Growing Coalbed Assets
By Gilleland, Kelly
Constellation Energy Partners and Pioneer Natural Resources are boosting their coalbed-methane activity through acquisitions as well as drilling. Capturing coalbed-methane reserves remains a top priority for several forward-thinking E&P companies, whether by increased leasing and drilling or through acquisitions. Coalbed- methane plays are important to the national gas supply as operators find maintaining conventional gas production remains a challenge.
The Energy Information Administration says that in 2006, domestic CBM production topped about 1.7 trillion cubic feet, a 2% increase over the prior year.
In 2007, Constellation Energy Partners LLC and Pioneer Natural Resources increased their CBM acreage holdings.
Constellation Energy Partners LLC is devoted to acquiring low- risk, proven CBM assets. This master limited partnership (MLP) was formed by integrated energy company Constellation Energy Group Inc. in 2005 to acquire, develop and exploit oil and gas properties and related midstream assets. It prefers assets with long and stable production and significant step-out development opportunities-CBM fits this playbook well. The majority of its CBM assets are in Alabama’s Black Warrior and the Midcontinent’s Cherokee basins.
“We’ve been in the process of acquiring long-lived, low-risk, lower-cost oil and gas producing properties,” says CEP chief financial officer Angela Minas. Our strategies are to maintain existing production through low-risk development drilling and achieve growth through acquisition-as opposed to organic growth. One of our aims is to expand into other coalbed-methane plays while leveraging our capabilities.”
ROBINSON’S BEND
CEP’s first acquisition was a 100% working interest in 96,000 net acres holding 120 billion cubic feet (Bcf) of producing and non- producing proved CBM reserves in the prolific Black Warrior Basin in Alabama.
Angela Minas, chief financial officer, Constellation Energy Partners
Known as Robinson’s Bend Field, about 80% of CEP’s reserves in the Black Warrior are proved developed. The average proved reserve- to-production ratio is about 25 years.
Robinson’s Bend has 487 producing wells and more than 300 potential drilling locations. The company also has identified numerous well refracture candidates. During 2007. CEP will have drilled, completed and placed on production 20 development wells here. The average well takes about four days to drill and complete, and is typically connected to pipeline within about 40 days after drilling begins.
CEP owns and operates all of the compression, gas gathering, water handling and related facilities for Robinson’s Bend Field. As a result. Minas says. “We are able to control decisions with respect to the development and operations of our properties in the field.”
The Black Warrior, one of the oldest and most prolific CBM basins in the country, has more than 2.750 producing CBM wells. They range from 500 to 3.700 feet deep, with coal seams averaging 25 to 30 feet of net pay per well.
Pumping units remove water from the wells and fracturing enhances production. These wells tend to start producing gas and water immediately upon completion, but production increases as the well is dewatcred.
CBM wells then demonstrate fairly constant production and reach a final decline rate of as low as 5% to 6% per year. A typical well produces during 20 to 50 years, which is well suited to an upstream MLP structure such as that of CEP, Alinas says.
Pioneer Natural Resources is the largest producer of CBM assets in the Raton Basin.
“We currently intend to drill and complete an average of 20 wells during each of the next six years,” she says, “which is intended to maintain existing production with nominal growth of 2% or 3%.”
CHEROKEE GROWTH PLANS
Although CEP is pleased with its strong Black Warrior position, it is also seeking CBM assets elsewhere. In 2007, it made three purchases in the Cherokee Basin straddling northeast Oklahoma and southeast Kansas, where the CBM reserve life is about 15 years.
In April 2007, it paid $115 million for a foothold in the basin by acquiring roughly 40,000 net acres from EnergyQuest Resources LP, a Quantum Energy Partners III LP portfolio company. The deal included about 550 producing wells, 800 low-risk, low-cost drilling and recompletion opportunities, and ample gathering system capacity.
In July 2007, CEP followed up with a second Cherokee deal, acquiring 560,000 net acres from Amvest Corp. for $240 million. This transaction includes 13-year, exclusive concession rights with the Osage Nation for CBM and shale exploration.
Upon closing, Amvest Osage, a subsidiary of privately held Amvest Corp., was merged into a CEP subsidiary. The property consists of about 370 producing wells and includes nearly 1,000 additional drilling and recompletion opportunities.
During the third deal, in September CEP purchased Newfield Exploration MidContinent Inc.’s CBM assets for $128 million, including 80,000 net acres.
CEP chief executive Felix Dawson said at the time the Newfield deal more than doubled CEP’s proved reserves and tripled daily production.
“We’ve now spent $483 million, and as a result, we are the second- largest producer in the Cherokee Basin. We hold approximately 160 Bcf of proved reserves in the Cherokee,” says Minas.
The company plans to ramp up production on each of the acquisitions during the next six to 12 months.
“On the EnergyQuest assets, we planned to spend $9 million in the first year and then roughly $3 million per year thereafter,” says Minas. “On the Amvest acreage, we planned to spend $23 million in the first year to ramp up production and then taper it off to the capital required to maintain existing production. On the Newfield transaction, we planned to spend about $4 million per year. Hie reality is we are not going to operate those assets all independently. One of our strategies is really around managing those acquisitions as one core asset.”
Recent acquisitions of coalbed-methane assets will add to CBM production in 2008 for these buyers.
CEP has a 50-50 joint venture with Bullseye Operating LLC on the EnergyQuest purchase but is essentially 100% working interest owner on the other acquisitions, although some individual wells may have non-operating partners, she says.
The company will use a variety of drilling techniques on its Cherokee acreage.
“We are assessing the returns from differing exploitation practices and factoring that into how we’re going to deploy capital,” Minas says. “There are some practices around commingling multiple zones and some recompletion opportunities in some shallower zones, particularly on the east side. We will also look at horizontal drilling in 2008.”
There is significant unproved acreage on the Amvest Osage properties, whereas the other deals were more concentrated and have more proved reserves.
“At the end of the concession agreement, whatever is held by production we will retain ownership of and the rest will revert back to the Osage Nation,” she says.
Pioneer Natural Resources Co.’s president and chief operating officer, Tim Dove.
Minas says CEP will stick to its strategy of steady and stable production, and continue to look for opportunities that fit its objectives.
“We are pleased with these acquisitions and think that the assets are well-suited to our MLP [master limited partnership] profile,” says Minas. “We’re not going to drill up our coalbed methane as rapidly as, say, a traditional E&P company might, which tends to drill as rapidly as possible.
“One of our growth strategies is basin consolidation: buying out others in the basin in which we have a position. We would be looking at other opportunities in both the Cherokee and Black Warrior basins, as well as other coalbed-methane or unconventional basins that fit our criteria.”
RATON BASIN DOMINANCE
Dallas-based Pioneer Natural Resources has aggressively pursued CBM assets with positive results. Coalbedmethane exploration in the Raton Basin began in the late 1970s and continued through the late 1980s with several companies drilling and testing more than 100 wells. In the mid-1990s, Evergreen Resources Inc. became the first company in the basin to produce CBM gas on a commercial basis.
By acquiring Evergreen in 2004, Pioneer created a new core area in the Rocky Mountains. It is the largest operator in southeastern Colorado’s gas-rich Raton Basin, averaging about 174 million cubic feet (MMcf) of CBM gas per day from more than 1,900 producing wells on 317,000 gross acres.
“We expect 8% to 10% production growth from our coalbed-methane assets in 2007, despite being slowed considerably by horrendously bad weather in the first quarter,” says Pioneer president and chief operating officer Tim Dove. “We still believe we are on track for a 10% growth rate in 2007 and at least 10% growth in 2008.”
The company recently completed a substantial Raton drilling program that was to bring 300 new CBM wells online by year-end 2007.
At press time, Pioneer was finalizing its $205-million acquisition of an operating interest in assets owned by Petrogulf Corp. that will add another 30,000 net acres to its Raton Basin portfolio.
This deal has significant upside through 110 additional step-out drilling locations. A majority of the acquisition value is derived from about 9,800 net acres immediately south of Pioneer’s Sangre de Cristo Unit. Pioneer estimates this particular acreage holds about 124 Befe of potential. “This is a bolt-on acquisition,” says Dove. “It takes advantage of our efficiency as an operator in our existing Raton operations and is bolting on what amounts to contiguous adjacent acreage. We can use our scale efficiencies to more effectively drill and produce the assets that are in this contiguous acreage.”
Pioneer’s acreage, primarily in the center of the Raton Basin, targets two coal-bearing formations, the Vermejo and the Raton. The Vermejo coals are found between 450 and 4,000 feet, and the shallower Raton coals are found from the surface to about 3,000 feet in depth. With historical Raton drilling success of about 98% and a large multi-year inventory of additional drilling locations, Pioneer expects significant growth in reserves and production for several years to come.
SELF-SUFFICIENT
As an operator, one of Pioneer’s strengths is cutting costs and speeding up production by having its own drilling and service equipment, Dove says, holding drilling costs in the Raton to an average of $450,000 per well.
“We are currently operating two of our own rigs. Because we use our own rigs, we are essentially able to hold drilling costs constant even though we’ve been in this escalating cost environment for a couple of years,” he says. “We also run our own frac fleets, cement crews, pipeline crews and so on. We are very self-sufficient when it comes to our operations and production, to the tune that 65% of our costs are controlled internally.”
This strategy stems from the remoteness of the Raton Basin operations.
“We’re a pretty good distance away from where we have other infrastructure, so we pretty much have to be self-sufficient. One of the first things we’ll do to the Petrogulf assets is come in and use our own crews and rigs, and drill up their 100-pIus locations,” says Dove.
Pioneer expanded pipelines in the field last year, and also boasts new and improved technologies in its field operations, especially regarding gas compression. Because CBM fields tend to produce at low pressures, wellhead and pipeline pressures must also be reduced to flow a maximum amount of gas through the wellbores.
One big positive about the Raton assets? Production is priced in Midcontinent markets, as opposed to gas produced from the Piceance and Uinta basins, where gas is priced based on substantially lower- priced markets.
“We clearly are the beneficiary of being able to move our Raton gas into Midcontinent markets,” he says.
CBM GROWTH IN OTHER AREAS
Pioneer also operates CBM pilot projects in the Piceance, Uinta and Sand Wash basins in Colorado and Utah, but the work is at a much earlier stage compared with the Raton achievements, Dove says.
The Piceance Basin is in the central portion of western Colorado, and the Uinta Basin is in eastern Utah. Pioneer owns about 244,000 gross acres covering producing and prospective regions of the two basins. Production is established from various tight sandstone, coal and shale formations. The company’s main projects in the area are CBM plays at Columbine Springs and Castlegate as well as a deep gas play at Main Canyon.
The Sand Wash Basin is the site of a potential CBM project north of the company’s Piceance Basin properties. Pioneer holds a 50% operated interest in 114,000 gross acres in the Lay Creek Field where it has drilled 17 wells in six separate pilot areas and completed workovers and recompletions of 14 wells drilled by a previous operator. The company has completed the water treatment facilities and planned to initiate gas sales by the end of 2007.
The success of the pilot project depends on the ability to dewater the formation and determine whether commercial quantities of gas can be produced. If successful, full field development could begin in 2008.
“Our ongoing strategy is to acquire more U.S.-based coalbed- methane assets and natural gas production.” Dove says.
At press time. Pioneer still planned to form and take public a new MLP, focused on its Raton Basin CBM assets, sometime in 2008.
By Kelly Gilleland, Contributing Editor
Copyright Hart Energy Publishing, LP Jan 2008
(c) 2008 Oil & Gas Investor. Provided by ProQuest Information and Learning. All rights Reserved.