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Since
2001, when Devon Energy Corp. drilled the first 125 Coal Bed Methane (CBM)
wells in Kansas’ Cherokee Basin, a geologic
province that stretches from southeastern Kansas into portions of
southwestern Missouri and northeastern Oklahoma, unconventional gas
production in the State has doubled each year, to just over 9 Billion Cubic
Feet (bcf) in 2003. That kind of production attracted a lot of attention,
and some of the biggest players in coal bed methane quickly moved into the
play, leasing up large land positions in the Cherokee and Forest
City
Basins.
Three
years on, the land rush is largely over, but the mergers and acquisitions
(M&A) rush is in full swing. The President of Evergreen Resources, Mark
Sexton, noted recently on Kudlow and Cramer, “the cheapest oil and
gas around right now is on Wall Street.” With energy company’s
valuations not even remotely reflecting the current energy prices, he says,
a lot of companies are garnering commodity value via M&A activities.
Evergreen,
one of the biggest and most expert CBM companies in the
US
, is being consumed in a $2.1 billion dollar merger
by Pioneer Natural Resources. But for some reason, Evergreen’s massive CBM
land position in
Kansas
is being spun-off prior to the merger. Rumors are
flying that Evergreen’s CEO still wants the play. The head of Heartland
Oil and Gas, whose leases are basically surrounded by Evergreen’s, says,
“It begs the question as to why Evergreen wanted to keep the CBM play out
of the merger? Despite Evergreen’s spending about 45 million dollars to
develop the
Kansas
play, they weren’t able to agree on a valuation
for their properties, since they’d been running them for such a short
time.”
And
that pretty much sums up the northeast Kansas CBM play – it’s too soon
to tell. Jack Ekstrom of Evergreen says there’s always talk when a merger
occurs, and the merged Evergreen/Pioneer will still have massive CBM plays
in Alaska, western Canada, and the Rockies, all of which he says are further
along than Kansas, and will present more than enough challenges to the
management of Pioneer, who are not that experienced with CBM.
No
one is denying Kansas’ potential. The June edition of Oil and Gas
Investor magazine listed the Cherokee as one of five CBM basins that
are “poised to deliver the next wave of growth” in the lower states.
Which
mid-size or major company will capitalize on that growth remains to be seen.
Evergreen has a merger deadline on divesting its Kansas
position, and is seeking a cash offer, with
several parties expected to bid. And, in a reversal of the usual trend,
Quest Resource Corporation, a small public company and experienced CBM
operator based in Kansas, acquired the much larger Devon’s Cherokee assets
in December last year. The cash purchase price of $126 million bought Devon
’s total proved reserves of almost 96 Bcfe, which
meant Quest spent an average of about 89 cents/Mcf, after allowing over $40
million to undeveloped acreage and the 200 miles of pipeline assets that
were part of the deal.
Quest
now has a greatly enhanced profile in the Cherokee with about 500,000
leasehold acres, almost 600 producing gas wells, and daily production of
about 26,000 MCF. The Company says it plans to run 2 to 3 rigs and drill up
to 240 wells this calendar year.
Outside
of the proven producing areas that Devon
initiated and Quest now owns, the work of proving
up additional areas of the play is continuing, with a number of companies
busily figuring out what the best practices are going to be for completion
operations, which is a big part of the CBM game.
Tim
Carr, of the Kansas Geological Survey says, “Expertise makes a difference,
in the completion realm particularly. There’s a learning curve in these
things.”
That’s
a sentiment echoed by the President’s of two other companies involved.
Heartland’s CEO Richard Coglon: “We’ve tried two different completion
methods with two different service companies already, and we’re doing a
frac now based on the method that worked better the first time. It’s cost
intensive now, but it will prove cost effective over time.”
Petrol
Oil and Gas President Paul Branagan, who knows a thing or two about complex
reservoirs, agrees. “As the play moves further north, proving production
takes more time and more effort. All the little complexities in the
producing areas are pretty well defined. We’re after the same Cherokee
targets but we need to clarify the best producing intervals, refine
completion techniques and sharpen the economics.”
Both
executives agree that all of the information to date from their exploration
drilling and early stage completion efforts is encouraging.
Tim
Carr, of the Kansas Geological Survey says “CBM is a weird deal. There’s
nothing spectacular at any one time. If you can get it to work, you can put
in lots and lots of wells, and they go on forever. Some of Bill’s wells
from the late 80’s or early 90’s are still making gas.” Once solid
flow is established in a CBM well, the production tends to last.
The
Bill he’s referring to is Bill Stoeckinger, who has long been an advocate
of CBM production in
Kansas
and is the consulting geologist with Petrol. The
Company has announced good gas shows throughout its exploratory wells in
Coffey county, and recently extended exploration drilling into neighboring
Missouri
counties.
Petrol’s
Branagan says “Everything we see from our cores, drilling flares, and the
logs, suggest in a strong way that we have similar gas reserve values as the
producing areas, and that the economics will work.”
Heartland
Oil & Gas is about to begin flaring gas from its Engelke production
pilot wells in order to establish flow rates and inflow pressures.
Heartland’s leases are far to the north of the play’s center around
Independence, Kansas, and would represent a significant new extension of
the play.
Tim
Carr says “It’s well established in the south. It’s creeping north.
The jury’s still out on how far north it’s going to go. It takes a while
to prove that you’re right or wrong on these things.”
Evergreen’s
Ekstrom notes “CBM is easy to find, and hard to produce. If you find the
right formula you’ll be successful.” After all, he adds, “If it was
easy everybody’d be doing it. I mean the industry is only ten years old,
for all practical purposes, and it’s already producing almost 9 percent of
domestic production!”
In
the Cherokee and
Forest
City
Basins, the proof of how much and how far successful CBM
production will expand is being established the old-fashioned way – by the
drill bit. The coming weeks and months should tell the tale, but with this
much interest and the number of wells being drilled, there’s little doubt
that somebody is going to
‘unlock the code’ that will create the next Devon-style success story in
this area.
Allen R. Gibson.
Allen R. Gibson has over twenty-five years experience in media and corporate
communications. His background includes radio, television, and print
communications for public companies in both the US
and
Canada.
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