E&P business in full development, midstream system connects with multiple markets.
The management team behind Tug Hill, which helped pioneer the Marcellus shale more than a decade ago, now says it has cracked the code to economic development of the dry gas Utica in West Virginia. The Fort Worth company’s upstream business, THQ Appalachia I LLC, has been quietly building a highly contiguous acreage position in the state’s Panhandle region and deploying innovative technologies for co-development of the Marcellus and Utica, with backing from private equity firm Quantum Energy Partners. These advancements have made THQA the first operator east of the Ohio River to move beyond appraisal into full pad development of the Utica, with “the lowest-breakeven dry gas in the entire Appalachian Basin,” COO Evan Radler told Drillinginfo.
At the same time, Tug Hill’s midstream business, XcL Midstream, has been working with Quantum over the last two years to build a greenfield system to link southwest Appalachian gas production to every major long-haul pipeline in the region. It has now brought online its Appalachia Connector system, which will connect with East Coast, Midwest, Midcontinent, Gulf Coast, and West Coast markets. Radler said in an interview that the pipeline offers significant market price optionality and premium netbacks for dry gas production by providing access to nearly every major price point in the region.
Multiple companies, including Gulfport Energy, Ascent Resources and Rice Energy (before its acquisition by EQT Corp.), have established producing operations on the Ohio side of the Utica. But the shale deepens as it moves eastward into West Virginia and southwest Pennsylvania, driving typical well costs much higher. Some West Virginia operators have been able to achieve well costs of $15-18 million, but most have reported costs exceeding $20 million, according to Tug Hill.
Thus, spectacular wells like Range Resources’ 59 MMcf/d Claysville Sportsman’s Club-1 in 2014 and EQT’s 73 MMcf/d Scotts Run 591340 in 2015 have remained isolated occurrences rather than launching full-scale development programs. In contrast, THQA’s use of high-spec walking rigs to drill large multi-well pads and proprietary drilling practices have helped the company achieve well costs of $10.5 million or better, engineering and development SVP Sean Willis told Drillinginfo.
The company’s 2019 Utica wells have come in under $10 million, or $1,050 per completed lateral foot with laterals averaging 9,100 feet. The most recent wells have been drilled in less than 30 days, which Willis said is at least 33% faster than THQA’s fastest competitors in the deep Utica. The company has turned eight deep Utica wells to sales, drilled 12 to TD and spudded six more. It is running four rigs and two to three frac crews to turn 60 total rich Marcellus and dry Utica wells to sales this year, with plans to add a fifth rig in late 2019 or early 2020.
The wells have proven extremely prolific. THQA has observed casing pressures up to 9,500 feet in its deep Utica wells, which it is producing under pressure and rate management with plateau rates of 15-20 MMcf/d projected to hold flat for approximately 485 days.
“We recently conducted a productivity test in one of our Utica/Point Pleasant wells,” Willis said in an interview. “And that well demonstrated production potential of greater than 100 MMcf/d … but we choose to continue to produce through a rate and pressure management practice that maximizes the ultimate value of the wells.”
In the rich Marcellus, the company says it has consistently achieved peak condensate rates of 500-800 bbl/d and approximately 60% overall liquids weighting. THQA is spending less than $950 per completed lateral foot to bring these Marcellus wells online. Its recent Marcellus wells have been drilled in about 10 days, spud to rig move, with laterals exceeding 7,500 feet
Tug Hill attributes its best-in-class well costs largely to the co-development of the deep Utica with the Marcellus over the last two years on large pads averaging eight to 10 wells. Drilling, completion, and production operations occur simultaneously on the same pad, with drilling operations sequenced to maximize savings.
To facilitate these complex, simultaneous operations, Tug Hill employs innovative construction techniques to place the wellhead and production facilities below ground in subgrade cellars, allowing the rig to move freely on the pad. The biggest pad that Tug Hill has completed to date has 19 wells, and a 27-well pad is in progress.
Another contributor to the low well costs is the use of water supply from Tug Hill’s midstream company, XcL, for fracking operations. The water business utilizes a network of large above-ground storage tanks and can support up to four simultaneous frac jobs. Furthermore, the multiple interstate pipelines accessed by the Appalachia Connector’s dry gas transport line further improve the margins for THQA’s production, which the company believes are running about 17% higher this year than its nearest competitor and about 43% higher than the median value in southwest Appalachia on an EBITDA/Mcfe basis.
“We have multiple sources of gas supply and can wheel gas around to take advantage of the pricing points at any moment, which creates significant gas marketing and trading opportunities,” Radler said in an interview. He added that this optionality provides a unique value proposition for producers compared with other local pipeline systems, whose geographic limitations force them to connect to only one or two interstate lines.
Appalachia Connector consists of dual 24-inch dry and rich gas pipelines centered on Marshall and Wetzel counties, West Virginia. The 68-mile dry system, which Tug Hill says includes the first significant dry gas gathering in the West Virginia Panhandle, will have 3.5 Bcf/d of deliverability when fully built out with residue gas receipt points at two separate processing facilities. THQA has 800 MMcf/d contracted on the dry gas system, which connects with TC Energy’s 1.5 Bcf/d Leach Xpress and 2.7 Bcf/d Mountaineer Xpress and Dominion Energy’s TL-377 line, now in service, plus Enbridge’s TETCO M2, expected online this summer. Future interconnections include Equitrans’ 850 MMcf/d Ohio Valley Connector, Tallgrass Energy’s 2.6 Bcf/d Rockies Express and Energy Transfer’s 3.25 Bcf/d Rover.
The 59-mile rich system, overlying some of the most liquids-rich acreage in the Marcellus, has 600 MMcf/d capacity fully contracted to THQA, with expansion capacity. It currently delivers rich gas into Blue Racer Midstream’s 600 MMcf/d Natrium processing facility, but XcL is also building its own gas processing complex in Marshall County with planned nameplate capacity of 800 MMcf/d. The initial 200 MMcf/d train is under construction and expected to come online in 2020. The company expects to break ground before year’s end on a second train with 300 MMcf/d capacity and an in-service date in 2021, and another 300 MMcf/d train is in the initial design phase. Residue gas from the facility will feed into XcL’s dry gas pipeline, providing enhanced flow assurance and price optionality.
THQA’s prolific Utica dry gas output enables XcL to blend 99% of the ethane from its rich Marcellus feed gas back into the residue gas stream from its processing facility, Radler said. This provides a key economic advantage compared to other gas processors in the area, which he said must typically recover 40-50% of their ethane to meet regulated pipeline specs.
“Ethane blending is a big advantage for this plant, the first plant in the region that can blend this much ethane back into the dry gas stream,” Radler said. “And ethane is the worst-priced NGL product in the basin right now. … We’re able to sell that ethane at a premium price through the residue gas stream using our dry gas system, while limiting additional fees that would arise from de-ethanization facilities and ethane transport pipelines.” Besides its gas gathering and transport and water supply businesses, XcL also provides condensate gathering and stabilization services to southwest Appalachian producers.
Tug Hill expects its upstream margins to improve further as more of the XcL facilities come online in the next 12 months and provide additional gas marketing optionality. THQA has current net production of 300 MMcfe/d (approximately 35% liquids) and expects to exit 2019 at 500 MMcfe/d as additional wells on its larger pads turn to sales. By YE20, the company anticipates net volumes of 700 MMcfe/d. It has an estimated 18 months of drill-ready inventory for each of its four operated rigs.
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