Original Article

By OGJ editors

FORT WORTH, Oct. 6 — The oil and gas industry is climbing technical, geological, operational, and political learning curves in tackling the numerous US unconventional gas and oil drilling plays, speakers told PennWell Corp.’s Unconventional Gas International Conference & Exhibition in Fort Worth on Oct. 5.

Development of natural gas from shale formations has transformed the gas industry worldwide, and far more progress is possible with tremendous employment and other economic benefits to the greater society and even the rest of the world, keynoters said.

It is only 7 years since Devon Energy Corp. drilled the first well that combined horizontal drilling and massive hydraulic fracturing technology, said Larry Nichols, Devon founder, chairman, and chief executive officer.

US unconventional gas plays have been a game changer for consumers, bringing stability of price and long-term supply assurance, agreed Nichols, Jeff Ventura, Range Resources Corp. president and chief operating officer, and Kathryn Klaber, Marcellus Shale Coalition (MSC) president and executive director.

Security of gas supply is being assured, perhaps for decades, they said, because operating companies have figured out how to extract gas from formations formerly bypassed intentionally, have learned often at great cost which shale plays don’t work, are successfully tackling water issues, and promoting the environmental cleanliness of gas.

Operators are honing their craft, keying off the desired rates of return, Ventura said. They have learned that longer laterals and more frac stages are not always cost-effective and that closer well spacing and refracs may be superior in certain plays or portions of plays.

Shale gas and oil recovery factors are still relatively low and represent a major avenue for potential improvement, Nichols said.

Ventura said the Appalachian basin Marcellus shale formation, where his company kicked off drilling in 2004, today is producing 1.4 bcfd of gas and is the third busiest US unconventional gas play with 101 rigs. Marcellus recovery potential is 489 tcf, and Klaber noted that 1,681 wells had been drilled through mid-2010.

Most-drilled Marcellus counties in Pennsylvania are Washington with 259 wells and Greene with 150 wells in the southwest part of the state and in the northeast Bradford with 309, Tioga 261, and Susquehanna 134.

Pennsylvania’s multiplicity of governmental jurisdictions provide ample educational and coordinating opportunities for MSC, she said, which represents nearly all of the Marcellus shale operators in the state. MSC looks forward to working with officials in West Virginia, which has a tax regime more onerous to the industry than Pennsylvania’s, as firms begin a greater share of wells in West Virginia, she added.

How the industry tackles public and political misunderstanding will key to turning the vast identified shale resources into reserves, Nichols said as he celebrated the US Congress being in recess.

“Adverse public policy is the biggest impediment to supply security,” said Nichols, who is also chairman of the American Petroleum Institute.

Broad conversion of personal vehicles holds some promise for gas markets, but not if the oil and gas industry is taxed to pay for conversions, Nichols said. The largest potential market for gas in the US is conversion of electric power plants that now burn coal, he noted.

Ventura and Nichols agreed that a wellhead price of $5-7/Mcf at the oil field service operating costs of about a year ago should be sufficient for a 20% rate of return in most US basins due to the size of the unconventional resource, but they did not speculate on when gas prices might rise to that range.

Original Article

On Sept. 29, the Louisiana Tax Commission, appointed by the governor, approved a new rule that would increase oil and gas property tax assessments within the state by more than double the established rates in 2010. Specifically, this new measure targets the lateral sections of unconventional oil and gas wells. Without question, this tax increase will stifle the more than $10 billion investment in the Haynesville Shale.

To adequately and economically develop unconventional resource places such as the Haynesville Shale, oil and gas companies needed to explore new and innovative technological advancements to capture these vital energy resources. The process of horizontal drilling became the most effective method to ensure the production of these unconventional oil and gas reserves.

During the process of drilling a horizontal well, a lateral section is drilled and established. This lateral section is cemented, perforated, and essentially becomes the key component to severing oil and gas from a targeted geological formation. The 2011 rule changes the depth to total “measured depth” which will assess the horizontal section the same as vertical wells with casing, pipe and equipment.

Prior to the new imposed rule, property tax rules addressed valued equipment assets found in the vertical section of an oil and gas well. According to the Louisiana Tax Commission’s new rules, the lateral section of an oil and gas well has an intrinsic value. This finding could not be further from the truth. As the lateral section is permanently cemented deep below the earth’s surface, the equipment within this section becomes an asset that can no longer be recovered by an oil & gas operator. Additionally, some horizontal wells have no casing in the horizontal section, called an “open hole.” To tax equipment that has no potential for resale and is non-recoverable is unfair and unreasonable.

Today, the Haynesville Shale serves as one of the few positive economic drivers in our state. At a time when oil & gas development is at a standstill in the Gulf of Mexico and we are experiencing significantly low natural gas prices, a tax increase of this magnitude will lead to a statewide exodus of many companies and certainly discourage future companies from doing business within our state.

While the governor, Louisiana Economic Development and local officials work to recruit investment and jobs throughout our state, the Louisiana Tax Commission has just put a significant dent in those efforts. The old adage that Louisiana is “Open for Business” may not be the case for long.

Don Briggs is president of the Louisiana Oil & Gas Association based in Baton Rouge. He is a frequent contributor to The Daily Advertiser.