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The Wall Street Journal: Wildcatters Join Land Grab Hoping for Next Big Field

By RUSSELL GOLD
August 9, 2006; Page C1

Everyone is looking for the next Barnett Shale.

As recently as 1998, the Barnett was a relatively insignificant natural-gas field, covering pieces of three counties near Fort Worth, Texas, and producing just 96 million cubic feet a day. Then companies discovered how to crack the rock and unlock the gas.

Today, the field spans eight million acres across a dozen counties and produces 1.3 billion cubic feet a day, some 2.5% of natural gas produced in the U.S. It is the second-largest gas field by production in the continental U.S. after the San Juan Basin in New Mexico — and still growing.

If energy companies can find another such field — and there are indications of early successes — the rise of shale-gas production could fuel American homes and industry for decades to come.

DRILLING INTO THE ‘BIG EMPTY.’
 
The search for the next Barnett Shale is leading wildcatters into some corners of the country that haven’t seen much energy exploration recently: the states of Alabama, Illinois, Ohio and Pennsylvania. But the area generating the most excitement is in a swath of far West Texas — 200 miles east of El Paso — called the “Big Empty.”

There are two thick shale deposits there, each a few hundred feet thick. One is the same Barnett stone that is found in Fort Worth and the other is the Woodford Shale, which also is being explored in Oklahoma. More than a dozen companies, including heavy hitters such as ConocoPhillips and EnCana Corp., together have leased about 1.5 million acres — an area twice the size of Rhode Island.

Natural gas is used as fuel and feedstock in the manufacture of fertilizers and plastics as well as to generate electricity and heat homes. Prices have become volatile as U.S. production has fallen over the past few years. Prices of front-month futures contracts on the New York Mercantile Exchange shot up to $8.21 per million British thermal units during the recent U.S. heat wave, but settled yesterday at $7.158 per million BTUs. Prices were relatively stable at $2 to $3 per million BTUs in the 1990s.

Shale rocks are hard and dense but can contain large quantities of natural gas. Getting at the gas is a slow and methodical process. It isn’t yet clear if companies can figure out an economic means of producing gas from the shale in West Texas. Production data from just a handful of wells are public. A couple of wells have been unsuccessful, but at least two are producing more than two million cubic feet of gas a day, comparable to a well in the Fort Worth Barnett Shale.

The attraction of shale production, says Southwestern Energy Co. Chairman and Chief Executive Officer Harold Korell, is “we know the gas is there and it’s a matter of engineering it out.” Southwestern Energy was the first company to find a Barnett “clone,” the Fayetteville Shale in northern Arkansas, and lock up an enormous amount of acreage. The company’s stock price has more than quadrupled since it announced the find in 2004.

The size of the Barnett Shale is significantly larger than first thought. Part of the reason is that techniques — such as drilling wells that start vertically and then turn horizontal, as well as using pressurized water to fracture the rock — have raised production per well.

There are reasons for skepticism about the emerging field in West Texas. The wells are deeper than those in the Barnett, more complicated and, therefore, more expensive. Because there is so much competition, the cost of leasing acreage in the area has risen tenfold in the past couple of years, to about $350 an acre.

Yet even before prospective new gas fields can prove their worth, energy companies are racing to lock up drillable leases. What has occurred over the past couple of years is a “land grab that will in my opinion separate the winners from the losers in this industry for the next 20 years,” says Aubrey McClendon, chairman and chief executive of Chesapeake Energy Corp., which holds shale leases in Oklahoma, Texas and the Appalachian region.

In the past, wildcatters sometimes found large nonshale gas reservoirs that created surpluses and drove down prices. But the days of those large finds are over. Individual shale wells don’t produce the gas equivalent of a gusher. Instead, numerous expensive wells need to be drilled every year to keep production steady. If prices begin to fall off, fewer wells are likely to be drilled, production would slow and prices would rise.

“Now more than ever we have a just-in-time gas delivery system,” says Chesapeake’s Mr. McClendon.

In addition to Chesapeake and Southwestern, competitors targeting Barnett clones include EOG Resources Inc., Quicksilver Resources Inc., XTO Energy Inc., Newfield Exploration Co. and Range Resources Corp. EnCana, the Calgary-based energy company, acquired a large footprint in the West Texas field when it bought Tom Brown Inc. in 2004, as did ConocoPhillips when it acquired Burlington Resources Inc. earlier this year. Royal Dutch Shell PLC has acquired acres in the Fayetteville Shale.

“The success of the Barnett has kicked off the exploration of every other conceivable shale in the country,” says Mark Whitley, senior vice president of Fort Worth-based Range Resources. “So far we haven’t found other shales as good as the Barnett, but we’ve found some good ones.”

Shannon Nome, an energy analyst for Deutsche Bank Securities Inc., says companies chasing shale gas should see their stock price rise because they can increase production and are potential acquisition targets.

Write to Russell Gold at [email protected]

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