No Midlife Crisis In The Barnett

In June 1982, Mitchell Energy & Development Corp. brought the C. W. Slay No. 1 well on production in extreme southeast Wise County, Texas. There have been other exploration and production milestones in that part of the oil patch, but the Slay No. 1 is widely considered the first production well in the Bar-nett shale and marks the dawn of the unconventional era.

Since then, the Barnett has produced some 11 trillion cubic feet (Tcf) of gas. In November 2011, it reached peak production of 6 billion cubic feet per day from all Barnett wells (not just those in the huge Newark East Field), according to Texas Railroad Commission data cited by the Powell Shale Digest.

The Barnett is facing middle age as a producing basin, but its evolution is continuing. Range Resources Corp. left the play in 2011, selling its entire position to private interests for $900 million. As the shale’s 30th birthday approaches, both Quicksilver Resources Inc. and Carrizo Oil & Gas Inc. are in the final stages of reconfiguring their positions: Quicksilver by creating a master limited partnership (MLP) for some of its longer-lived production, and Carrizo by selling a portion of its acreage to private interests.

These and other transactions have led some to suggest that the boom is off the rose in north-central Texas, that the first shale play is becoming more historical footnote than opportunity. The rig count is down substantially, but that is due to low natural gas prices.

A closer look at the companies getting out or modifying their positions reveals a series of prudent but company-specific transactions. Indeed, executives at the firms on the move have nothing but optimism for the Barnett’s long- term potential.

Carrizo Oil & Gas Inc. perfected long laterals beneath the University of Texas-Arlington campus.

Those sentiments are echoed by players sticking with the play, who say production will go on another 10 to 20 years.

On February 10, Quicksilver registered with the Securities & Exchange Commission to prepare for the initial public offering of the MLP, Quicksilver Production Partners (QPP). No date has been set for the actual issue of shares. Net proceeds that flow back to the parent company will be used to retire debt. Citing the mandatory quiet period in advance of the QPP issue, Quicksilver declined to provide further details.

However, the company was a big booster of the Barnett before the cone of silence came down, and is expected to pick up where it left off when permitted. At investor conferences late last year and earlier this year, company officials stressed that the company is not getting out of the Barnett—it is simply rearranging its assets there to take advantage of the best operating structure for each well and the prevailing low-gas/high-oil market.

About 15% of Quicksilver’s Barnett acres are expected to go into QPP initially, with more dropped into that structure over time. As MLP advocates across the industry have noted, long-life, low-decline wells are the perfect fit for that format.

Usually producers designate wells for their MLPs based on production profile, maturity or vintage, and Quicksilver has given no indication it will deviate from that approach. Public estimates of reserves to bring to market, when the market is ready, total some 1 Tcf of gas.

Quicksilver began taking leases in the Bar-nett from 2002 to 2003, but was involved in shale development long before that through its connection to Mercury Exploration Co., which was developing Michigan’s Antrim shale in the 1990s. From its base in Fort Worth, Quicksilver had a front-row seat for Mitchell’s activity in the Barnett, and in 1997 it actually drilled a well in Johnson County with advice from Mitchell.

Quicksilver’s acreage is largely in the liquids window in the southern part of the play. At its Barnett peak, its holdings across the basin totaled 200,000 acres, and its production was 360 million cubic feet per day. The acreage has been honed to about 160,000, but production has stayed level for the most part. The company plans $110 million in capex spending for the Barnett for 2012, with two rigs running through the first quarter and one for the remainder of the year. It will drill about 25 new wells and has an inventory of uncompleted wells.

Carrizo has a backlog of Barnett wells to frac and hook up to sales, and is still producing, but it is also deploying capital in more economic plays.

Splitting the difference

Carrizo is equally enthusiastic about the Bar-nett’s future. At the time of the IPAA Oil & Gas Investment Symposium in April 2011, Range had departed the play just weeks before, but Carrizo president and chief executive Chip Johnson told investors, “People who think the Barnett is going to roll over and die need to look at our data.”

In advance of its sale of 122.4 billion cubic feet (Bcf) equivalent of proven Barnett reserves to KKR for $104 million, Carrizo was showing economics for a 5.5- Bcf well in southeast Tar-rant County with total drilling and completion costs of $3 million, finding and development (F&D) costs of 73 cents per thousand cubic feet (Mcf), and an internal rate of return of 87% at a Nymex price of $6 per Mcf.

The fundamentals of the play have not changed, but Carrizo found itself in need of cash to close a $150-million capex gap, and at press time, announced the sale of 110 net Bar-nett wells producing 35 million cubic feet per day (MMcf) to Atlas Resource Partners for $190 million cash.

“We were the second public company into the play,” says Johnson. “Burlington was already in. We were into onshore Gulf Coast wildcats, and needed a resource play. Devon was telling the world everything they had learned from acquiring Mitchell, but industry did not believe them. So we made the change from an explorer to a producer, and found cheap leases near the UT-Arlington campus. It was a big game-changer.”

As an early operator in the play, at first Carrizo employed horizontal drilling simply as an expedient, says Johnson. “Southeast Tarrant County had a lot of five-acre lots. We also had that acreage at UT-Arlington, and under the General Motors factory in Arlington. We had to drill long laterals. But those ended up changing everything.”

Carrizo has continued to push the envelope with directional drilling, using sinusoidal bores in every dimension. “We can turn 180 degrees,” says Johnson. “We want to perforate as much of the section as possible. I hate to waste any part of a lease. If we have to go around corners to maximize the frac, then we will.”

Since selling its liquids-rich production to KKR in 2011, Carrizo still owns about 32,000 net acres with current production of some 100 MMcf per day, all dry gas.

“Our core properties have F&D costs of just $1 an Mcf,” says Johnson, “but at current gas prices it is still our lowest rate of return for any of our assets. In our portfolio it just can’t compete with our positions in the Eagle Ford or the Niobrara.”

That said, Carrizo is running out every ground ball. “We are still producing and still fracing,” says Johnson. “We have a backlog of wells to complete and refrac, but we are not drilling, just optimizing. We also have downspacing opportunities, but not at $2.50 Nymex.”

Barnett gas-well production growth has slowed significantly in the past several years, not helped by low natural gas prices. At the same time, the Barnett well count growth has slowed, as industry’s focus shifts to oily plays.

Busy in the Barnett

The Barnett always will be on the leading edge of unconventional basin evolution, and for some producers it is still on the forefront of drilling and completion technology. “We simply don’t know the life cycle of a shale play,” says Stephen McDaniel, executive vice president and chief operating officer of EnerVest Operating LLC. “We are participating in that right now.”

EnerVest entered the Barnett only recently, through its December 2010 acquisition of Talon Oil & Gas, which held acreage on the east side of Parker County. It made a few smaller additions, and then took a big bite with its acquisition of Encana’s operations in the Barnett in December 2011.

“Our investors are looking for derisked production, and as the oldest of the new shale plays, the Barnett is just that,” says McDaniel. “We are not front-runners in new plays. Our strength is to acquire more mature fields and get more out of them.”

So, maybe the future of unconventional basins looks a great deal like the well-known evolution of conventional basins. Indeed, McDaniel is one of several executives who uses conventional reservoir language when speaking of the resource play. “The Barnett is truly a world-class reservoir. There is a whole lot of gas left in the play. Even an incremental improvement in recovery of just a few percentage points is a very meaningful amount of resource.”

EnerVest, including all its various interests, structures and investments, holds 113,000 gross acres with 1,000 operating wells and current gross production of 265 MMcf per day. On top of that, EnerVest lifts about 1,200 barrels per day of oil and condensate.

“We have a good mix of wet and dry wells,” says McDaniels. “We like our current production, which is mostly along the Parker-Tarrant county line, a good blend of acreage across the core and Tier 1 areas. We also have quite a bit of oil production in the Barnett Combo area in Wise and Montague counties.”

EnerVest has allocated capex of $215 million to the Barnett for 2012. The company had three rigs running at the beginning of the year, and planned to bring in a fourth in March. The budget calls for 91 new wells, with one rig allocated to oil production in the Combo play.

McDaniel is excited to be bringing more production out of the Barnett. The Encana acquisition vaulted EnerVest from 10th to sixth place among producers in the play; Devon is first and Chesapeake is second, according to the Texas Railroad Commission.

“We are very busy in the Barnett,” says Mc-Daniel. “We are doing pad drilling, zipper fracs, tighter spacing, and always fine-tuning our logistics. Of course, that is on top of our usual work of introducing artificial lift, making refracs, and so forth. Of course, every shale is different, but what we are learning in the Bar-nett we are going to apply to the Utica and other unconventional basins.”

Pioneer Natural Resources is another relatively recent entrant to the Barnett. “We were the lead engine of the second train into the play,” says Tim Dove, president and chief operating officer. Pioneer acquired Shell’s position in 2007, and has seen the focus in the basin shift to the liquids-rich areas of the play. Today Pioneer holds 78,000 net acres in the oily Bar-nett Combo area. Dove says his firm has more than 1,000 liquids-rich wells to drill.

Devon Energy and Chesapeake led Barnett gas production through the first half of 2011.

The firm is running two rigs in the Combo play, and has drilled 43 wells, with all but one on production. The company’s focus today is to extend laterals from 3,500 feet to 5,000 feet, using as many as 15 frac stages. “There is still a strong correlation between number of stages and the well’s production,” Dove notes. Total production is about 6,000 barrels of oil equivalent per day, of which about 58% is liquids.

Pioneer is not keen to divest its legacy gas assets in the Barnett. “Why would we want to sell at the bottom of the market?” asks Dove. But neither is the company looking to buy. “We are in a hold scenario in terms of our dry-gas assets. The Barnett has a long life, lots of liquids, and plenty of gas. We see more gas-fired power plants being planned, and petrochemical demand is burgeoning. When gas prices recover, there are going to be a lot more wells in the basin. But for the time being, we will focus on drilling our extensive liquids holdings.” A range of options

Mark Whitley, senior vice president of the North Appalachia and Southwestern Division at Range Resources, was vice president of the East Texas Division of Mitchell Energy back in the day. He joined Mitchell in 1982 and held different jobs with the company, always with a close eye on the boss. “The development of the Bar-nett was very much driven by Mr. Mitchell,” says Whitley. “He is the one who should get the credit for the shale-gas revolution.”

Today, the pace of shale development has sharply accelerated. “Things were done at a slow pace at first. Mitchell had a large inventory to drill. George (Mitchell) knew there was gas in that shale, and it took a decade to figure out how to get it out. Frac jobs back then were very different from what we pump today.”

The real key to the Barnett, Whitley states, is not directional drilling or even sophisticated frac jobs. “Eventually we realized that each well was not a one-off; that this was a repeatable process. That was the point: wow, we can do this over and over and make better wells.”

Range acquired its position in 2005, which is when Whitley joined the firm to advise on wells in Johnson and Ellis counties along the Ouachita Thrust. “Range acquired the Fort Worth company, Stroud Energy, which had acreage in Tarrant and northeast Parker counties ,” says Whitley. “In those years many of the bigger players were getting in. Devon acquired Mitchell, but also Chief, EOG became a big player, and Chesapeake acquired Hallwood.”

Range’s position peaked at 100,000 acres and produced 120 MMcf equivalent per day by 2010. The position was sold to Legacy for $900 million, which Range has deployed in its other shale plays, just as it has deployed its expertise in shale production. The reasons for selling, says Whitley, are no different than for other firms divesting positions: a funding gap.

“Our Barnett position was good, marketable assets, derisked in the core area,” says Whitley. “We had gone as far as we could go with them and we had that big kahuna up the road in the Marcellus. We replaced all the lost production from that sale by the end of the same year.”

While he does not have a vested interest in the future of the Barnett at the moment, Whitley does have a sentimental and a visual interest. “I can look out the window and see Barnett rigs,” he notes. “I see a long, broad middle age for the play. The core area is only about 10% of the basin, which in total covers 3 million acres. And there is production up and down that whole area. There is a significant liquids window and plenty of gas processing on the ground.”

His colleagues share that optimism. “The Barnett has been predicted to die several times,” says Carrizo’s Johnson. “Look at the rig count, down something like 70% from its peak. But the basin is producing 5 Bcf per day. There are some skeptics who say the shale plays are not going to last, but the Barnett has already proven that wrong. We are confident in the play and in the recovery of gas prices.”

McDaniel, at EnerVest, concurs. “There is so much gas in place, 120 Bcf or more, per section. Mitchell pioneered the fracing, and Devon did a lot of work with horizontals, but we are still experimenting with fracs and completion techniques.

“Even with all of that, even with the downspacing, we are still seeing projected recovery factors of just 40%. That means that more than half the gas is still in place. What amazes me is how quickly our industry is evolving. It has taken 30 years in the Barnett. Look how fast people are moving now in the Marcellus and the Utica.”