Over the last six years, the Cherokee Basin in Wilson County, Kansas, has become a much more productive play, and indicators point to an even more productive future.

According to a report issued by Houston-based Wood Mackenzie, the Cherokee’s CBM production has increased by more than 480% since 2002. In the last six years, operators have woken up to the potential of this play, and new players have entered the stage. Recent merger and acquisition activity indicates that interest in the CBM potential of the basin is growing.

Analysts at Wood Mackenzie point to trends in activity in the Cherokee CBM play that support their view that industry interest is on the rise. These include:
• A consistent increase in drilling activity by Newfield and Quest since 2002;
• A steady rise in CBM production since 2002; and
• Increasing levels of M&A activity, involving some of the basin’s main players.

Past, present, future

Production in the Cherokee Basin dates back to the 1860s, with shale gas production dating from the 1920s. It is only recently, however, that operators have begun to focus on the area’s CBM gas plays, particularly in southeast Kansas. As many as 17 distinct coal seams, ranging in depth from the surface to 2,000 ft (609.6 m), underlie the basin. Some prominent seams include the Weir-Pittsburg (the thickest accumulation), Riverton (which is widespread), and Mulky. Other hydrocarbon prospects include Summit coal and Little Osage shale. Most of the seams prospective for CBM development occur in the Middle Pennsylvanian Cherokee Group, a 300- to 500-ft-thick (91.4 to 152.4 m) sedimentary section that contains about 12 to 15 net ft (3.7 to 4.6 net m) of coal.

Typically, wells in the Cherokee Basin are drilled on 80-acre spacing. Initial production rates vary from 10,000 to 150,000 cf/d. Normally, initial water production levels range from 10 b/d to 70 b/d. Gas production levels increase as the wells are dewatered. Produced water is pumped into disposal wells.

According to the Kansas Geological Survey, the average CBM well in southeastern Kansas can produce 60 MMcf/d of gas during a two-year period. In today’s gas market, 60 MMcf/d is nothing to sneeze at. The gas market, though it has not been nearly as capricious as the oil market, has been volatile. Prices have continued to go up, with the NYMEX gas price for May 2008 above US $11/MMbtu.

With the US focus on increasing domestic gas supply, the Cherokee Basin has begun to attract more attention. Though no large independents are working in the region at present, a number of smaller E&P companies are taking advantage of the low drilling and completion costs, the relatively inexpensive land prices, and the well-developed network of infrastructure, which allows the gas to be transported to many of the major US markets.

The upsurge in activity in the basin dates back to 2002. Figure 1 illustrates the extent to which drilling activity has increased in the Cherokee CBM play over the last six years.
Sustainable production growth
Apparently, the trend that began in 2002 is set to continue at least for a couple of years.

A production forecast published by Wood Mackenzie shows an increase in the basin’s CBM play based on the activity of the largest operators in the region. Research results show that there has been a steady growth in gas production since 2002. From 2002 to 2007, CBM production in the Cherokee Basin has increased by 480%. By 2010, Wood Mackenzie anticipates production will double from current levels.

Mergers, acquisitions
Since 2002, a number of deals have taken place that have reapportioned the CBM plays in the basin. Newfield Exploration Co. has come full circle since it began acquiring properties in the region in 2002, selling all of its CBM assets in the Cherokee Basin to Constellation Energy Partners in Sept. 2007.

Newfield handed over its CBM assets to Constellation Energy Partners for $128 million in a deal that included 600 producing wells and more than 600 low-risk, drilling and re-completion opportunities on 80,000 net acres.

Assets in this transaction included those acquired by Newfield from Rockford Energy in July of 2004 and EEC Corp. in September of the same year. Newfield closed the Rockford Energy acquisition for $41 million, adding CBM assets in northeastern Oklahoma in the southern portion of the basin. The EEC Energy deal a few months later brought additional Cherokee Basin assets. Together, these deals added 93,000 gross acres (50,000 net) and a 270-mile (434-km) gas gathering system to Newfield’s holdings. Net production from these assets at the time was 7.5 MMcf/d.

Quest Energy Resources’ acquisitions in the area paralleled Newfield’s. In Nov. 2002, Quest acquired STP Cherokee Inc., which added 48,000 acres, 130 wells, and a 180-mile (290-km) gas pipeline. The transaction doubled Quest’s reserves, production, and pipelines.

The following year, Quest acquired Devon Energy’s CBM position in the basin for $126 million. The transaction included 372,000 gross (366,000 net) acres, and 418 gross (325 net) wells as well as 200 miles (322 km) of gathering pipelines. The properties were producing 19.6 MMcf/d at the time of the purchase. Reserves consisted of 95.9 bcfe (proved), 91.7 bcfe (probable), and 72.2 bcfe (possible) An added plus for Quest was that a significant portion of Devon’s assets were adjacent to assets Quest already owned.

Today, Quest estimates the Cherokee Basin has the potential to hold more than 1.2 Tcf of natural gas resource under the company’s existing and targeted acreage. At present, Quest operates more than 2,300 wells that produce more than 55 MMcfe net per day. As of Dec. 31, 2007, Quest reported total proved reserves of 211 Bcf.

According to the company’s Web site, Quest’s typical Cherokee Basin CBM well has a predictable production profile and a standard economic life of approximately 15 years. Quest plans to drill 325 wells in 2008 from its inventory of approximately 2,100 locations.

Aggressive development in the CBM fields, coupled with an increasing amount of drilling and a busy asset acquisition market are pointing toward sustained growth in the Cherokee Basin.