JULY 2016 The “Better Business” Publication Serving the Exploration / Drilling / Production Industry

Companies Thriving In Marcellus/Utica By Al Pickett Special Correspondent Range Resources began planning for the future of its Marcellus and Utica development on day one. Because of that, Range Executive Vice President and Chief Executive Officer Ray Walker says his company has been able to put together a class-leading drilling program and will be drilling on its extensive Pennsylvania leasehold for “more years than I will be working.” “There is the experience factor,” Walker avers. “(Company President) Jeff Ventura and I have been around a while. We saw this as a great opportunity to do it the way we wanted. We are setting up for 2017 and beyond with a class-leading low-cost structure that no one can match.” Unlike many who may have been amazed when the Marcellus and subsequent Utica horizontal plays took off, Walker says Range realized the region’s potential immediately. “We discovered the Marcellus in 2003 when we were going for deeper formations, such as the Lockport and others below the Utica,” he recalls. “That was a vertical play, and it didn’t work. Everyone was looking for the next Barnett, which was going strong then. Our geologists recognized that the Marcellus and Utica were similar to the Barnett, only better.” Walker says Range did its first vertical test in the Marcellus in the fall of 2004 and drilled its first horizontal in early 2006. “Range also drilled its first successful Utica test in 2009 and went straight to horizontal drilling,” he adds.

Long-Term Approach Because of that early recognition, Range began designing pads to facilitate development. The company has 124 pads with five or fewer wells and 59 pads with six to nine wells, but Walker says most of those pads are designed to accommodate 18-20 wells and have the flexibility to drill Marcellus, Utica/Point Pleasant, or Upper Devonian formations. “Our approach was long term, like a developer building a master-plan community,” he compares. “In 2007 and ’08, we saw a real opportunity to put together a leasehold at low cost. We picked up acreage in the core of the core, where there was the most infrastructure. Our plan was to generate the best overall economics, focusing on the long term. “We try to do things systematically,” Walker adds. “We are in a commodity business, so we know there will be downcycles, but with our size scale and lowcost structure, we are in position to weather them. Almost all our acreage is held by production now, so we can focus our dollars on the very best wells in the very best areas.” With its pads designed to accommodate up to 20 wells, Walker predicts Range will save $850,000 a well drilling off existing pads because of minimal permitting requirements and reuse of roads, surface facilities and gathering systems. The company has 1,540,000 acres with stacked pays in both Southwest and Northeast Pennsylvania, giving it multiple development opportunities, Walker attests. That leasehold consists of 335,000 wetgas acres and 180,000 dry-gas acres in the Upper Devonian, 335,000 wet-gas

acres and 290,000 dry-gas acres in the Marcellus, and 400,000 dry-gas acres in the Utica/Point Pleasant. In addition, he says Range has another 280,000 net acres in Northwest Pennsylvania that are primarily legacy leases held by production, where it is not drilling currently. “Ninety-five percent of our activity is in Southwest Pennsylvania,” Walker relates, describing Washington County, Pa., as the “crown jewel” of the play. Range Resources’ focus has, understandably, been more on the Marcellus than the Utica, according to Walker. “By drilling the Marcellus, we hold all rights,” he explains. “We have done three Utica wells on Marcellus pads, but a Utica well with an 8,500-foot lateral costs $14 million, which is two-and-a-half times what a Marcellus well costs for the same amount of gas.” Lowering Costs Walker says Range has increased its average lateral lengths since 2012, but it has lowered per-foot well costs by 63 percent in that same time frame. While he acknowledges reductions in service costs have contributed to that savings, he points out that Range has seen a steady decline in well costs year after year, including 2012-14, when service costs were at record highs. The company has been able to lower costs in a number of ways besides drilling on existing pads and drilling longer laterals. Other improvements he claims include better bit technology and lowering fracturing time, which enables more stages to be completed in a single day. Walker points out that Range’s finding

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SpecialReport: Horizontal & Innovative Drilling and development costs were 40 cents a foot in the first quarter of this year, adding that he believes that number eventually can be lowered to 20 cents. On average, Walker says, Range’s lateral lengths were 6,000 feet last year. This year, they will be 7,000 feet and next year 8,000 feet. “Ultimately, we will drill 10,000-foot laterals in our dry gas wells and a little less than that in the wet gas,” he describes. “Our fracture spacing is tailored to the specific resource, but we usually employ 150- to 200-foot spacing.” Walker says Range has one rig operating in Northeast Pennsylvania to honor commitments on large leases. It has two big rigs and two little rigs running in Southwest Pennsylvania, where the company maintains the bulk of its activity. “We use small air rigs to drill the tophole portion and set the shallow casing,” he mentions. “Then we bring in the big rig to drill at the kickoff point.” Multiple Markets A key–and at one time a hindrance–to developing the Marcellus and Utica is the availability of multiple markets for its products. “In 2007-08, we decided we wanted

to have multiple outlets so we were not beholden to any one project,” Walker reveals. “We have three ethane outlets, all priced differently. We are the only producer on the Mariner East Pipeline with a unique 15-year deal. We have a lot of flexibility for our propane, ethane, butane and condensate. “By the end of the year, 70 percent of our gas will be sold in places other than Appalachia,” he continues. “It will be even more so next year. We have multiple pipelines and markets, and we found cheap transportation. We even have exported some liquefied natural gas.” Remarkable Changes Steve Schlotterbeck laughs when asked whether 10 years ago he could have envisioned today’s development of the Marcellus and Utica plays. “No,” the president of EQT Corporation replies emphatically. “It is a whole different game now. Ten years ago, we were drilling postholes. In 2006, we drilled 700 vertical wells, and we were growing our production in the single digits. This year, our drilling plan includes up to 82 horizontal wells, and our growth will be in the low 20 percent range.” “We were the 25th largest natural gas

As the fifth largest gas producer in the nation with more than 2,000 producing horizontal wells in the Appalachian Basin, EQT Corporation continues to build onto its portfolio of pipeline capacity to deliver its produced gas to a variety of markets both inside and outside the Northeast region.

producer in the country in 2006, and never had drilled horizontal wells,” adds David Schlosser, EQT’s executive vice president for engineering, geology and planning. “Today, we are the fifth largest gas producer with more than 2,000 producing horizontal wells throughout the Appalachian Basin.” Indeed, Schlotterbeck suggests, EQT is emblematic of the change the Marcellus and Utica resource plays have brought to the historic Appalachian region. EQT has 660,000 acres in the Marcellus–split about 50-50 between West Virginia and Pennsylvania, although he says the company has shrunk that to about 320,000 acres in what he calls EQT’s core development area. “We have close to 800 producing wells in the Marcellus and an additional 70 wells in the Upper Devonian, which is located above the Marcellus,” he enumerates. “About two-thirds of those are dry gas and about one third are wet gas. There is still a lot of economic development because of the quality of our acreage in what I call the core of the core in Washington and Greene Counties, Pa.; and Wetzel County, W.V.” One reason EQT has been able to continue to drill economically successful wells during the downturn, Schlotterbeck assesses, is the company’s ability to improve operations. “Our drilling costs are down 33 percent, and our operating costs are falling in double digits,” he says. “We have employed aggressive cost controls.” Dave Elkin, senior vice president for drilling and completions, says, “The key is to keep rigs drilling. We move rigs 24 hours a day, so we have reduced moving time by 50 percent. We are utilizing zipper fracs to keep the frac crews pumping. We can complete more wells in a shorter time.” Schlosser adds that EQT also is drilling longer laterals, moving from 3,000- to 4,000-foot laterals to 7,000-foot laterals this year. “Although we continue to test and analyze the number of frac stages,” he continues, “we have evolved to our current setup of five clusters per 150-foot stage.” Elkin notes that EQT plans to drill 72 Marcellus wells and 5-10 Utica wells this year, making it the biggest year for the company’s Utica program. While all of EQT’s Utica wells in Pennsylvania are dry gas, Schlotterbeck says the Marcellus wells can be either wet or dry. “It depends on where you are,” he says. “The Marcellus wells in Greene and

SpecialReport: Horizontal & Innovative Drilling Washington Counties can be either one. Our acreage in Wetzel County is mostly wet. A couple years ago, liquids were a lot more economical, but the wet/dry price is similar now.” Marcellus Acquisition EQT announced in May that it had signed a definitive agreement to acquire 62,500 net acres and production of 50 million cubic feet of gas equivalent a day from Statoil USA Onshore Properties Inc. for $407 million. The transaction was expected to close in early July. Located primarily in Wetzel, Tyler and Harrison Counties, W.V., the acquisition adds a sizeable amount of acreage within EQT’s core development area and complements adjacent operations in Wetzel County, according to Schlotterbeck. He says the acquisition includes 31 Marcellus wells (24 producing) and approximately 500 undeveloped locations that are expected to be developed with average lateral lengths of 5,600 feet. According to a company press release, since much of this acreage is contiguous with EQT’s existing development area, the lateral length of 106 existing EQT locations now can be extended from 3,000 to 6,500 feet, which will reduce overall costs and deliver stronger well economics. The acquisition increases EQT’s core undeveloped Marcellus acreage by 29 percent, and includes drilling rights on an estimated 53,000 net acres that are prospective for the deep Utica. Take-Away Capacity One of the keys to developing the Marcellus and Utica is finding a variety of markets, according to Schlotterbeck. “That is a critical factor with the Northeast’s basis differential and discount to the New York Mercantile Exchange,” he points out. “So, we have built a portfolio of pipeline capacity.” Schlotterbeck says EQT has pipeline capacity to the New York City/New Jersey market areas, and has built the Ohio Valley Connector transmission line, which connects to the Rockies Express Pipeline that takes gas to the Midwest. EQT and a number of other companies are in the permitting process to build the Mountain Valley Pipeline, which will take gas to a number of industrial customers and gaspowered electric plants being built in the Southeast, he adds. Schlotterbeck acknowledges a number of challenges to operating in the Northeast,

especially during an economic slump. “Maintaining a strong balance sheet and keeping your people motivated is a challenge,” he allows. “We have been fortunate that we have had no layoffs. “From an operational standpoint,” he goes on, “one of the biggest challenges is putting together a lease that allows us to drill a long lateral. This then begs another problem, which is antiquated state regulations.” For example, in West Virginia, 100 percent of the heirs must agree to a lease before a well can be drilled. “There can be hundreds of owners to a single lease, which is a huge challenge,” Schlotterbeck muses. He says he believes continued innovation and finding ways to drill better and cheaper will drive the industry in the future. It is that innovation that has led to the surge of Marcellus and Utica development. Record Production Drilling in both the Marcellus and Utica, Denver-based Antero Resources reported average net daily gas production of 1.758 billion cubic feet equivalent (23 percent liquids) in first quarter 2016, an 18 percent year-to-year increase and a 17 percent increase over fourth quarter 2015. Average net liquids production was a record 68,561 barrels a day, a 71 percent increase over the prior year and a 25 percent increase sequentially. “We had an excellent quarter operationally, once again achieving record production while also reducing well costs 16-19 percent from 2015 levels,” Chairman and Chief Executive Officer Paul Rady says in the company’s first-quarter operations update. “These lower well costs were the result of continued operational efficiencies and our ability to restructure a number of service contracts. “Reducing well costs has been a high priority for Antero over the past 18 months, as it provides us with another lever to improve economics and drive value,” Rady continues. “We also have locked in attractive product prices with our industry-leading hedge book and continue to realize improved pricing through our firm transportation portfolio.” Antero reported its realized natural gas price before hedging averaged $2.08 an Mcf, a mere 1-cent differential to NYMEX. Its realized hedged-gas price averaged $4.54 an Mcf, a $2.45 premium to NYMEX. The company reported a re-

alized C3+ NGL price before hedging of $14.07 a barrel, which is 42 percent of West Texas Intermediate. Its realized natural gas equivalent price, including NGLs, oil and hedges, averaged $4.14 an Mcfe. First quarter 2016 was the first full quarter that the Stonewall gathering pipeline was in service, which, according to Rady, resulted in Antero selling 99 percent of its gas to favorably priced markets, including TCO, Chicago, MichCon, TGP and NYMEX. He says Antero completed and placed 19 horizontal Marcellus wells on line during the first quarter with an average lateral length of 8,000 feet. Of those 19 wells, 15 had 30-day average rates of 17.6 MMcfe/d, assuming ethane rejection (22 percent liquids). Antero reports it is completing wells with approximately 25 percent higher fluid volume and proppant loading, and is operating seven drilling rigs and four completion crews in the Marcellus Shale. Antero also reports placing 13 horizontal Utica wells on line in the first quarter. Average lateral length was 8,500 feet, and the eight wells that had been on line for more than 30 days had average restricted 30-day rates of 14.1 MMcfe/d while rejecting ethane (14 percent liquids). In addition, the company says it completed the Fogle Unit 1H well in Noble County, Oh., with encouraging early results. This well represents the most southerly location drilled to date on Antero’s Utica acreage. Reducing Footprint Rob Boulware, stakeholder relations manager for Seneca Resources Corp., admits these are challenging times in the Marcellus and Utica plays, with significant reductions in rig counts, capital spending, and workforce allocations. “We began the year with three rigs, and dropped to a single rig as of March,” he reveals. “Reduced drilling, combined with getting a partner to fund a large portion of this year’s program, has enabled us to live within cash flow. Our current plans allow us to stay at a single drilling rig for at least a year before we need to again ramp up drilling and completion activities in order to have enough production to fill the pipeline capacity that will come on in November 2017–the targeted completion date of our Northern Access Pipeline.” Boulware adds that Seneca has reduced

SpecialReport: Horizontal & Innovative Drilling

Seneca Resources Corp. has drilled and completed its first Utica/Point Pleasant horizontal well in the Clermont, Pa., area. The relatively short (4,500-foot) Utica/Point Pleasant lateral was drilled on a pad with other longer-lateral Marcellus wells, and will be brought on line later this summer when all the wells on this pad are completed.

its completion crew activity to daylightonly operations. That means the company typically can complete five-six stages a day, which allows it to recycle all its produced water and avoid disposal costs. “The key drivers in our continuing cost reductions include a frac contract executed in September 2015 and a significant reduction in water costs,” Seneca Chief Operating Officer John McGinnis says in the company’s first quarter earnings report. “We now average less than $1 a barrel in water costs, compared with about $3 early in our development program.” Boulware says Seneca started its own water logistics company, Highland Field Services, to handle a substantial portion of the fluids used in its operations. “Having invested $20 million in infrastructure–including a centralized storage facility, a treatment plant, and a pipeline delivery network–Seneca has reduced significantly the amount of freshwater it uses in drilling operations by reusing produced fluids in future completions,” Boulware explains. “Seneca also used Highland’s pipeline delivery network to transport water from its centralized storage facilities directly to well pads, reducing truck traffic on local roadways.” Moving forward, Seneca’s goal is for freshwater to account for no more than half the fluids it uses in well completions, and Boulware says the company expects recycling produced fluids to save an average of $500,000 a well. McGinnis reports Seneca drilled and completed its first Clermont, Pa., area

horizontal in the Utica/Point Pleasant play at an estimated cost of just over $7 million. “This well was drilled with a relatively short, 4,500-foot lateral to better understand per-foot productivity,” McGinnis reports. “Once we have completed all 11 wells on this pad (10 in the Marcellus), we will bring them into production later this summer.” He adds that the rig was moved to another pad in the Clermont area, where it was drilling Seneca’s second Utica well. “This well is scheduled to be tested early in 2017,” McGinnis says. On the marketing front, he says the company plans to continue layering in fixed-price sales and firm sales tied to financial hedges, when the opportunity arises. “This has allowed us to slowly grow production and realize acceptable pricing during an exceedingly difficult period,” McGinnis states. “For the remainder of our fiscal 2016, the vast majority of our natural gas production–forecast around 64 Bcf–is locked in, both physically and financially, at an average realized price of $3.20, which is net of firm transportation.” Joint Development National Fuel Gas Company announced June 13 that Seneca Resources, its wholly owned exploration and production subsidiary, and IOG CRV-Marcellus LLC, an affiliate of IOG Capital LP, along with funds managed by affiliates of Fortress Investment Group LLC, had agreed to a

modified extension of their joint development agreement, which included a commitment to develop additional Marcellus Shale natural gas assets in northcentral Pennsylvania. Under the terms of the agreement, Seneca and IOG committed to jointly participate in a program to develop 75 Marcellus wells in the Clermont/Rich Valley area of Pennsylvania. IOG initially committed last December to develop 42 wells with an option to participate in 38 more. At that time, according to the announcement, 39 of the 75 joint development wells had been either completed and turned to sales, or were drilled and in the process of being completed, leaving 36 wells to be developed under the revised joint development agreement. IOG also was granted an option to participate in a seven-well Marcellus pad that will be completed prior to Dec. 31, 2017. If IOG chooses to participate in the seven-well Marcellus pad, the company says its total commitment will reach 82 wells. Seneca will continue to be the program operator. Production from all joint development wells will be gathered by National Fuel’s Clermont Gathering System. According to the announcement, IOG also will continue to share in Seneca’s contracted firm sales and firm transportation capacity, including 490,000 dekatherms a day of capacity on National Fuel’s Northern Access Project, which is expected to be placed in service by November 2017. Ohio Utica While much Marcellus and Utica production is concentrated in southwestern Pennsylvania and the West Virginia Panhandle, there is plenty of Utica activity on the other side of the Ohio River as well. Gulfport Energy has 231,000 net acres, concentrated mainly in the dry-gas window in Belmont and Monroe counties, Oh., with net proved reserves of 1.7 trillion cubic feet equivalent. The company breaks down its asset as 5 percent oil, 15 percent condensate, 15 percent wet gas and 65 percent dry gas. The Ohio Utica play is primarily dry gas along the border with Pennsylvania and West Virginia, and becomes wetter as one moves west. In its first-quarter earnings report, Gulfport announced it spudded 10 gross (7.1 net) wells and turned 15 gross (8.0 net) wells to sales in the Utica Shale. Net

SpecialReport: Horizontal & Innovative Drilling production from Gulfport’s Utica acreage averaged 670.7 MMcfe/d, an increase of 8 percent over fourth quarter 2015 and an increase of 69 percent over first quarter 2015. Gulfport says its wells were drilled off the Valerie, Charlie and Roger pads. It forecasts 23-29 gross drilled, uncompleted wells in its inventory by year-end. Gulfport’s type curve assumes an 8,000foot lateral and 1,000-foot spacing with EURs ranging from 17.2 Bcfe to 20.7 Bcfe per well in the dry gas window. Because of increased efficiencies and further reductions in service costs, Gulfport also announced it had decreased its total expected well costs by $300,000 a well, relative to estimates it provided in November 2015. Gulfport is operating three horizontal rigs in the play. The company also lists firm transportation agreements with the ANR, Dominion Transmission, NGPL, Rockies Express, Rover, Tennessee Gas, Texas Gas Transmission, and TETCO M2 pipelines, giving it access to gas markets in the Midwest, Canada and Gulf Coast. Gulfport (25 percent interest) and Rice Energy (75 percent) have formed a midstream joint venture, Strike Force Midstream LLC, to provide gas gathering, compression and water services to Gulfport’s eastern Belmont and Monroe county acreage. When completed, it will include 165 miles of high- and low-pressure, 12to 30-inch dry gas gathering pipeline and an estimated 1.8 million dk/d of throughput capacity. Building On Strength Asked whether her company is focused on dry gas, wet gas or crude oil, Director of Investor Relations Julie Danvers says Rice Energy is “commodity agnostic,” and focuses capital investment decisions “on maintaining balance sheet strength and generating healthy returns, while creating significant future midstream value.” “The substantial majority of our acreage position is in the core dry-gas window of the Marcellus and Utica shales, which is where all of our activity is based, and generates returns of approximately 65 percent at current strip pricing,” she adds. Rice Energy is operating on both sides of the Ohio River. Danvers says the company has 200,000 effective stacked acres: 94,000 in the Pennsylvania Marcellus,

57,000 in the Ohio Utica, and 49,000 in the Pennsylvania deep Utica. Cumulative net wells producing at the end of the first quarter consisted of 130 in the Marcellus, 18 in the Ohio Utica, one in the Pennsylvania Utica, and three in the Geneseo formation. Danvers says Rice plans to drill 25 net operated Marcellus wells, 12 operated Ohio Utica, and five nonoperated Ohio Utica wells this year. It plans to bring on line this year a net 27 operated Marcellus wells, 13 operated Ohio Utica wells, and 14 nonoperated Ohio Utica wells. Rice has achieved significant drilling and completion cost reductions in the Marcellus and Utica, according to Danvers, which are attributable to increased operational efficiencies driven by shorter cycle times within a favorable service price environment. “We continue to reduce average drilling times, and achieved a 35 percent reduction in the first quarter compared with our 2015 average, while consistently maintaining our wellbore within a targeted three-foot interval,” she states. “Shorter cycle times also extended to our completion operations, where we have been able to complete approximately 20 percent more stages per day while maintaining our robust completion design. “Our leading-edge cost in the Marcellus is $925 per lateral foot, which is a 40 percent reduction from prior levels,” Dan-

vers adds. “In the Utica, we reported $1,380 per lateral foot during the first quarter, a 45 percent reduction.” Danvers says Rice Energy is allocating 100 percent of its capital to 150,000 drygas acres within the core of the Marcellus and Utica, which she says offers attractive returns. “Our deep inventory of more than 800 core locations generates returns of approximately 65 percent at strip pricing and an average PV-10 break-even cost of $2 an MMBtu Henry Hub,” she claims. “We protect our returns and balance sheet through our robust firm transportation portfolio and systematic hedging strategy, which allows us to develop our assets economically, and to grow our upstream and midstream businesses through the commodity price cycle.” Danvers says building a right-sized, high-quality firm transportation portfolio that provides diverse access to premium markets is essential to Rice Energy’s development program and price realizations. “Our firm transportation portfolio covers more than 80 percent of expected 2016 production and delivers 70 percent of this year’s anticipated volumes to premium markets outside Appalachia,” she recounts. “By 2020, our firm transportation portfolio will decrease to approximately 60 percent of expected production, increasing exposure to anticipated improvements to in-basin pricing.” ❒

Rice Energy plans to drill 25 net operated dry gas wells in the Marcellus, and 12 operated and five nonoperated dry gas wells in the Ohio Utica this year. The company reports achieving a 35 percent reduction in drilling and completion costs in the first quarter compared with its 2015 average, while consistently maintaining wellbores within a targeted three-foot interval.