Reserves)

Question: “How much are current costs with drilling?

Hickey: “Most wells (in LA) are $4.5-$5 million for dry hole costs. And it is about the same amount ($5 million) for the completion…..$9.5-$10 million is what our most recent costs have been in DeSoto Parish. At current gas prices, it does make it tough.”

After the Q&A session was over, I approached Mr. Hickey and asked him if in any of their drilling in DeSoto Parish they had seen any oil shows in any of the various depths.
“It is dry as a bone, nothing but dry gas is what we have seen. I wish it were otherwise.”

After a few more talks on plays such as the Utica Shale, more on the Granite Wash and the Woodford Shale in Oklahoma, the day ended with Dave Hager, Executive Vice President of Exploration & Production at Devon Energy Corporation answering a few questions over lunch.

When asked about Devon’s Kardell well in San Augustine County, Texas, Hager said that they believe the Kardell and wells in the vicinity will have a 6 BCF EUR potential. He would not divulge what the rate the Kardell was currently producing, but that it was producing well, though it had dropped off quite a bit from its initial production.

After sitting through the conference and hearing all there was to say I believe the following points were the overarching themes for the E&P companies in the near future in the unconventional plays and the natural gas industry:

-We must continue to create further demand for natural gas. Companies are moving forward to do this. Chesapeake appears to be the front runner in this push.

-Natural gas prices may be trending downward in coming months with warmer weather approaching. Though, no one can be sure.

-Companies that have been focusing on unconventional gas shale plays in the past few years are starting to look for oil as the economics work better with current market conditions.

-Companies are going to continue to bring in large partners to help assist them in their drilling programs in the unconventional plays.

-The future looks bright for finding new unconventional plays across the US in other areas besides what is known now.

Due to time constraints, I am not able to share all that went on at the conference. Hopefully, I have included information that is pertinent to what you shalers want to know. Lets keep pushing for greater demand in natural gas. Best of luck in 2010. I’ve got to get back to work!

Best Regards,

Austin Eudaly


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Tags: 2010, Conference, DUG, gas, play, shale, unconventional

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Comment by Austin Eudaly on April 22, 2010 at 13:30
LO1GT (Little 1st Grade Teacher),

XTO was not mentioned much. However, they are a major player in the Haynesville Shale. From memory, Shelby County was not mentioned, but there is some wells being drilled in certain parts of the county now. XTO has a few rigs up and running currently in Shelby.
Comment by Bob Clarkson on April 15, 2010 at 16:33
We too attended this though only the expo part of it. Found it to be a waste of money and time! The exhibits hall was small. It was much ado about nothing! When I contacted them with my concerns and asked for a refund they gave me some propoganda about several TV shows interviewing them. Like I care. Needless to say I won't go back!
Comment by little ole 1st grade teacher on April 15, 2010 at 16:13
Was XTO Energy mentioned at all?
And was Shelby County which is in the Haynesville Shale Play mentioned?
Comment by Austin Eudaly on April 14, 2010 at 8:38
VSC, Im afraid that Hart Publishing won't allow anyone that did not attend the conference to view the slides from the presentations. They were pretty firm on that.
Comment by Bobi Carr ("parker") on April 14, 2010 at 1:47
Great job again Austin.
Comment by VSC DeSoto South on April 13, 2010 at 17:18
Thank you. Great reporting.
is there anyway to see the presentations from this conference online, without having been an attendee?
Comment by j garrett on April 13, 2010 at 8:12
Good job. Thanks!
Comment by Austin Eudaly on April 12, 2010 at 23:33
Thanks for the clarification Les. I learn something new about the business every day.
Comment by Les B on April 12, 2010 at 22:35
Austin, thanks for the report. Just one small clarification. Not all unconventional gas is shale gas. Although shale is getting all the attention, unconventional gas includes coalbed methane (CBM) and tight sand gas.
Comment by Jack Blake on April 12, 2010 at 19:36
Jack Blake says thank you for writing the informative report for the shalers.
Long live the HS cried Jack Blake!!!

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