During the past century, an estimated 50 trillion cubic feet (Tcf) of natural gas has been produced out of the Appalachian Basin in the northeastern U.S. More notably, another 50 Tcf of estimated recoverable gas reserves remain. But it's not likely to take another 100 years for such reserve potential to be tapped. With the basin's gas output currently receiving Nymex-plus prices, both the long-worked shallow plays and the deeper, largely unexplored horizons within the region are drawing renewed attention from operators-all over North America. "With Appalachian gas prices now in the range of $5.50 to $6 per thousand cubic feet (Mcf), we're seeing the likes of Calgary's Talisman Energy to the north and Houston's EnerVest Management Partners to the south beginning to enter the basin," says Charles Colburn, Pittsburgh-based managing director for Ralph E. Davis Associates Inc., a Houston-headquartered petroleum engineering and geological consulting firm long involved in the region. Such producers join the ranks of the well-established, leading players in the basin, including Dominion Exploration & Production, Equitable Production, Cabot Oil & Gas, EOG Resources and NiSource Inc. subsidiary Columbia Natural Resources, slated to be acquired this fall by Triana Energy Holdings, a Morgan Stanley Capital Partners affiliate. "The nice thing about this basin-stretching southward from New York to Pennsylvania, West Virginia and Kentucky-is that the drilling-success ratio here is better than 90% and it offers very good returns," says Colburn. "Given current prices for high-Btu-content Appalachian gas, the high-grading of basin prospects and the use of modern [drilling and completion] technology, there's no reason that an operator, on a normal development program, can't realize a 30% or more internal rate of return." Modern technology, however, is something the basin has been well behind the curve on-in some cases for the past 20 years. Ralph E. Davis opened its Pittsburgh office a year ago to promote the use of modern technologies to its Appalachian client base, to enhance their existing reserve bases and find additional reserves. One of these technologies is horizontal drilling, for which there are a lot of Appalachian play-type candidates, says Colburn. Case in point: the 600- to 3,000-foot deepcoalbed-methane (CBM) play. Largely in Pennsylvania and West Virginia, this play is being successfully exploited by Consol Energy, which already has more than a Tcf of proved CBM reserves. Other candidates on the development side are the 2,000- to 6,000-foot Devonian- and Mississippian-age series of sands found throughout the basin. Deeper still, on the exploration side, are the 5,000- to 9,000-foot Oriskany, a tight sandstone of lower Devonian age, and the 10,000- to 14,000-foot, Ordovician-age Trenton-Black River play-the dolomite-reservoir section of which has drawn major interest in upstate New York. Says Colburn, "The use of horizontal drilling, which intersects more pay zones and potentially higher-permeability and higher-porosity strata than a vertical well, could push average finding costs in Appalachia-now around $1 per Mcf-down to 55 cents, or lower." Better frac and reservoir-stimulation techniques could lower finding costs even further. He notes that the use of Cobra Jet technology, developed by Halliburton, would allow operators to better isolate desired zones for fracing and achieve more recovery from those zones. Still in its infancy, the Trenton-Black River play holds much of the larger-reserve promise for basin producers. "In the northern part of that play in upstate New York-at average depths of 10,000 feet-they're looking for per-well reserve targets in the range of 2 billion cubic feet (Bcf) to 15- to 20 Bcf." Looking to tap this deep play's potential is Talisman Energy. Earlier this year, the giant Canadian E&P company-with far-flung operations worldwide-completed a $310-million series of acquisitions in the south-central part of upstate New York. With asset purchases from Fairman Corp., East Resources, Pennsylvania General Energy, Columbia Natural Resources and National Fuel Gas, Talisman obtained 418,00 net acres, 30 existing gas wells and some 60 million cubic feet per day of gas production in the counties of Tioga, Steuben and Chemung. Why this foray? "For the past five years, we've been operating in the Ordovician in onshore Ontario and under Lake Erie, drilling upwards of 50 wells there," says Jim Buckee, Talisman president and chief executive officer. "The expertise we gained allowed us to extrapolate the Trenton-Black River exploration-play concept southward into upstate New York." The company is particularly focused on the New York portion of the Trenton-Black River because of the dolomitization of the play there, which creates secondary porosity and permeability. And it's bringing horizontal-drilling technology to the 10,000-foot targets in the region; previously, only vertical wells had been drilled there. Pursuing 5- to 10-Bcf-per-well reserve targets, Talisman so far this year has drilled the Henkel #1 well, currently producing 13 million cubic feet per day; the Ganung well, where the hole collapsed; and the K well, which looks promising. "Actually, the Ganung well was a good-news-bad-news situation," explains Buckee. "The bad news was that the hole collapsed; but it also means that there's likely to be lots of porosity, permeability, fracturing and, ultimately, good production." This year in the region, Talisman will drill eight horizontals to the Trenton-Black River, with a capex budget of $46 million; next year, it plans 10 other horizontals, with capital spending of $48 million. Besides this, the company has begun optimizing output on 25 of the 30 wells it acquired, adding compression facilities and flowlines; this has improved existing daily gas production from 60- to 70 million cubic feet. Between drilling and well optimization, Talisman's goal within the next 24 months is to increase daily gas production from the Trenton-Black River to 100 million cubic feet. "Although increased gas demand for power generation has been offset somewhat by demand destruction in the industrial sector [due to higher gas prices], we see good gas prices through 2008," says Buckee. "This will be the direct result of faltering North American gas supply, which dipped 5% last year and is expected to fall another 3% this year. So, whereas gas historically was always a $2 commodity, we see it now as a $4 commodity." As for the economics of the Trenton-Black River play, "they're stellar," he says. "While the wells in upstate New York cost $2 million each to drill, the finding and development costs there are about 50 cents per Mcf. Assuming all the wells come onstream as predicted, 20% to 30% internal rates of return are achievable." Although the Trenton-Black River offers a big bang for the drilling dollar, many Appalachian operators are more focused on the basin's shallower 2,000- to 5,500-foot Mississippian-age sands and carbonates. One of them is Houston's Cabot Oil & Gas Corp., which has been operating in the basin since 1897. The vast majority of its 455 billion cubic feet of gas equivalent of Appalachian reserves and 51.5 million cubic feet of daily gas production is situated in the southern part of West Virginia, in McDowell, Wyoming, Raleigh, Wayne and Kanawha counties. There, it operates 2,000 of its 2,243 Appalachian gas wells, tapping into the Weir, Berea, Big Lime and Maxton sands. The average reserve life: 24 years. "We like the Mississippian because of the low-risk nature and predictability of the play," says Michael Walen, Cabot senior vice president, E&P. "We pretty much know what we're going to get even before we drill, and we can replicate our drilling success well after well-similar to the success rates we see in the CBM plays out west." There's also a lot to like about the play's economics. Cabot's finding and development costs in the basin average 70 cents per Mcf, plus it controls more than 2,400 miles of gathering lines that interconnect with the pipelines of Dominion Transmission, Columbia Gas Transmission and Tennessee Gas Pipeline. Says Walen, "We're able to hook up our gas wells very quickly. Sometimes we'll have a gathering line in place within a week or two after finishing a well. So there's not much lag time between bringing a well on and generating revenues from it." Currently, the company is receiving nearly $6 per Mcf for its gas. The Cabot executive points out there's a vast difference between the economics and risk profile of drilling wells in the company's core Appalachian area-which covers 1.2 million gross acres-versus drilling to deeper horizons. A typical Mississippian development well, for instance, costs Cabot about $250,000 to drill and complete; by comparison, a 10,000- to 12,000-foot Trenton-Black River well in the north-central part of West Virginia might cost $3- to $5 million to drill and complete while an 8,000- to 9,500-foot Oriskany well in the northern part of the state might cost $700,000 to $900,000. "Also, while we complete 98% of our shallow development wells, we might only complete 50% of Oriskany wells drilled and even less with respect to Trenton-Black River wells." Nonetheless, of the 100 Appalachian gas wells the company plans to drill this year at a cost of $22 million, it has scheduled for fourth-quarter 2003 a Trenton-Black River wildcat in upstate New York, south of the Finger Lakes region. "The per-well reserve potential there is on the order of 4- to 5 Bcf, with daily gas output as great as 10 million cubic feet," says Walen. "Our typical shallow West Virginia wells, by comparison, come in at around 150,000 cubic feet per day. So we're exposing ourselves to some pretty significant upside-something we can afford to do in today's gas-price environment." The company is also actively acquiring 2-D seismic and leases on other Trenton-Black River prospects in the region. Concludes Walen, "We were one of the earliest players in the Appalachian Basin, and more than 100 years later, we still like it." Also liking it is Linn Energy LLC, a privately held Pittsburgh-based producer formed this past April. It is also focused on the shallower horizons of the Appalachian Basin, specifically the upper Devonian in West Virginia, the Devonian in southwest Pennsylvania and the Silurian-age Clinton-Medina sands in northwest Pennsylvania and western New York. "Our plan is to buy gas-producing properties in the basin that have proven, long-lived reserves-15 to 30 years-at depths ranging from 2,000 to 6,000 feet, and use that to launch further drilling and reserves purchases which target the same or similar formations," says Michael C. Linn, president and chief executive officer. The company clearly has the financial muscle to be a serious player in the basin. Recently, Houston's Quantum Energy Partners made a $15-million private-equity investment in the operator for the purpose of engaging in Appalachian acquisition and exploitation activity. The principals of Linn Energy have also made a substantial investment to that end. In addition, the operator has a $50-million-plus credit facility with Wells Fargo Energy Capital. Says Linn, "We're now in a position to make more than $75 million of basin acquisitions." By mid-summer, the new Appalachian entrant had completed two acquisitions in southern West Virginia and western New York, and was in the process of closing a third in southwest Pennsylvania-all at a cost of more than $25 million. The acquisitions give the company about 30 Bcf of proved gas reserves and more than 400 producing wells, each with output of 10,000- to 20,000 cubic feet of gas per day. "By early fall, we expect to be drilling more than 30 Devonian-shale or tight-sands wells on these locations, with the expectation of similar daily production levels," says Linn. The cost of drilling and completing these wells, he says, ranges from $80,000 to $120,000 for the 2,000- to 4,000-foot wells, to between $180,000 and $220,000 for the 4,000- to 6,000-foot wells. "The reason the basin is so attractive at this time is its long-life gas reserves, the Nymex-plus pricing we receive for that gas-recently $5.30 per Mcf-and the current low cost of capital to enter the play," explains Linn. "With the cost of capital in the 2% to 4% range, the play makes good economic sense from a return standpoint, plus the cost of drilling and completing wells in the region is cheaper than in other basins." This fall, the company expects to make a fourth acquisition, and by next April, to have spent an aggregate $50 million on Appalachian acquisitions and drilling up their potential. "I'm bullish on the outlook for natural gas," says Linn. "Our nationwide depletion rate is accelerating and the efficiency of the rig rate-the amount of gas found per rig-is declining. Therefore, gas supplies are going to be stretched very thin. Also, gas demand should pick up if the economy turns around."