COALBED METHANE

Coalbed methane (CBM) has earned its place as an integral part of the nation's natural gas supply. This year, CBM plays will produce 4.7 billion cubic feet (Bcf) of gas per day, accounting for more than 9% of total U.S. gas production, estimates Jefferies & Co. Inc. Although the phenomenal rate of production growth that CBM has posted since the early 1990s is slowing, its overall production will swell by about 2% per year for the next several years. Jefferies predicts that gas production from CBM wells in the U.S. will rise to 4.8 Bcf per day in 2005 and to 4.9 Bcf in 2006. More than half of the nation's CBM production flows from the San Juan Basin in New Mexico and Colorado, the granddaddy of all CBM basins. Already, some 4,000 wells have made more than 10 trillion cubic feet (Tcf) of gas from the San Juan, far and away the premier CBM-producing basin in the world. Nonetheless, daily CBM production peaked in the San Juan in 1999 at 2.7 million cubic feet. This year, some 2.5 million a day is coming from the basin, split almost evenly between the Colorado side and the New Mexico side. Although production is declining, the slope of that decline is flattening. Operators are battling production fall-off with continued infill drilling in the Fruitland coal trend and ongoing efforts to refine drilling, completion and production operations. Unproven potential does still exist in such zones as the Menafee coalbeds on the basin's southern flank, which are a target of a joint venture between Magnum Hunter and CDX Gas LLC. These companies, both based in Dallas, are working to develop a new play using a patented horizontal-drilling technology developed by CDX and that has been remarkably successful in some other basins. Regardless of these longer-term efforts, San Juan CBM production is projected to drop to 2.4 million cubic feet per day in 2005, according to Jefferies analyst Frank Bracken. Although the Ferron play in Utah's Uinta Basin is not of the scale of the San Juan, this is another CBM area that is on decline. Following a surge of drilling, daily production from this fairly restricted trend peaked at 283 million cubic feet in 2002. More than 750 wells have already been drilled in the Ferron, but projected activity levels will not be sufficient to offset anticipated declines. Anadarko Petroleum, operator of Drunkard's Wash and Helper fields, drilled just nine Ferron wells in 2003. Going forward, production is expected to average 264 million per day this year, and to fall to 245 million in 2006. Alabama's Black Warrior is another long-established CBM basin, and it has nearly reached the limits of its productive capacity. Altogether, CBM wells in the Alabama basin have contributed 1.5 Tcf to the nation's gas supply. Since the mid-1990s, a dozen fields have been steadily making between 300- and 320 million cubic feet of gas per day. Black Warrior daily production will rise a bit to around 332 million at the end of this year, up 3% from 2003, predicts Bracken. This is mainly due to some 300 infill wells that were drilled in the basin last year. High gas prices of late have also encouraged operators to try recompleting several seams in a single wellbore, and to experiment with stimulation treatments. Nonetheless, volumes will begin to drop by 2006. With declines in the Ferron play added to falling production levels in the workhorse San Juan, and little help from output in the Black Warrior, any overall growth in CBM production must come from other areas. Powder River Basin Wyoming's Powder River Basin offers the nation the best opportunity for substantially higher levels of CBM production, although these increases will not match the hypersonic pace of growth that characterized basin CBM during the last five years. The CBM play in the Powder River is vast, covering an area roughly 100 miles long by 60 miles wide. Some 12,100 wells are currently producing 940 million cubic feet per day, and just since 1997 the basin has produced more than 1.2 Tcf of gas. Nearly 90% of that production has come from the shallow Wyodak and equivalent coals. This production is maturing, however. Wyodak wells produced 3% less gas in the last half of 2003 than in 2002, Bracken notes. Lately, attention has also focused on reserve restatements in the Wyodak play. Operators have begun to encounter problems including unexpected pressure declines and interference from offset production. This February, Denver-based Western Gas Resources announced reserve revisions of 123 Bcf, primarily related to undrilled Wyodak locations. Another issue involved a shift in the accepted methods of Wyodak reserve calculations from adsorbed isotherm data to desorbed gas-content values. This was driven by the realization that the Wyodak is not fully saturated with gas. Emphasis in the Powder River is now shifting to the younger but deeper Big George coal. Presently, some 121 million cubic feet of gas per day is being produced from Big George developments that span a 40-mile-long trend west of the Wyodak fairway. Western Gas plans to drill 800 wells in the Powder River Basin this year, and 500 of these will target the Big George play, according to Peter Dea, president and chief executive officer. "This is exciting coal, twice as thick as the Wyodak. It has twice the gas content and covers a little broader area than the Wyodak, and it has comparable permeability," he said at the IPAA's recent investment symposium. Western Gas, Anadarko Petroleum, Devon Energy, Yates Petroleum and Marathon Oil have all established production in the Big George. Western Gas is producing 45 million net cubic feet per day from the emerging zone; its All Night Creek area is making 29 million per day, and its Kingsbury Creek, 10 million per day. The Big George has been challenging however, both from a technical and a regulatory standpoint. This coal requires a long dewatering period. And, mineral rights throughout much of the prospective area are federally owned. The Bureau of Land Management did not issue drilling permits for a long period while a basin-wide environmental impact statement (EIS) was in progress. Since the EIS was completed, the pace of permitting has gradually picked up. Western Gas has received 347 federal well permits since the third quarter of 2003. According to the Coalbed Natural Gas Report, by mid-March of this year BLM's Buffalo Field office had issued 1,400 permits for CBM wells on federal lands in the basin. Indeed, the agency now plans to issue 3,000 permits per year, and is working on a streamlined process that should enable it to issue permits in 46 days. Work is ongoing in the Wyodak play. One example is Riverton, Wyoming-based U.S. Energy Corp., which purchased 247 wells in the original CBM fairway near Gillette in January. The company, working through its Rocky Mountain Gas Inc. (RMG) subsidiary, acquired gross daily production of 6 million cubic feet of gas, a gathering system and 50,000 net acres of fee minerals. "On our new Gillette North and Gillette South properties, we've been enhancing wells and adding equipment to the gathering system," says Mark Larsen, RMG president. The company has installed vortex tools to flush the gathering system, and added liquid rings on the pod buildings to create vacuums on the wells at Gillette North. In addition, the company is planning to look at the thinner, deeper coals that lie beneath the Wyodak in both its Gillette-area properties. "We've identified two deeper coals under our properties, the Moyer and Danner, at depths between 850 and 1,100 feet. We think we can test these quite economically using the existing Wyodak infrastructure." Additionally, fee acreage RMG picked up in the transaction lies south of the Wyodak fairway, in southern Campbell and northern Converse counties, where the Anderson and Canyon coals are prospective. Operators are also busy in the split-coal country to the north of the traditional fairway. This is an area that Pinnacle Gas Resources Inc., a private firm based in Sheridan, Wyoming, is targeting. The company, formed last year, operates close to 375 CBM wells. In 2003, it drilled 134 wells, mainly in northwestern Campbell County. This year, it is running three rigs and plans to add up to two more to drill 200 wells, mainly in its Bobcat project area. The company is developing two types of wells: one that targets the Wall and Pawnee coals, at depths between 700 and 800 feet, and a shallower twin that taps the Canyon and Cook coals, which occur at depths between 400 and 500 feet. "This approach reduces the number of wells in a given pod," says Peter Schoonmaker, Pinnacle chief executive officer. "We have less surface impact and we recover an equal amount of gas at quicker rates." The technical challenge is to complete two individual zones in a well. Pinnacle has been having success with under-reaming the bottom coal in a well and perforating the upper coal. "We have to be able to develop this basin in a $3- to $3.50-per-thousand-cubic-foot environment," he says. Drilling is also in progress in Sheridan County, west and north of the Wyodak area. Here, Galaxy Energy Corp. has been acquiring an acreage position. Last year, the company determined its primary focus would be CBM in the Powder River Basin. It bought 61 wells in four development areas near Sheridan from Continental Industries, and also purchased another property near Leiter that contained five existing wells. "We're a serious entry into the basin," says Cecil Gritz, Galaxy chief operating officer based in Denver. "We've acquired properties in selected areas that we feel have potential. Most of the easy-to-find and easy-to-drill areas on the eastern side of the basin have already been developed, so we're moving into the deeper part of the basin, into areas with no production history yet." This year, Galaxy plans to drill 100 wells. Completions in the thinner coals are more complex and require more creativity than in the Wyodak fairway, he notes. St. Mary Land & Exploration, a Denver-based independent, is involved in part of the northern Powder River Basin along the Montana-Wyoming border called the Hanging Woman Basin. The company holds 139,000 net acres, of which 65,000 are in Sheridan County. This year, it will drill and complete 108 wells on the Wyoming side and install power lines and gathering infrastructure. The coals St. Mary is targeting include the Anderson, Canyon, Brewster/Arnold, Nance and Roberts seams. It anticipates drilling 175 wells per year beginning in 2005. A wild card in any projection of the Powder River's future CBM contribution is Montana. The Treasure State side of the Powder River holds definite CBM potential, mainly close to the Wyoming border. Fidelity Exploration & Production Co. is the lone CBM producer in the Montana portion, operating about 400 wells in Big Horn County from which it produces about 20 million cubic feet of gas per day. Fidelity, an MDU Resources Group company, has applied for permits for additional drilling this year, but has not yet received them. That's the case with other Montana CBM operators as well. Pinnacle has an extensive acreage position on its Kirby project in Big Horn County. "We would like to drill pilots on this property this year," says Schoonmaker. "But the permitting process is stalled over environmental concerns." Rocky Mountain Gas also has properties in Montana, holding 124,000 gross acres on its Castle Rock project in Powder River County. To date, 22 exploratory wells have been drilled on the properties. This year, RMG would like to drill some stratigraphic tests to further define the resource. Galaxy Energy is a partner in both the Kirby and Castle Rock areas. Major issues among residents of the basin and other groups include protecting air and water quality, preserving wildlife habitat and ensuring that surface owners in areas of split mineral estates are properly treated. "We know that development has significant impacts on communities; we want to stress that these impacts can be positive," says Karen Brown, project coordinator of the Coalbed Natural Gas Alliance and a Billings-based industry advocate who has been working on community issues in the Power River Basin. Brown focuses on educating and informing the public about energy development."We try to make four main points: the oil and gas industry is highly regulated; economic development is good; the majority of people support development; and most important of all, a healthy environment and the agricultural industries and oil and gas production can and do coexist." Given all the factors influencing this complex area, Bracken predicts that Powder River Basin CBM wells will produce 1.03 Bcf per day this year, and jump to 1.12 Bcf in 2006, mainly on the strength of the Big George play. "Operators are experiencing excellent production results which confirm the economic viability of the deeper Big George coals, which could hold several trillion cubic feet of natural gas," he says. "We expect continued intense drilling and dewatering activities in the Big George coals." Raton Basin Southern Colorado and northern New Mexico's Raton Basin is another area with growing CBM production. In 2003, the Raton Basin produced an average of 243 million cubic feet per day, all from CBM reservoirs. Denver-based Evergreen Resources Inc. is the dominant operator, producing about two-thirds of the basin's gas. (At press time, Dallas-based Pioneer Natural Resources Co. announced a bid for Evergreen.) Evergreen holds more than 300,000 acres in the Raton Basin, about half of which is developed. Its core production flows from the Vermejo coal, a widespread, predictable seam that varies between 10 and 40 feet in thickness. It also develops production in the Raton coal, a shallower zone that is more sporadically distributed. The company currently has 1,000 producing wells in the basin, and this year announced plans to drill 200 wells. Evergreen's drilling targets Vermejo field extensions, Raton twins and infill drilling. "We had historically been developing this field on 160-acre spacing," Mark Sexton, president, said at the investment symposium. "With a fifth well, we increased the percentage of recovery of gas in place, and that continues in a diminishing way up to about eight wells per section." Other operators in the Colorado side of the Raton are XTO Energy Inc. and El Paso Corp. Fort Worth-based XTO plans to drill 35 wells in the Raton Basin on its 54,000-net-acre position this year; it has already drilled 17 wells during the first quarter, and it has an inventory of 180 to 280 locations in the basin. The New Mexico side of the basin is controlled by El Paso Production Co. At the end of 2003, some 45 million cubic feet of gas per day was being produced, mainly from Colfax County. Rates should average more than 50 million per day in 2004. For the Raton as a whole, Bracken expects daily production will increase 17% to 285 million cubic feet in 2004, and continue to grow to an average of 358 million in 2006. Appalachian Basin The Valley play in Virginia's Pocahontas Basin leads Appalachian Basin CBM production. Consol Energy, the dominant operator, currently produces 146 million cubic feet of gas per day from some 1,300 wells, mainly located in Buchanan and Dickenson counties. That's about three-fourths of all of Virginia's CBM daily production, which totals 160 million cubic feet from 2,300 wells. Consol acquired the properties in 2001 in the Valley play, which encompasses Nora and Oakwood fields. It drilled 197 development wells on the 178,000-acre project in 2002. Proved reserves stand at 1.1 Tcf, two-thirds of which are undeveloped. Bracken forecasts production from the Valley play will rise to 184 million cubic feet per day in 2006, thanks to Consol's active drilling program. Penn Virginia Corp., based in Radnor, Pennsylvania, is another firm active in Appalachian CBM. The company plans to spend $20 million in horizontal drilling for CBM, according to James Dearlove, chief executive officer. It controls 620,000 acres in West Virginia, Virginia and Kentucky. Penn Virginia has an area of mutual interest with CDX. That firm's horizontal drilling technology works quite well in the hard, thin coal seams that are prevalent in the central Appalachians. Some 40% of the firm's 620,000 acres will be prospective. "The gas is there in sufficient quantity-it hasn't been mined through and hasn't outgassed," Dearlove said at the investment symposium. The estimate is conservative: Penn Virginia uses 30 inches as its coal thickness cutoff, although horizontal wells have been successfully drilled in seams as thin as 22 inches. The partners have drilled 23 successful horizontal wells in two years, all of which have been successful. What Penn Virginia particularly likes about the horizontal wells are their production profiles. They exhibit high initial rates more akin to what might be seen in a Gulf Coast well than an Appalachian producer. The internal rates of return for its CBM wells are two to four times that of vertical CBM wells, and an individual well can achieve payout in about a year. "Our experience has been, drilling 23 wells in 2002 and 2003 with no failures, that our internal rate of return has been 80%," Dearlove said. The company's gross production from horizontal CBM wells stood at more than 12 million cubic feet a day in November 2003. Penn Virginia plans 30 horizontal CBM wells this year, mainly in its Loup Creek/Mcgraws area in West Virginia and its Roaring Fork area in Virginia. Cherokee Basin The Cherokee Basin of southeast Kansas and northeast Oklahoma is an up-and-coming CBM area that is presently producing about 74 million cubic feet of gas a day. Development to date has been tilted toward the Oklahoma side; 1,500 CBM wells have been drilled in the northeast part of the Sooner State, to an average depth of 1,000 feet, according to the Oklahoma Geological Survey. Nearly 1,400 of these are producing, with rates varying up to 350,000 cubic feet per day. The average initial daily gas rate is 31,000 cubic feet, however. Producing seams are the Mulky, Weir-Pittsburg, Rowe and Riverton. Kansas has been more lightly developed, but that situation is changing, especially since Quest Resource Corp., an experienced CBM operator based in Benedict, Kansas, acquired Devon Energy Corp.'s substantial Cherokee Basin position at the close of 2003. The purchase is added to assets gained from its November 2002 acquisition of STP Inc., an independent that primarily owned Oklahoma properties. Quest's Devon purchase brought it 366,000 net acres, 325 net producing wells, and 200 miles of gas gathering lines for $126 million. Total proven reserves attached to the transaction were 95.9 Bcfe. "The Devon properties were interwoven with our existing properties," says Doug Lamb, Quest co-chief executive officer. "They complemented our holdings in both states." Quest Cherokee LLC, a wholly owned subsidiary of Quest, now produces 26 million cubic feet of net gas per day from the Cherokee Basin. It plans to drill and complete 240 wells this year, running between two and three rigs. "Most of these wells will be in the Kansas side of the basin, because we have a lot more proven undrilled acreage in Kansas than we do in Oklahoma," says Lamb. "There are more true coals on the Kansas side, and that's what we're going to work on developing now." According to Quest, the average Cherokee CBM well on the Kansas side produces at daily rates between 30,000 and 200,000 cubic feet. Its wells typically cost about $70,000 to drill and complete, and will produce between 100- and 200 million cubic feet of gas from depths of less than 1,500 feet. Bracken estimates that other operators will come close to matching Quest's activity levels and 2006 production will jump to more than 52 million cubic feet per day on the Kansas side of the play. The Oklahoma slice of the Cherokee Basin will also grow, rising to 70 million cubic feet per day by 2006. Basinwide, Bracken predicts production of 120 million per day. Arkoma Basin Horizontal drilling has clearly been the key to developing CBM in the Pennsylvanian coals in eastern Oklahoma and western Arkansas. Production is mainly flowing from the Hartshorne seams in areas that are also productive from conventional reservoirs along the Ouachita fold belt. Operators range from such nationally known firms as El Paso, Williams, Questar and Continental Resources to local producers Redwine Resources and Bear Productions. Some 1,000 wells have been drilled on the Oklahoma side of the gas-prone basin, mainly in Pittsburg, Haskall and LeFlore counties, according to Brian Cardott, who is with the Oklahoma Geological Survey. Overall, these are very good CBM wells, exhibiting an average rate of 136,000 cubic feet per day. Through 2003, nearly 250 horizontal wells were completed, and 25% of these had initial daily rates of greater than 500,000 cubic feet. Cardott noted that of 739 vertical CBM wells targeting the Hartshorne coal, only 10% had daily rates in excess of 100,000 cubic feet. On the Arkansas side of the Arkoma, there have been several developments. CDX Gas has been drilling multilateral wells in Sebastian County, including 19 wells in Chambers Field and eight wells in Hartford Field, according to the Arkansas Geological Commission. As of June 2003, production was 3.5 million cubic feet per day from the Lower Hartshorne coal. About 70 Bcf of gas has been produced to date from CBM wells in the Oklahoma portion of the Arkoma Basin; 40% of that has flowed from horizontal wells. Daily production was 50 million cubic feet in 2003. Bracken estimates the basin could contribute 87 million cubic feet per day by 2006. Washakie Basin A final area receiving strong attention for potential production growth is the western side of southwestern Wyoming's Washakie Basin, where the Mesaverde coals are prospective. The Atlantic Rim area, in Carbon County, Wyoming, is being developed by Anadarko Petroleum and Warren Exploration & Production Inc., an independent based in New York. The companies are looking at CBM potential in the Allen Ridge and Almond formations at depths of up to 2,000 feet. Anadarko and Warren have a joint venture covering 226,000 gross acres in the Atlantic Rim area. In 2003, Anadarko took over operations of 36 existing wells, and drilled nine additional wells. At year-end 2003, the initial 10-well pilot at the Sun Dog Unit was producing about 3 million cubic feet of gas equivalent and 13,000 barrels of water per day. Warren reports that the project, which started production in April 2002 at daily rates of 400,000 cubic feet of gas and 12,000 barrels of water, was still on a typical CBM negative decline curve. Warren and Anadarko have also drilled a 12-well pilot at the Blue Sky Unit, which is still dewatering. Another project, the 16-well Red Rim Unit, is in development on 160-acre spacing. This year the partners plan a total of 54 CBM wells on the project. Casper-based Double Eagle Petroleum Co. is also involved in the play. It has 30,000 net acres throughout the Atlantic Rim area, in and around its Cow Creek Field. The company reports that coals reach thicknesses of 30 to 40 feet, contain gas contents between 250 and 300 standard cubic feet per ton, have very good permeabilities and are overpressured. The eastern flank of the basin, in Sweetwater County, is seeing activity as well. Here, Warren operates the 30,000-gross-acre Pacific Rim project. Denver-based Kodiak Oil & Gas Corp. is a partner in this venture. Kodiak reports that nine wells have been drilled into the Almond coal, and gas sales from the properties will begin this summer. A 30-well program is planned this year. Bracken estimates daily production from the Washakie CBM play could reach 32 million cubic feet in 2006.