Fayetteville Shale Gas
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Recent News:
HEADLINE: Arkansas Gas Field Emerging from Shadow;
Chesapeake upping ante on Fayetteville Shale; XTO expected to follow
BYLINE: Gerelyn Terzo (gerelyn.terzo@sourcemedia.com)
Active Operators in the Fayetteville Shale Gas Plays
Southwestern Energy (Houston, Texas)
Chesapeake Energy (Oklahoma City, Oklahoma)
BODY:
As big energy companies scramble to stake their claims in the gas-rich Barnett Shale of West Texas, a similar opportunity could be quietly developing just over the border in Arkansas. The so-called Fayetteville Shale holds much of the same promise as Barnett, though it is struggling to emerge from the shadow of its larger and more successful neighbor.
"In a sense, Fayetteville Shale development is a victim of the success of the Barnett Shale. It looks promising, but it's tough to assess until more holes are drilled," said James Bowe, a partner who deals with energy companies for Washington, DC, law firm Dewey Ballantine. Indeed, the Fayetteville field is far less developed and its prospects less certain, but buying in is considerably cheaper.
The first major mover in Fayetteville was Houston's Southwestern Energy, which is drilling aggressively and investing millions in well hopefuls. The field has enough potential to have attracted the interest of natural gas giant Chesapeake Energy, which had zero leased acreage in the Fayetteville Shale at this time last year and today has more than 600,000 acres. Chesapeake is in the midst of a seven-well vertical-drilling test program that began in the fall.
"It's a credit to Southwestern Energy for identifying the play for land acreage before anybody knew about it," said Jeffrey Mobley, VP of investor relations and research at Chesapeake. "We currently have two rigs running in the play, up from one last fall. If the play works like we hope, it could be a 10-15 rig program for us. It's still a little early." Mobley said Chesapeake is looking to lease additional acres in the field.
Also eyeing the Fayetteville Shale is XTO Energy, according to sources familiar with the company's plans. XTO, the largest natural gas producer in Arkansas, did not return a call.
The first major oil company to take a stake in the field was Royal Dutch/Shell, and market participants do not expect other giants to follow because they have better opportunities elsewhere, especially overseas. "[Shell] is in the mode of trying to get new reserves on the books. That's driving them in a way that the other majors are not being driven," said Bowe. "I don't see the ExxonMobils of the world coming into a play like this."
Fayetteville Shale wells are considered economical when natural gas prices are as low as $3 per MCF, well below today's level of about $9. Making a conservative assumption of natural gas at $6, Bowe estimated that the typical Fayetteville Shale well would return five times its initial investment over its lifetime and pay back investors in less than one year.
The problem with the basin is the same as in much of the rest of the US-a shortage of rigs. Southwestern Energy optimistically planned to drill 150 natural gas wells in 2005, only to fall short of those intentions due to the unavailability and slow deployment of rigs. It wound up drilling some 80-90 wells, and has yet another robust drilling program of 175-200 wells in place for this year. To help facilitate that plan, it's building 10 new rigs of its own.
Chesapeake, which is also active in East Texas and in the Barnett Shale, plans to bolster its operating rig fleet to 100 platforms by this time next year. Last month, it agreed to buy 13 rigs from Martex Drilling for $150 million.
(c) 2005 Investment Dealers' Digest Magazine and SourceMedia, Inc. All Rights Reserved.
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