Chesapeake Energy in talks on Marcellus stake Tue Sep 2, 2008 11:40pm BST
By Matt Daily
NEW YORK (Reuters) - Chesapeake Energy Co (CHK.N: Quote, Profile,
Research) is in discussions with "more than one and less than a handful" of companies interested in buying a stake in its Marcellus shale properties, CEO Aubrey McClendon said on Tuesday.
Chesapeake, which has said it became the largest U.S. natural gas producer during the second quarter, has said it wanted to sell part of its holdings in the shale plays, which are believed to hold vast quantities of natural gas.
McClendon, in an interview with Reuters, declined to comment on whether state-run China National Petroleum Co was among the potential buyers. Chinese media has reported that the company was interested in partnering with Chesapeake.
"We're happy to talk to anyone around the world who is interested in the U.S. gas business," he said, referring to comments he made earlier in the day to investors that the buyer would be a non-U.S. company.
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So..while Chesapeake is the biggest producer, it is not the largest "DRILLER". Chesapeake buys many producing wells because it is in the business of selling gas.
.................... Ken Balliet , Natural Gas Resource Development
(Tech Connections Column, February 2008, American Oil and Gas Reporter)
An early January workshop in Morgantown, W.V., zeroed in on the Marcellus Shale-just one of the Devonian black shales in the Appalachian Basin. Terry Engelder of Pennsylvania State University and Gary Lash with State University of New York College at Fredonia, presented insights from their decades of work on Devonian-age shales in the Appalachian Basin, while focusing more on the geological aspect than on drilling, completion and fracturing techniques.
Why is interest in the Marcellus so strong? For starters, the play covers an area at least four times as large as the productive Barnett Shale, and its attributes compare favorably with other successful North American shale plays. These favorable attributes include:
- Continuous reservoir over a large enough area to contain a potential resource equivalent to a supergiant gas field; • Up to 10 percent total organic carbon (TOC);
- Adequate thermal maturity; • Significant gas-in-place (20 billion-100 billion cubic feet a section); • Thickness (50-200 feet) at a reasonable depth (4,5008,500 feet);
- Favorable mineralogy (The Marcellus is a lower-density rock with more porosity, which would be filled with more free gas.); and
- Overpressured, at least in the northern part. Some sources estimate 337 trillion-516 trillion cubic feet of gas in place. A mere 10 percent recovery rate equates to 34 Tcf52 Tcf of gas. This would make the Marcellus a giant field located close to market with an existing transportation infrastructure.
Hold on to your hat! Chesapeake is selling out its interest to...who?
And Range announced that is is putting new lease on "hold" until they get a handle on their lease position. Maybe till next year........Ken Balliet
This was great info.
Did anyone see where CHK just sold some of their Fayetteville lease
rights to BP. 135,000 acres of rights for $1.9 billion. There is a
lot of zeros here but I think that works out to be about $14,000 per acre. And, while it was hard to tell from the brief news clip, it appears CHK keeps 25% of the production. If the Marcellus play is even half as good, why are people leasing at $2,800 and 17%? No opinion intended just an observation.
LMC
The market value of anything is the price at which a willing buyer and seller agree to exchange the transaction. We have a long way to go yet with this play to get those prices....but we will get there.
ken balliet
http://blogs.oilandgasinvestor.com/steve/files/2008/07/shaletoshiningshale.pdf
Says kljpgh:
This document is a must-read. It analyzes 6 major shale gas plays from the viewpoint of "should investors invest money in the gas company".
This is not from the perspective of us local landowners.
Deutsche Bank says "the Marcellus Shale appears to offer the most attractive range of IRR's [initial return rate] on a type-well basis (72-100%), benefitting from broadly lower royalties and premium natural gas pricing given the play's proximity to populous consuming markets."
They report the estimated operating cost per Mcf in the Marcellus play as $0.90, lower than all other plays. This is consistent with what Range Resources stated in its presentation at the 2008 Oil and Gas Conference in Denver last week. Range also reported last week that its production from Marcellus wells is greater than expecetd, being around
4.1-4.7 MMcf per day.The Deutsche Bank report, released last month on
22 July, indicated the estimate lower at 3.0 MMcf per day. Thus the returns will be even greater should the output remain in the 4.1-4.7 MMcf/d or greater.
The important point to note derives from the statement above "benefitting from broadly lower royalties ". On page 11 of the document, you will find a summary of the outputs and expenses of the 6 major shale regions, 4 of which have been in development for sometime.
Note that the going rate for leasing land in those regions is $5000 to $25000 per acre, with royalties ranging 13% to 27%, but favoring the higher 25-27% values. No wonder the cost of production is cheaper in the Marcellus --- landowners are giving their land away here in PA!!
I do! I really do! But unfortunately, I think it’s a train and some of us are about to get run over. No two ways about it. The expansion for natural gas continues to accelerete, and production successes at wells across the northeast this summer will push that train even faster. I see it coming over my shoulder. Do you see it? Reports of lease rental rates escalating, more new companies flocking into the play, press releases by companies reporting good success in Marcellus, they all point to the escalation of all the impacts that this Play will bring, both good and bad. Landowners continue to react to this information, drawn to the hope of getting the best deal like moths to a bright beacon on a warm summers night. Except it isn’t a beacon… it’s a train! I keep thinking of the scene in “Ants” where he(an ant) warns the flies “don’t look into the light”, just as they fly into the bug sapper and are instantly vaporized with a sharp “snap”.
Don’t look into the light and you will see the train! The exploration and drilling for natural gas will be with us, for better or worse, forever. The train of rental rates is only going to gather speed as this play matures and core areas are mapped out. If you want to hop on the train at this point in the play, great! But understand that the train is going to go much faster . The Barnett Shale play in Texas, very similar to the Marcellus Shale, has rental rates that exceed $15,000/acre and over 25% royalty with 15 years experience into the Play. Are we there yet? Absolutely not! Will we get there? Who knows? I think the biggest question is “when” will we get there. But that is the potential, and you need to recognize the very early stage we are in. Don’t “react” to each rumor of increased rental prices or royalties as separate incredible unforeseen events. Understand the timeline we are on. Manage your leasehold to best ride the train for your situation and you will be in the drivers seat, instead of staring at the light waiting to get sapped.
If you read the prior posts to this blog, one thing I’ve been trying to impart to folks is that this Play is still “highly speculative” in the eyes of the energy companies. We common folk find this hard to believe when the energy companies are handing out millions of dollars to landowners covering over half of Pennsylvania, but it is nonetheless a fact that you must incorporate into your thinking when evaluating a lease. I also said that this summer many wells will be drilled and much more will be learned about: 1) the resource and 2) previously un-quantifiable inputs and other production factors. The result will be sudden changes in leases rates and energy company investments in infrastructure and exploration.
Well, a big step in this direction came July 11th when Range Resources issued a press release from its corporate office as follows:
“John Pinkerton, Range's Chairman and CEO, said, "With more than 100 wells drilled in the Marcellus Shale, including 20 horizontal wells, we are extremely pleased with our progress to date. We believe we have developed a solid understanding of the play's technical aspects and are moving from the testing phase to the development stage.”
That is very good for landowners all across the board no matter what company you may be working with. As the saying goes, “a rising tide floats all boats”. I also applaud Range Resources for providing important information landowners and community leaders to allow them to plan and make decisions that will affect all our communities. The entire release can be found here, http://www.rangeresources.com and I think it is “must read” for any landowner in the Marcellus Play.
The fact that they released this information is another positive step in not only helping to remove some of the “speculation” but also might be the beginning of what I would hope would be a trend of open and frank communications between gas companies and the landowners of Pennsylvania.
Let me highlight some other very important points in the press release. Range is very pleased with “average peak initial production rate”.
“Range has announced results for 15 horizontal wells. The last 10 reported horizontal wells had an average peak initial rate of 4.1 Mmcfe per day…Based on the results to date, Range estimates that the gross average reserves per horizontal well are in the range of 3 to 4 Bcfe.”
Since the Play began, estimates of well production have been kicked around all over the board. Energy companies were conservative, and our team was told that 1to 2 Mmcfe (million cubic feet equivalents) was realistic. So that’s where we started on the production curve. Now, we can start at 4.0 Mmfe and use that to calculate potential royalties. Keep in mind that production drops off sharply in the shale plays…but using the royalty calculator on our website (http://naturalgas.psu.edu) you can estimate what that change will mean for royalty owners. The difference is significant.
What about development? How fast will they get to my drilling my well? Here’s what Range says:
“Currently, Range has three rigs operating in the Marcellus play and plans to drill 40 horizontal wells in 2008. Later this year, Range expects to add two fit-for-purpose rigs. Preliminary planning for 2009 includes increasing to eight rigs. Wells are currently being drilled, completed and tested, after which they are shut-in awaiting pipeline build out. The initial phase of the pipeline and processing infrastructure is expected to be completed in first quarter 2009. Production start up will be phased in, but is expected to reach 30 Mmcf per day in the first quarter of 2009. As additional wells are connected and drilled, production is anticipated to increase throughout 2009.”
Quote “Forty wells in 2009”. Ok…with a dozen other companies drilling that would be roughly about 500 wells next year in PA. With how many landowners leased and waiting for a well? Tens of thousands! So prepare to lease again when your current lease expires.
Where is Range’s “core” drilling area?
“Range estimates gas in place in the core SW and NE areas will range from 70 to 150 Bcf per section with variation attributable to thickness, depth, porosity, reservoir pressure and total organic carbon of the shales. Using geological, engineering and production data obtained from the wells drilled throughout the Marcellus fairway, Range has revised upward its estimate of the unrisked reserve potential of its leasehold position to 15 to 22 Tcfe. Of this total, 10 to 15 Tcf are located in the SW, with the remainder in the NE.” (Note: tcfe=trillion cubic feet equivalent)
Keep in mind that this is only a report from only one company, and a report crafted for public consumption. Each company seems to forming its own “core” geographical area in the state. This makes it even more important for landowners to market their leasehold to as many companies as they can to find the top competitor for their lease.
A word of caution: This press release is still not a definitive all encompassing green light by any stretch of the imagination, but it is good news and very encouraging nonetheless for royalty owners and leaseholder. Stay tuned for more as the Play unfolds. Please post your comments!
…………………posted on “The Wellbore Log” by Ken Balliet,
Natural Gas Resource Development program
Penn State Cooperative Extension
http://www.personal.psu.edu/klb26/blogs/the_wellbore_log/
The number one question I get from landowners on most days is pretty simple. It usually boils down to something like, “We have been contacted by a gas company offering XXX dollars per acre and xx% royalty. Is this a good deal? Or, similarly, we have NOT been contacted but are in the Marcellus Play, How do I find out if they are interested in my land?
Sorry, there is no easy answer to this...and only you can answer it. Why? It’s important to understand that lease rates vary greatly from company to company, area to area, and even time to time! Where one company considers their prime lease area, others companies may not even have an interest. When you look at a map of the Marcellus Shale, the initial area of interest is well outlined; BUT, I am amazed to hear landowners from outside that area call me, and have 4 or 5 quotes from gas companies! So the only good advice is, no matter where you are, market your leasehold properly, and you should sleep easier at night knowing you did your best.
How do I market my leasehold to get the most benefit?
1. Let everyone know you are marketing your leasehold. Contact as many energy companies that actually drill wells as you can. The end result of your efforts is to have a well drilled on your property. Dealing with a company that is not pulling drilling permits usually means they will flip your lease to one that will, and pick up a nice profit. Why deal with a middleman? A list of companies can be found right here at: http://naturalgaslease.pbwiki.com
2. Compare the terms that matter most to you. Don’t just compare dollars. Many other provisions that deal with road and pipeline locations, seeding and plantings, gates and privacy will minimize the impact on your property, give you peace of mind, and is worth money. Many times it’s the unquantifiable factors which make the basis of a good decision. How amenable is the company to resolving your concerns? What is your gut feeling about the company? Listen to it. Find a company that fits you. Find a good attorney on that website as well to look after your interest and help you navigate the intricacies of a lease.
3. Evaluate your terms realistically. Many times your rental rate may not come up to those you’ve read about. Are they trying to scam you? No. Usually not. The amount of dollars a gas company will offer is based on many factors. Areas that are unproven or geologically less desirable will command less of a price. As the play matures, meaning “time marches on”, the characteristics and production potential of geographical areas will increase and risk will decrease, so rental rates will trend up for some areas , but also go down for others.
4. Keep the length of the primary term as short as possible. Avoid extensions, they are never in your favor. Why? Because when it comes time for renewal, the energy company is holding all the cards. If the rental rates are higher, they renew at the old low rate and gain; if the rental rate is lower, they just exercise their option to NOT renew the lease. In either case, you lose.
5. Plan for a well or the next lease negotiation now. If you are still in the Play, you will need good information to deal with these two events at some point in the future. If they contact you to have a well drilled, great! You are now a royalty owner. With only a couple dozen of drilling rigs in PA, there is a good probability that the tens of thousands of leases currently in existence will not be drilled in the next 5 or even 10 years. That means that those folks can market their lease again. The other good news is that as the play matures, the price per acre should continue to go up, IF the resource performs as predicted. So when you re-negotiate your next lease, it could be much higher than those you see today. That would be good news for those of us who leased last year before the current bump up in rates.
Bottom line! Market your leasehold to get the benefits your value. Expand your knowledge about the industry. Keep up-to-date on issues, especially severance taxes, wellhead taxes, and a host of regulations and assessments that will impact the profitability of the play; and hence, your royalty position. Most of all, look at this play in the scope of the long term, not one isolated event.
Good Luck in "The Play in PA"................................Ken Balliet
During a discussion with several executives of a major energy company in the Marcellus Play they mention to me that it was important for landowners to understand that all this activity so far is VERY speculative. They correctly cite the fact that there are no Marcellus wells producing at the moment so the production characteristics of this play are pretty much an unknown. Yes, the relatively few wells drilled to date have been flared and there is an increasing amount of data available to these companies upon which to base their financial interest, but none have been connected to a pipeline and allowed to produce solid production data. This one company could drill up to 50 wells to see IF the play will be a profitable investment. I told them that for a landowner who receives a substantial check of $400,000, or even much less, this play is NOT speculation. To them it is unfathomable that so much money could be invested and then perhaps walk away.
This point illuminates the differences of the mindset between the Lessor and the Lessee when it comes to risk! It is critically important for landowners to have a REALISTIC understanding of the energy company's point of view if they are to accurately evaluate their risk as they negotiate leases now and in the future. They need to understand that as this play matures their risk of not having a lease in the future will definitely increase. Why? Because there are dozens of factors that will come into play as energy companies evaluate where and how much they will invest in this resource. If the Marcellus is like the Barnett Play, areas of the play will differ geologically and yield less volumes of gas. Some areas will be difficult to drill or service with pipelines. Extraction issues such as road access and bonding, water usage permits, and even the price of natural gas on the futures market will play a role in the dynamics of this play.
Developmental risk is just beginning to be assessed. For the energy companies, Pennsylvania is a unknown quantity because we do not have the infrastructure, the governmental organizations, and the established regulations to handle all the issues that are coming our way with this opportunity. These will all have to be created and developed as we go, each side fighting to get a leg up on the other. Already the power struggles have begun between regulatory agencies to see who will control vital resources and therefore get a bigger slice of the budget. Who will provide the money for all the inspectors, administrators and clerks needed to support all the regulatory activity? Certainly not the tax payers who do not have a well. Royalty owners, landowners with active wells, will be paying the bill in the future. Severance taxes on well production, wellhead fees and pipeline taxes are just a few of the ways local and state government will fund all the planning and regulation needed to protect stakeholder interests. How fast this all shakes out and its impact on gas production and profitability will be looked at closely by these companies and compared with alternative drilling sites around the country. There are several other black oil shale plays heating up around the country just like the Marcellus Play that energy companies are looking at as well.
The bottom line is, if you are a lessor, keep an eye on what is happening in your community from the energy company’s point of view. Their risk is your risk. Don’t be fooled into thinking that this is a done deal by any stretch of the imagination. We are just getting started down the road and there are lots of bumps and potholes to negotiate! If you have not signed a lease should you go out and sign with the first company you find? Absolutely not! But neither should you assume that what you see now in the play will remain for any length of time beyond today. Good news or bad news is on its way and it will play a large part in determining where we go from here.
Comments? Let me to hear from you.
..................Ken Balliet
Welcome
This is the first posting to my new blog called The Wellbore Log.
These are truly exciting times here in Pennsylvania. News about planned wells, leasing activity, and hundreds of questions from landowners keep coming into the office. Keeping up with it all keeps me busy many hours past a normal day, even for Extension! The web-site http://naturalgaslease.pbwiki.com is doing a great job getting information out to landowners who are connected to the net. But I've always felt that we've missed a personal element to the site. One that communicates not just the "facts" about the Marcellus Shale Play, but the pulse, the feel, the attitudes, the opportunities, and the challenges our communities will be facing for the foreseeable future. This blog will be my vehicle to reach out to you with current happenings, discussion, and hopefully a little wit to help you become, and stay connected.
The Wellbore Log is aptly named because 1) A well bore is the path a drill head takes thought the earth to reach its ultimate destination , and 2) a "log" is a record of an event or a series of events. The wellbore Log is a record of where we are in the exploration process, It is a record of what we have passed throught to get here. It is a record of what is happening around us as we travel down the "path" or this event.
So, welcome again! And hang on cause this is going to be a great ride!
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