Ever since geoscientists at Penn State and State University of New York (SUNY) said a black shale in northern Appalachia, the Marcellus, could boost proven U.S. natural gas reserves by many trillions of cubic feet, industry excitement has mounted. To realize the vast potential depends on how well E&P companies use horizontal drilling and fracturing techniques to maximize production. But the prize could be enormous: the Marcellus shale stretches from southern New York through western Pennsylvania into eastern Ohio and across West Virginia.

Penn State professor Terry Engelder and SUNY professor Gary Lash say the Marcellus shale conservatively holds 168 trillion cubic feet equivalent (Tcfe) of gas in place, but this figure might be as high as 516 Tcfe. This compares to the U.S., Mexico and Canada currently producing roughly 30 Tcf of gas annually.

Engelder says the technology exists to recover 50 Tcfe of gas from the Marcellus, making it a super-giant gas field. This volume would be enough to supply the entire U.S. for about two years, with a wellhead value of about $1 trillion.

One key challenge is to delineate this huge play, which covers about 1,100 miles from West Virginia to New York. “As a company and an industry, we will be attempting to determine which areas will be most productive and what drilling and completion methods are most effective,” says Range Resources Corp.’s president and chief executive John Pinkerton.

“While existing technologies from the Barnett shale and other similar plays in North America are being employed in the Marcellus shale play, these technologies will need to be tailored to specific geological conditions present within the various regions of this play.”

In those areas that have already entered the development phase and where infrastructure exists, drilling and production can increase significantly, he says. Areas of the play that are untested or lack infrastructure could be delayed for several years.

Here is a look at the plans of some key players who are starting to develop this vast resource.

Range Resources Corp.

Range Resources has drilled some 100 wells in the Marcellus shale in Pennsylvania, New York and West Virginia, which gives it substantial insight into the potential of this emerging resource. In late 2008, it had three rigs drilling with plans to increase that to eight for 2009.

Range’s last seven horizontal wells had an average peak initial rate of 4.9 million cubic feet (MMcf) per day.

Over the past 30 years, Range has quietly accumulated a lease position in the Appalachian Basin of 2.3 million net acres. Of this, approximately 900,000 net acres are in the fairway of the Marcellus. Based on current recovery rates, Range estimates there is from 15- to 22 Tcfe of net unrisked resource potential associated with its acreage—or enough to grow its current proved reserve base ten-fold.

“Range acquired a significant portion of its acreage prior to the run-up in lease prices precipitated by the recent land grab, and to date our Marcellus acreage costs average $404 per acre,” says CEO Pinkerton.

“We have drilled approximately 100 vertical and horizontal wells to the Marcellus over the past four years, but a number of these wells have been shut-in awaiting processing and pipeline infrastructure.With the opening of the Houston, Pennsylvania, gas processing plant by MarkWest Energy LLP in October 2008, our Marcellus production currently exceeds 30 MMcfe per day.”

Significantly, MarkWest has already started building two additional processing plants to stay ahead of Range’s drilling and completions teams.

“We do not foresee any delays in hooking up wells drilled in 2009, and therefore expect to exit 2009 with Marcellus production in the 80- to-100-MMcfe-range, coming from both dry gas and wet gas areas,” says Pinkerton.

At press time, the 2009 budget was estimated to be about $1 billion. “We anticipate entering the development mode in the Marcellus during 2009, drilling approximately 50 horizontals and another 25-plus verticals.”

Range has been drilling on 80-acre spacing; however, optimum spacing isn’t known yet, so in 2009, it will test 40-acre spacing. If this is successful, Range anticipates being able to drill up to 14 wells from a single pad, vs. the current design of six wells per pad.

“Not only does this enable us to more effectively drain an area and increase the recovery factor, but it substantially reduces surface disturbance and leaves a smaller environmental footprint,” says Pinkerton. In addition, it reduces drill time and costs as drilling equipment can remain in one place for multiple wells, versus the time-consuming task of moving equipment and rigging up and down at multiple drill sites.

Atlas Energy Resources

As of October 2008, Atlas Energy Resources LLC had completed 98 wells to the Marcellus shale, of which 90 (some of which have been online for two years) have normalized production approaching 25 MMcf per day into a pipeline, according to Atlas president and chief operating officer Richard D.Weber. The remaining eight wells were to be turned into the sales line by the end of 2008.

Atlas has developed a robust geologic database from its Marcellus shale wells in southwestern Pennsylvania and has significantly enhanced its vertical completion and production techniques that include perforation schemes, multistage fracs, pumping rates, fluid volumes, and flow-back rates.

The company’s last 13 vertical Marcellus wells averaged initial rates of 1.3 MMcf per day, which is 30% higher than Atlas’s prior average vertical Marcellus well. One vertical well in Fayette County, Pennsylvania, had an initial rate of 3.6 MMcf per day and it has produced 132 MMcf in its first 60 days.

With results like that, no wonder Atlas intends to drill 100 vertical and 25 horizontal wells in the Marcellus in 2009.

A typical vertical well costs between $1.3- and $1.8 million, whereas horizontal well costs will run between $4.5- and $5.5 million, says Weber.

Atlas has posted much higher IP (initial potential) rates on vertical Marcellus wells using a two-stage frac design, and has averaged 24-hour IP rates of 2.1 MMcfe per day, more than double the company’s historical average from its previous 90 wells. The two-stage frac also exhibits a shallower decline rate than a well with a single-stage frac.

Assuming these results continue—which is not assured—the company expects to realize sizable increased reserves and production per vertical well. The incremental cost of the two-stage design over a single-stage design is approximately $125,000 per well.

In November 2008, Atlas reported successfully casing its second horizontal well to the Marcellus, with a lateral leg of approximately 3,000 feet.The company planned to complete this well, in Washington County, with an eight-stage frac. Atlas has spudded its third and fourth horizontal wells. For the remainder of 2009, it plans to drill 12 additional horizontal Marcellus wells, in which it will have a 100% working interest.

Atlas has all permits and equipment in place for its Marcellus program. In addition to two rigs on contract that are capable of drilling the lateral section of its horizontal wells, Atlas, through a 50%-owned affiliate, will take delivery in the second quarter of 2009 of a third, built-for-purpose, horizontal rig. (The company uses its fleet of contracted shallow rigs to drill the vertical section of horizontal Marcellus wells.)

As of last fall, Atlas had obtained 70 vertical and 10 horizontal drilling permits and had more than 130 being prepared for submission to the Pennsylvania Department of Environmental Protection.

Atlas controls 555,000 acres in the Marcellus shale fairway, which includes 271,000 acres in its focus area of southwestern Pennsylvania. Since the beginning of 2007, Atlas has acquired 217,000 acres, primarily in southwestern Pennsylvania, at a fully loaded cost of $235 per acre.

Atlas has delineated most of this acreage, and the company estimates its potential net recoverable reserves attributable to this area is between 4- and 6 Tcf.

Enhancing the economics, all of its current production is pipeline quality gas that does not need to be treated. Through its affiliate, Atlas Pipeline Partners LP, Atlas controls a gathering system capable of delivering 120 MMcf per day into four different interstate pipelines. It plans to more than double this gathering capacity by the end of 2009.

Southwestern Energy Co.

Southwestern Energy Co. currently has about 110,000 net acres in Pennsylvania under which it believes the Marcellus shale is prospective. It has drilled its first four wells in Bradford and Susquehanna counties; the company’s first horizontal well was to be completed in fourth-quarter 2008.

At press time, the company was still formulating its budget for 2009. “We continue to be encouraged regarding the technical merits of the play, but activity will be measured due to the uncertainty in the regulatory arena, permitting, water handling, and the lack of a pooling statute.

“Long term, the Marcellus has the potential to be a viable play across a significant geographical area generating significant economic benefits for all parties involved,” says Jeff Sherrick, senior vice president of exploitation.

One of the keys to success in the Marcellus shale, according to Sherrick, will be to execute a socially responsible development plan. To effectively produce gas from shale requires fracturing, which requires access to water—to date this has been a limiting factor for industry activity in the trend.

But Southwestern experienced a similar challenge in the early development of the Fayetteville shale in Arkansas a couple of years ago. “Working closely with the Arkansas Department of Environmental Quality (ADEQ), together we developed a very successful program of building water-supply ponds for frac jobs across the 860,000 acres we are developing in the Fayetteville shale, and today these same ponds are providing wildlife habitats and recreation to the landowners, “ he says.

“The topography in Pennsylvania where we are active is very similar and we believe our water needs for the Marcellus program can be met by jointly developing a similar program with the Pennsylvania Department of Environmental Protection and the local water authorities,” adds Sherrick.

The Marcellus, like most shale reservoirs, will require horizontal wells to economically develop the resource. A significant challenge that needs to be resolved is pooling of land into units to allow for effective development using horizontal drilling techniques. In order to drill wells that stretch out horizontally 4,000 to 6,000 feet from the surface location, several tracts of land must be pooled into a unit to share in the ownership.

“Many states have pooling provisions to address this issue and we believe this would greatly enhance the future development of the Marcellus shale. Pooling will also enhance the number of locations companies can utilize for multi-well drilling pads, with several horizontal wells drilled from the same surface location. Southwestern Energy has very successfully used multi-well, pad drilling in the Fayetteville shale to minimize our environmental footprint in Arkansas, and with the adoption of pooling we will be able to apply similar techniques across more of our acreage during development of the Marcellus shale,” says Sherrick.

Penn Virginia Corp.

Penn Virginia’s Jim Dean, vice president for investor relations, says the company will commence drilling in the Marcellus shale in the second half of 2009 at the earliest. This is largely due to a number of Penn Virginia’s other shale and resource plays competing for capital and other resources.

Other factors that are influencing Penn Virginia’s timing in the Marcellus include a desire to further analyze its recent acreage additions and to decide where to drill. Issues with commodity prices and in the capital markets likely reinforce the timing, as this activity is higher-risk, exploratory drilling.

“We are likely to focus on other established developmental plays earlier in 2009 prior to turning to the Marcellus shale and other exploration plays later in the year or in the following year. These plays include the Lower Bossier (Haynesville) shale in East Texas, the Granite Wash play in the Anadarko Basin, the Selma Chalk in Mississippi, and horizontal coalbed-methane in Appalachia,” says Dean.

“We are encouraged by the results of others in Pennsylvania for the Marcellus shale and hope that we are able to add another winning developmental play to our growing portfolio.”

Carrizo and Avista join forces

Carrizo Oil & Gas Inc., and Avista Capital Partners announced in November a joint venture to pursue growth opportunities in the Marcellus shale. Under the terms of the agreement, each has committed to contribute up to $150 million in cash and properties to acquire and develop acreage in the Marcellus shale play, including the dedication of all of their respective current Marcellus leasehold. The joint venture controls approximately 155,000 net acres in the play.

Carrizo, which is already active in the Barnett shale, will operate the joint venture properties and provide all geotechnical, land and accounting support. Avista has agreed to fund 100% of the joint venture’s next $71.5 million of expenditures, currently projected to be spent over the course of the next eight to 12 months.

After this initial cash contribution has been funded by Avista, the parties will share all costs of joint venture operations in accordance with their participating interests, which are expected to be 50/50 thereafter.

Carrizo’s undivided interest in the joint venture, including land and drilling expenditures, future net oil and gas revenues, and future oil and gas reserves, will be reflected in the company’s consolidated financial statements. S.P. (Chip) Johnson IV, Carrizo’s CEO, views the Marcellus shale as “one of the company’s potential core growth areas and a source of future shareholder value.”