Nothing ignites drilling activity increases like higher demand.

Northeastern US operators leverage high gas prices into more cash flow, more financing choices and a lot more wells. Appalachian operators are using the opportunity to prove there's still plenty of life in supposedly mature areas.

The numbers tell the story for eastern Kentucky, New York, Ohio, Pennsylvania, eastern Tennessee, Virginia and West Virginia. In those states, drilling permits issued through October 2003 totaled 6,384, a 16% increase from the 5,533 permits issued in the same period a year earlier. Even more important, operators started 3,688 wells in the period in 2003, up nearly 30% from the 2,849 wells started through October 2002, according to IHS Energy.

One big contributor, William S. Daugherty, president and chief executive officer of Daugherty Petroleum Inc. in Lexington, Ky., has five rigs running along the Pine Mountain Fault in Kentucky. The reasons? "Better prices, and our lease position has evolved. We have much greater prospects than at any time in our history," he said.

Gas prices averaged US $5.25/MMBtu for the first 9 months of the year, and he has one long-term contract at $6.60/Mcf. The company also gets a 15% to 20% Btu bonus for its high-quality gas, and because it doesn't have to pay the pipeline charges that a Gulf Coast operator pays, he gets a higher netback than producers who sell at Henry Hub prices do.

Daugherty plans to complete 80 wells this year and has 150 wells on the drawing board for next year, all in the Big Sandy area where the company has assembled some 170,000 acres of leases.
All that drilling is highly capital intensive. The company funds some of the drilling from its growing cash flow, but it also forms partnerships with high-net-worth individuals and industry partners.
Big Sandy is a special situation. The field has produced more than 2.5 Tcf from 10,000 wells, but coal-mining restrictions in the past put a lot of prospective acreage off limits to drilling.

Daugherty has picked up some 120,000 acres of leases that have never been drilled in the long-producing tight Devonian play.

"We're seeing original pressures," he said. The company also is putting better completion techniques to work than the original completions in the field.

The result is wells that typically produce 1,100 MMBtu/Mcf to 1,236 MMBtu/Mcf gas at an initial rate between 75 MMcf/d and 200 MMcf/d, decline slowly and last for 25 years. The moderate-cost wells range between 3,500 ft and 4,500 ft (1,067 m and 1,372 m) deep, and the company has a chance of production from up to five pay zones.

If it's a contest for the most active driller in Pennsylvania, look for a local company. "I believe we've been the most active driller in the past couple of years; number one or number two," said Frank Carolas, executive vice president of land and geology with Atlas America Inc., which works through its Atlas Resources Inc. operating company.

The company has drilled about 250 wells a year for the past several years, he added.
The heavy capital costs of that kind of program encourage the company to raise money through public and private offerings. In this case, Atlas puts up 30% of the cost and investors put up the other 70%.
The target is tight Devonian and Mississippian sands to a depth of about 4,000 ft (1,220 m). Some of the poorer wells come in at only marginal rates, but some of the better wells will reach 400 Mcf/d of sustained gas production into the pipeline. The key to good wells is found through detailed mapping of primary reservoirs.

Appalachia can boast of a lot of success stories. It provided the cornerstone for the expansion of Cabot Oil & Gas into the Rocky Mountains and Gulf Coast. It gives Columbia Natural Resources Inc. bragging rights to putting the Trenton-Black River play on the explorer's map in New York and West Virginia. It provides a good living for a lot of people in the oilpatch.

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