Hancock Gas Lease

Last Thursday a well in Clearfield County PA suffered a blowout.. Fracking fluid and gas jetted out of the hole, reaching 75 feet into the air, and was finally brought under control Friday around noon.

While the pollutants could have caused a major mess, it seems that the worst contamination was prevented. As the water made its way toward local streams, a work crew intercepted it by digging a trench and pumping it away, recovering about 35,000 gallons. No injuries resulted, nor was there any fire. However, the Washington Post reports

The gas never caught fire and no injuries were reported, but state officials worried about an explosion before the well could be controlled. The well was brought under control just after noon Friday, about 16 hours after it started spewing gas and brine, said Elizabeth Ivers, a spokeswoman for driller EOG Resources Inc.

EOG, the company owning the well, has released a statement about the incident:

The incident occurred at approximately 8:00 p.m. EDT on Thursday, June 3, 2010 when a service rig operated by a contractor was in the final stages of completing this natural gas well prior to bringing the well on production. When the incident occurred, containment trenches and sump pumps were immediately put in place to capture fluid release and well control specialists were dispatched to the wellsite. At sundown, for safety reasons, the area was secured and all personnel were moved away from the well site. The following morning the well control specialists and EOG assessed the situation and took steps to shut-in the well. They determined that no detectable amounts of natural gas were present in the area of the well. The PADEP was notified of the situation and representatives of the agency were also on location to oversee the securing of the well. At approximately 12:15 p.m. EDT on June 4, 2010, the well was secured and shut-in. The well site is in an unpopulated location approximately 11 miles from Penfield, PA. There were no fires, no injuries and no significant impact to the environment as a result of this incident.

During the 16-hour period, the well released a limited amount of flowback water, salt water and some natural gas, but the well has been completely shut-in and secured since approximately 12:15 p.m. EDT on June 4th. The containment trenches and sump pumps captured the majority of the fluids that flowed from the well during this time period. As of the morning of June 6, 2010, approximately 834 barrels (35,000 gallons) of these fluids had been recovered and are contained on location. EOG believes this is the majority of the fluids that were released from the well prior to being shut-in. EOG also immediately began monitoring nearby streams and springs to identify and respond to any impact to area water. At this time, EOG believes that any impact to area streams and springs and to the environment is minimal. All operations at this well site have been suspended and all applicable equipment has been secured pending the incident investigation.

In a preliminary assessment of the cause, it appears that the seal integrity between the pipe rams of the blow-out preventer (BOP) and the tubing was compromised allowing pressurized fluids and some natural gas to flow. The cause of this compromise is being investigated. As part of EOG’s routine operating and safety procedures, the BOP had been successfully tested the morning of June 3, 2010.

This is a nasty development, but I think there’s a silver lining to it.

First, we’ve learned more about the possible dangers of drilling, and hopefully that in turn will lead to a better understanding of how to mitigate them. We’re all lucky that this happened in an unpopulated region, so the effect of this accident will have minimal impact on people’s lives.

Second, with world attention focused on the disaster in the Gulf of Mexico, this helps us keep a little perspective. This accident was dangerous, and things could have gone worse. But it’s a completely different class of incident compared to the Gulf. In particular, it appears that gas drilling, even involving hydrofracking, is much more manageable than deep-sea drilling.

Chesapeake Energy, the largest player in the Marcellus shale, has just released its Operational Update, discussing developments through 4th quarter of 2009. Although it doesn’t go very far in breaking things out by New York versus Pennsylvania or West Virginia, we can get some idea of what direction they’re going in overall. And that direction is down — drilling down, that is.

Since January 1, 2008, Chesapeake has drilled and completed 56 company-operated horizontal wells in the Marcellus. During the 2009 fourth quarter, Chesapeake’s average daily net production of approximately 45 mmcfe in the Marcellus increased approximately 26% over the 2009 third quarter and approximately 530% over the 2008 fourth quarter. Chesapeake is currently producing a company record monthly average of approximately 65 mmcfe net per day (115 mmcfe gross operated) from the Marcellus and anticipates reaching approximately 270 mmcfe net per day (515 mmcfe gross operated) by year-end 2010 and approximately 450 mmcfe net per day (855 mmcfe gross operated) by year-end 2011.

To further develop its 1.6 million net acres of Marcellus leasehold, Chesapeake is currently drilling with 24 operated rigs and anticipates operating an average of approximately 32 rigs in 2010 to drill approximately 175 net wells.

That is, they’re increasing the number of drill rigs they’ll be using in order to drill 175 new wells next year (across the whole Marcellus). And they’re expecting the output of these wells to significantly increase the amount of gas they’re extracting.

State Senator James L. Seward (R/C/I – Oneonta) has proposed bill S6269 in the hopes of ensuring that gas operations do not damage New York’s water supply. As reported by WBNG 12,

Senate bill 6269 would allow the commissioner of the DEC to require any permit holder who is authorized to drill gas wells to post a bond with the state comptroller. The bond, an insurance policy, would then be available to defray the cost of repairing damage to a water supply.

“Gas exploration historically has been rather safe in New York, but it makes perfect sense to demonstrate continued vigilance in this matter,” Seward added. “This bill would establish accountability and responsibility on the part of gas drilling companies.”

A pretty good overview of the environmental concerns that gas drilling poses has just been published by advocacy group* ProPublica.

The debate over the safety of natural gas drilling has intensified in the past year, even as the nation increasingly turns to cleaner-burning natural gas as an alternative to oil and coal. In Congress, one group of politicians is writing a climate bill that would encourage the use of more natural gas, while another group is pushing a bill that would put a key part of the process under federal regulation and force the disclosure of chemicals used in the drilling process. Neither bill addresses the question of how to encourage energy companies to use existing techniques that lower the risks of environmental damage.

Their discussion is actually quite thorough, I encourage reading it.

My one complaint is their continued economic illiteracy. The article states

Some of their techniques also make good business sense because they boost productivity and ultimately save the industry money — $10,000 per well in some cases.

ProPublica should see the inherent contradiction in characterizing the energy industry as greedy fiends, while at the same time asking us to believe that they’re actively resisting measures that would save them real money.

* They would object to my characterization of them as advocates, preferring to think of themselves as a news agency. But I think their agenda shines through their reporting clearly enough that I have to consider them as advocates. Even so, the referenced article is pretty good.

The last several days have brought some news that may anger environmentalists.

First, Cayuga Heights may have violated its own laws concerning water quality accepted at its treatment plant. Writes the Press & Sun-Bulletin:

According to tests on wastewater coming to the plant, the village accepted material exceeding standards for metals such as copper and lead, and greatly exceeded standards for “Chemical Oxygen Demand” and “Total Suspended Solids.”

However

Mayor Jim Gilmore and Superintendent of Public Works Brent Cross responded that the gas-drilling wastewater was 3 million gallons of 540 million processed during the period. Monthly tests showed no violations of the village’s DEC permit while accepting the waste, Cross said.

Two days later comes news that there may be unexpectedly high levels of radioactivity being produced from gas well drilling.

An analysis of wastewater samples by the Department of Health found levels of radium-226, and related alpha and beta radiation that are up to 10,000 times higher than drinking water standards, according to a memo the agency sent to the Department of Environmental Conservation. That means the DEC will have to do more testing to identify drilling sites that pose radiation risks, and ensure hot drilling waste is handled and disposed of properly, according to records from the state. …

“The issues raised are not trivial but are also not insurmountable,” the health department’s memo to the DEC concludes. “Many can be addressed using common engineering controls and industry best practices.”

This is troubling coming right after the Cayuga Heights piece, which reveals that the DEC doesn’t really have the capacity to do this testing adequately.

Finally, the next day, two companies involved in drilling — Chesapeake Appalachia and Schlumberger — were each fined for a chemical spill at a Pennsylvania drilling site. Again from The Press & Sun-Bulletin:

Chesapeake Appalachia and Schlumberger Technology Corp. were both fined $15,557 for spilling 295 gallons of hydrochloric acid at a Bradford County drilling site early this year, according to records from the Pennsylvania state Department of Environmental Protection.

Failure of a tank used in hydraulic fracturing caused the spill in Asylum Township. …

Chesapeake notified the DEP on Feb. 9. An inspector called to the site determined about 7.5 gallons of the solution leaked every hour, which would suggest the leak happened over two days or more.

The companies sopped up free standing acid from the ground with absorbent pads and excavated trenches to contain the spill, according to DEP records. They later removed 126 tons of contaminated soil.

Much of the controversy about gas drilling in the region has centered around possible pollution to the NYC water supply. In response to this, Chesapeake Energy is now saying they will not drill in the watershed region. As reported in OilVoice:

Chesapeake Energy Corporation, America’s most active driller of new natural gas wells and one of its largest natural gas producers, today confirmed its previous announcements that it has no intention of drilling natural gas wells within the New York City watershed.

Be sure to read that carefully. They are most assuredly not backing away from all drilling. The sketchy reports carried in The Times and WNYC are misleading, implying that Chesapeake is backing out of the whole region.

Actually, they’re only excluding the watershed itself — and that is smaller than you might think. The OilVoice article reports that Aubrey K. McClendon, Chesapeake’s CEO says:

Our research has shown we are the only leasehold owner in the New York City watershed, and so Chesapeake is uniquely positioned to take this issue off the table and allow the discussion to proceed constructively on natural gas development in the Southern Tier. The small amount of acreage Chesapeake had acquired within the watershed region – fewer than 5,000 acres – was largely obtained as a result of leasing land outside the watershed from property owners who also had tracts within the watershed. This leasehold is immaterial to Chesapeake and also does not appear prospective for the Marcellus Shale.

The above emphasis is mine, to show that they absolutely do plan to pursue drilling in the region, just staying out of the watershed itself.

(Yes, it’s been a very long time since our last update here. But it seems that things are getting interesting again…)

There has been very little in the news this week. One wonders what’s going on? Is there still action simmering, or is the situation chilling like our weather?

Looking around for news to give us some hints, the two biggest items we can find seem to point in opposite direction.

On one hand, Chesapeake Energy has released information to their investors outlining their plans. Investment site The Motley Fool reports that CHK is scaling down the amount of money it plans to invest in drilling (although some of that change is due to the structure of deals rather than actual planned drilling activity):

Chesapeake Energy (NYSE: CHK) giveth, and Chesapeake Energy taketh away.

Not long after becoming the nation’s No. 1 producer, the natural-gas guru is tightening the reins in response to the recent commodity price rout.

As usual, there is a huge amount of information packed into Monday’s press release, but I will try to hit upon most of the key developments, and draw out some implications for both Chesapeake and the rest of the industry.

Front and center is the drawdown in drilling — $3.2 billion worth through 2010. That’s a significant amount, but it’s important to recognize that fully 40% of that figure stems from the “capex carry” associated with two major joint ventures — one executed, and one pending.

One deal with BP (NYSE: BP) has been consummated in the Fayetteville shale, and sees BP covering the first $800 million of Chesapeake’s share of the spending. Chesapeake is now actively seeking to strike a similar arrangement in the Marcellus shale. The suitor is expected to be a major like BP, rather than another independent like Haynesville partner Plains Exploration & Production (NYSE: PXP). We’ve already caught ExxonMobil (NYSE: XOM) sniffing around the Marcellus, but there are plenty of other global players eager to get into the shale game. Considering the probable wealth of targets throughout Latin America, I certainly wouldn’t rule out Petrobras (NYSE: PBR) as a potential partner.

The other 60% of Chesapeake’s projected drawdown cut comes out of internally funded drilling. The curtailment doesn’t look nearly as drastic when you consider that Chesapeake is mainly dropping more marginal targets in favor of sweet-spot stuff like the Haynesville. Greater productivity of the latter wells can go a long way toward minimizing the production drop-off.

Chesapeake’s move here — beyond the positive impact it will have on the company’s own balance sheet — may be just as important for the message that it sends to both peer companies and the broader market. For peers like Anadarko Petroleum (NYSE: APC) and XTO Energy (NYSE: XTO), the message is clear: We’re showing discipline, and it’s time to follow our lead. As an extension, a rational industry-supply response will make it plain to observers that there’s a floor not too far below today’s natural gas prices.

So The Fool closes in concluding that while some pullback has occurred due to falling prices for natural gas, industry insiders think that it’s fallen as far is it’s going to.

…which is goodnews for Chief Oil & Gas, who have just taken delivery of a new drilling rig, one designed and intended especially for use in the Marcellus Shale. As reported by MarketWatch:

Union Drilling Rig #58 is a first-of-its-kind drilling rig designed for drilling in Appalachia and the Marcellus Shale-

Chief Oil & Gas and Union Drilling, Inc. unveiled the new AC QuickSilver drilling system in Lycoming County, Pennsylvania, the first-of-its-kind rig designed for horizontal natural gas drilling in the Marcellus Shale….

This is the first of several new-build rigs planned by Chief Oil & Gas for the Marcellus Shale region. The next new rig is expected to go into operation in early spring 2009. Chief expects to have six drilling rigs running in the Marcellus Shale by the end of 2009.

The 1600 horsepower rig is built by Houston-based IDM Group, operated by Union Drilling, Inc. and is under a three-year contract for use by Chief Oil & Gas.

Christopher D. Strong, Union Drilling’s President and Chief Executive Officer, stated, “We are very pleased to unveil this new technology for Marcellus Shale drilling. This new rig design is especially well-suited for Appalachia’s rugged terrain and the ‘Quick-Move’ technology will allow Chief to rig down, then rig up on a new location within 100 miles, in less than 48 hours. It also allows for faster, more efficient drilling and has the capability to drill longer horizontal laterals.”

The rig also employs QuickSkid technology which allows for more efficient drilling of multiple wells from one pad site, reducing the impact on the environment.

This seems to suggest commitment to move forward on Marcellus drilling, at least in Pennsylvania. And we already understand that the New York Governor’s order for the Generic Environmental Impact Statement would cause delays on the NY side at least into spring of 2009.

Just a bit south of us in Dimock, PA, gas drilling has already begun. The Press and Sun-Bulletin reports that Cabot’s estimates predict some $23 Billion of gas per year at current prices, just beneath Susquehanna, PA only, yielding some $2.9 Billion in royalty payments.

Drilling operations are ramping up in Dimock, Pa., less than 25 miles south of the Broome County border. Residents there, who signed away their mineral rights for $25 an acre, are tolerating dust, noise and traffic from oversized rigs while hoping the bustle of work will produce fat royalty checks. …

[Dimock] has become a bustling destination point for rig-toting 18-wheelers, water tankers and oversized excavating equipment.

They pass the house of Pat Farnelli, who owns about 20 acres with her husband, Martin, on Carter Road. … Success of the drilling “will make the difference on whether we can keep our house,” said Pat, apple-cheeked, imperturbable and, more than anything, hopeful. “Everybody on this road could use the royalties.”

…She can see the tip of a derrick poking through the treetops about a quarter-mile away. She’s become accustomed to the round-the-clock cacophony coming from the hillside, illuminated by lights during the night. For her, it’s a sign of hope more than an irritation.

She cheerfully describes the commotion as “a hodgepodge of noise — screeching, banging, mechanical noise a lot like quarry noise, but more varied. But nothing we can’t stand … as long as it doesn’t affect the water quality.”

And indeed, it’s not all easy:

Less dramatic but equally problematic are threats to water, including spills and the disposal of millions of gallons of contaminated waste water and other products from drilling.

Contractors working for Cabot are cleaning the remnants of an 800-gallon diesel fuel spill in Dimock earlier this year. Work crews are evaluating the extent of contamination in the ground after emergency responders contained and vacuumed what they could from the surface.

While the company is expecting to complete 30 wells this year and drill 80 more in 2009, Dinges acknowledged in his report that permitting regulations regarding water consumption and disposal is slowing the process. That issue will likely grow for Cabot and other firms as waste from Marcellus production grows exponentially with expected production in the Appalachian basin in coming years.