The Rise of New Local Independent Unconventional Gas and NGL Producers in the Appalachian Basin

The Rise of New Local Independent Unconventional Gas and NGL Producers in the Appalachian Basin

Of the new operating companies coming onto the scene over the last several years, most are funded by private equity commitments from providers who have specialized in unconventionals. Most have assembled experienced and capable teams of oil & gas professionals, sometimes consisting of executives from companies that were bought out by larger companies wanting to get into the shale plays. Two, Rice Energy and Eclipse Resources, have transitioned to public companies through IPOs. Both of these companies have significant core acreage and high volume wells. Eclipse just completed a possible U.S. record 18,500+ ft lateral in Guernsey County, Ohio, in the Utica. Well costs have dropped significantly. Thus, there are still technological and economic improvements occurring. 

Besides requiring experienced and capable teams equity providers require good acreage positions in or near the core areas of the various plays and sub-plays by drill-bit hydrocarbon (gas, NGLs, oil) - thus demonstrable economics. Another issue of great importance in the Appalachian areas at present is access to pipelines and processing facilities, especially as pipelines and processing facilities currently have limited access and tap fees are quite high. As drilling typically precedes gathering and infrastructure build-out there can also be significant delays getting product to market in today’s environment. Interstate pipelines are incrementally coming online to transport more gas out of the basin. Other factors than core acreage and midstream infrastructure can also influence economic viability. For example, Seneca Resources owns land and minerals (fee acreage) across contiguous swathes of their acreage so they require smaller gas rates to be economic in those areas. Operational capacities and efficiencies can also lower per well costs through things like water management pipeline and facilities projects, multi-well pads, multi-formation pads, and simultaneous and zipper fracking. Pipeline agreements and commodities hedging agreements vary considerably by company conferring various economic advantages and disadvantages.

    

Timing for these companies for getting into the market has been a very big issue. Timing has been a factor in acreage costs, non-viability of drilling in current low-price environments, and thus the delaying in starting or continuing of new drilling and producing projects.

Some of the new companies such as American Petroleum Partners, Travis Peak Resources, and LOLA Energy have yet to drill due partly to the prolonged low-gas-price downturn and some such as Apex Energy are just doing a few tests currently. Companies that just started drilling a few years ago such as PennEnergy Resources and Edgemarc Energy are drilling occasionally and planning future programs. Most companies are completing backlogged wells if they have them as the “fracklog” depletes faster with the slightly better Appalachian and Index prices. 

Most of these companies are focused on small numbers of areas. They are focused on developing economic areas rather than exploring. They are predominantly development companies that are always high-grading their holdings. Some have both dry gas and NGL areas so completion and production focus can be weighted by commodities prices and shifted accordingly.  

Several larger companies have announced a return to drilling or to add additional rigs in 2H 2016. These include Southwestern, Chesapeake, Range, EQT, Consol, Gulfport, and others. Range recently made an acquisition in Southern Louisiana which suggested to some that they are seeking gas to fill possible future short-term gas shortages in the south due to Appalachian bottlenecks. The new Appalachian drilling could extend the gas glut as delayed pipelines have extended the Appalachian bottleneck situations. Robust summer demand has thus far lowered the excess gas in storage closer to normal levels but still above. Any such delays will only be temporary as new takeaway capacity and LNG exports come on line, particularly in 2017 and beyond.

Some of the newer local companies are touting their localness as a desirable quality – employees live in or close to the areas in which they drill and work so they have an inherent interest in safeguarding their communities from environmental problems. They are also producing a local product, supporting the local economy, hiring local people, and paying local taxes. The LOLA in LOLA Energy stands for “locally owned, locally accountable.” Perhaps anti-corporatist localists like Bill McKibben should take note! As these producers predominantly produce natural gas and natural gas liquids, they can also tout their contribution to lowering carbon emissions. Reigning in fugitive methane and VOC emissions might also be a trend among these local companies who seek to be accepted by the public. Some are involved in community service and philanthropy. Planning for wells and facilities in populated areas has required significant cooperation between company and county/township officials. While there is still significant opposition to oil and gas development, there is also much support and expectations of safe, competent, and environmentally-friendly operations. These are perhaps possible examples of current and future corporate and community cooperation which would be a welcome change from protests, law suits, and other organized opposition. Natural gas is recognized as a very important factor in decarbonization and is also currently the most affordable energy source.

Some of these companies may want to grow and sell to bigger companies. Others may choose to go public. Others yet may decide to continue as they are and if they can be successful and develop reputations for operating responsibly then they may go far.