Two years ago, East Texas’ Deep Bossier was one of the hottest unconventional plays in the U.S. EnCana Corp. had just purchased Leor Energy’s assets in Amoruso Field for $2.5 billion, and the best wells in the deep, high-pressured, high-temperature formation were ranked among the top 20 U.S. gas wells annually.

But in the past year, faltering gas prices have muffled the roar of production from the play’s Amoruso and Hilltop fields, in Leon and Robertson counties. The Deep Bossier is taking a back seat to EnCana’s land-retention strategy in the nearby Haynesville shale. And reacting to low commodity prices, the company curtailed production out of Amoruso by some 100 million cubic feet per day as part of a larger strategy that touched other areas as well.

Gastar Exploration Ltd., a decade-long Deep Bossier devotee, in 2009 also faced a Bossier slowdown, with a critical need for cash brought about by “bad markets, bad prices and a bad balance sheet,” says president and chief executive officer J. Russell Porter. Salvation arrived with the $250-million sale of its Australian coalbed-methane assets—Porter’s “favorite child”—to Santos Ltd. in mid-summer.

Anadarko Petroleum Corp. and Marathon Oil Corp., which also ply the Deep Bossier’s tight sands, likewise are focused elsewhere. Anadarko released its rig in the third quarter and dropped production to 116 million cubic feet per day net from 133 million net in the second quarter.

Transformative transaction

But despite poor gas prices, for Gastar the New Year brings rejuvenated plans. The sale to Santos left it entirely Deep Bossier- and Marcellus shale-focused. Net proceeds of $175 million eliminated most of its debt and freed up $20 million in cash flow that had been directed to annual interest payments. When the sale was announced, Porter called it “clearly a transformative transaction…”

Porter endured plenty of sleepless nights in 2009. “I kind of shudder at the consequences, corporately, if we hadn’t been able to pull the sale off,” he says. “Now, we operate essentially all of our assets and can respond to gas prices with our capital budget, so we have a lot of flexibility.

“There’s a learning curve you have to go through with any play, and the intensity of the curve is magnified when the wells are expensive and you’re small.”

Gastar has a new $47.5-million revolving credit facility with Amegy Bank, Bank of Montreal and Iberia Bank. Additionally, in late fall the company sold its majority interest in the Hilltop Resort Gathering System to US Infrastructure LP, netting over $21 million in proceeds. The system comprises 20 miles of natural gas pipeline connected to 24 Gastar-operated wells.

Solid economics

Times are tough in natural gas plays all over; unlike some, the Deep Bossier can hold its own. Producers estimate its drilling and completion costs are $2.70 to $3 per thousand cubic feet (Mcf).

“The Deep Bossier economics are better than any other play we are aware of,” says Porter. “At a return to $6 gas, we’ll be drilling wells for the next several years that offer 100% internal rates of return and almost four times return on investment.”

EnCana also credits the Deep Bossier’s viability at today’s gas prices. “We use a measure of supply cost to evaluate various plays within our portfolio,” says Alan Boras, manager of media relations. “We’re always working to have one of the lowest supply costs for drilling and completion and to focus investment on a balanced portfolio based on that capacity to achieve low supply costs. The Deep Bossier’s supply cost is less than $4 per Mcf. So even when prices are soft, it’s still very economic.”

Technology and experience with drilling have lowered risk. “We have enough well control and 3-D seismic that most of these are very low-risk locations,” says Porter.

Gastar holds some 33,000 gross (15,350 net) acres in the play with 130 undrilled locations based on 160-acre spacing—“and that is high-grading the acreage,” Porter says. Total net potential is 425 billion cubic feet. The company’s total drilling budget for 2010 will be $55- to $60 million, with $40 million earmarked for the Deep Bossier.

After releasing its rig in May, the company put it back to work at Hilltop in late October. It will keep one rig running through 2010, with another possible should gas prices top $6.50 or so. Gastar’s most recent well, Wildman Trust #5, was put on production from a single zone at 15 million cubic feet per day at a restricted rate. At press time it was being recompleted to several additional zones.

“We would expect a sustained 10 million cubic feet per day as a result of these completions, and then a decline,” says Porter.

Gastar curtailed a number of wells, beginning in early September until just recently. It cut back production by only several million cubic feet per day, but that reduction left it almost 100% hedged at about $5.

At press time the company was drilling the #4 Donelson, a Lower Bossier target at about 19,000 feet with an estimated ultimate recovery (EUR) of 15 billion cubic feet. For 2010 it has scheduled a Middle Bossier (15,000 to 18,000 feet) and two additional Lower Bossier wells.

The company produces some 50 million cubic feet per day gross and 25 million net from Hilltop. Deep Bossier wells are typified by high initial production rates followed by a steep decline. “It’s not as steep as the Haynesville,” says Porter, “but it’s about a 60% first-year decline and then a strongly hyperbolic curve.”

Estimated EURs for the Lower Bossier—the favored target because of its high production rates and consistency—range from 15- to 25 billion cubic feet. Middle Bossier wells have IP’d at 18- to 20 million per day but haven’t proved as consistent in permeability and porosity. A highlight at year-end 2008 was #1 Belin, which registered 150 feet of net pay in multiple sands, each capable of initial potentials of between 10- and 15 million cubic feet per day. Today its EUR is “at least 25 billion cubic feet,” says Porter.

Wells require about 90 days to drill and another 30 to 40 to complete. On much of its acreage, the company can combine Middle and Upper Bossier with the Knowles limestone target.

Operators in the Deep Bossier are reducing drilling costs, both through technology tweaks and service-price cuts. The Donelson #4 will cost $10- to $11 million, down from an average $12 million previously. A Middle Bossier target averages $7.5- to $8 million.

“Our costs have come down, especially for stimulations,” says Porter. “We have our design for stimulations dialed in—the difference is they are costing less. High-pressure-pumping costs are way down.”

In the late fall Porter observed a ramp-up in activity for service companies.

“I see it as a harbinger of pressure on natural gas prices, because fracers and frac equipment are becoming very difficult to schedule,” he says. “Prices haven’t come up, but they are busier. To me, that’s a bearish sign for the next year or two. The long-awaited production decline is not going to be nearly of the magnitude people had hoped for.”

Gastar cuts time and materials by drilling with water-based fluids through the Travis Peak formation on its way to the Middle Bossier, and by using PDC bits from the surface to the top of the Travis Peak and Knowles; then running a diamond-impregnated bit on the Lower Bossier on a turbine.

Additionally, when Gastar’s current rig contract expires after two more wells, it will save an estimated $400,000 per well.

Gearing down

EnCana Corp. shifted down its Deep Bossier activity in 2009 and will cut it by half again in 2010—from 34 net wells to a projected 14 wells in the next 12 months. Its land position is now about 150,000 acres, at year-end 2008 it tallied an inventory of 250 locations, and it holds a 93% working interest in Amoruso. IP rates from its 113 wells range from 5 million to 60 million cubic feet per day.

In July, the company detailed in an earnings call its Deep Bossier drilling plans for 2009. Its budget called for 20 wells in Amoruso, 14 in Hilltop, and four exploration wells. During the call, executives referred to the Deep Bossier as “the highest-return play” in the company’s portfolio. EnCana has hedged about half of its 2010 production at $6-plus.

Boras estimates that average costs have fallen by about 15% per well in the Deep Bossier to some $9.3 million. The company is looking at the potential for horizontal drilling. “Pressure and temperature at depth will determine how we move on that,” he says.

EnCana doesn’t expect gas prices to stay flat. “If you look back at prices prior to the recent drop—they floated in the range of $6 to $8 for five years,” says Boras. ”Supply costs industry-wide are creeping up past $7, but we think with the slowdown and service cost reductions that $6 or $7 is where they belong. We anticipate when the market gets back into balance, we’ll return to those levels.”

But while natural gas prices languish, so goes activity in high-potential plays like the Deep Bossier. And producers are left with little choice but to continue sifting their portfolios for the best returns.

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