CONSOL Energy Inc

From Wikimarcellus

Pittsburgh, Pennsylvania-based CNX Gas Corporation (NYSE:CXG) controls 760,000 acres of Marcellus shale primarily located in Pennsylvania and West Virginia. As of March, 2010, it acquired two thirds of this acreage from Dominion Resources, Inc.. With the addition of the Dominion leasehold, the combined production amounted to an annualized production rate of 141 Bcf.

CNX had originally been spun out of CONSOL Energy and is a subsidiary 83% owned by the parent company. On a revenue basis, it is the leading gas producer in the Appalachian Basin. Beginning in April, 2010 CONSOL tendered an offer to acquire the 17% of outstanding CNX stock not owned by the parent company.

As of September, 2008 it had commenced a drilling program in the Marcellus with one vertical 8,000 ft deep well which had initial flow rate of 1.3 Mmcf per day. CNX had invested $6 million in this well. It had been stimulated with a five-stage, slickwater frac. The company already had an extensive coal-bed methane (CBM) operation in the area so that shale gas was being blended with the CBM production in order to take advantage of the company's existing extensive gas gathering system. Additional wells were planned. As of October, 2008, a second horizontal well had been drilled and was pending hydro-fracturing.

CNX was reported to have been actively leasing drilling rights in Greene County, Pennsylvania.

In October, 2008 the company was also reported to have been active in Marshall County, WV. It had invested $34 million during 2008 in a gas well drilling program in the State of West Virginia. As of then, twenty-two wells had been drilled there in 2008. A total of thirty-four wells were planned to be drilled by year-end 2008. The company had also invested around $10 million in gas processing plants.

In December, 2008, CNX reported its first horizontal well had a flow rate of 6.5 million cubic feet (MMcf) per day. It was located in Washington County. It is believed to be the same one previously reported in September, 2008 as a vertical well with initial production of 1.3 MMcf per day.

In January, 2009 it was reported that a second and third horizontal wells had been drilled and were in the process of being fraced.

A February, 2009 report indicated that so far CNX had 10 Marcellus wells and 186,000 acres under lease in that formation. (Update: see below - expanded to 250,000 acres in January, 2010). Their total Appalachian shale acreage including Marcellus, Huron and Chattanooga shales was 633,000 acres. (Update: As of July, 2009 it was roughly 675,000 acres - probably 20K higher with addition of January, 2010 acreage)

One factor that distinguishes CNX from its competitors, if not all of them, is that much, of its Marcellus acreage, technically speaking, had not leased at all, but rather was owned outright. That has a significant positive impact on its cost structure and means that the company is under no obligation to drill in order to retain its land.

In March, 2009 there was a report about CNX moving its corporate headquarters to Southpointe II in Canonsburg, PA where CONSOL's headquarters were also located. Marcellus shale gas production had started to be a very significant income producer for CNX as its 4th quarter income had nearly doubled. In the past most of its income had been derived from coal bed methane (CBM) production, but Marcellus production had started to kick in. The company planned to ramp up Marcellus drilling in 2009 with a CapEx budget of almost $50 million, and was cutting back on its CBM drilling.

In April, 2009 the company released the following table summarizing the results of its first five horizontal Marcellus wells all located in Greene County, PA:

            HORIZONTAL MARCELLUS SHALE PROGRAM STATISTICS
                                    Peak       April 19       Cumulative
                                    Daily      Daily          Production
      Well   Turn in   Peak         Production Production     Mcf through
      Name   date      date         (Mcf)      (Mcf)          April 9
      ----   --------  ----------   -----      ----------    ------------
   1. CNX#3  10/5/2008 12/16/2008   6,623      2,500         479,639
   2. CNX#2  1/28/2009  2/13/2009   2,532      1,900         145,610
   3. CNX#2A 2/13/2009  3/4/2009    1,982      1,600          97,242
   4. GH10CV  4/6/2009  4/9/2009    5,508      4,800          11,960
   5. GH10ACV 4/18/09   4/21/2009   4,900      4,900            N/M
        Average Peak                4,309

According to a July, 2009 press release, in two separate transactions, CNX had expanded its Marcellus shale leasehold by 40,000 acres to 230,000 acres. In the first transaction it leased 20,000 acres from NiSource located in Greene and Washington Counties, PA and in Marshall County, West Virginia. This acreage was located in close proximity to CNX's existing holdings in that area. In the second transaction, the company had leased an additional 20,000 acres from its parent company CONSOL Energy. These latter holdings were located in and around CONSOL's coal mining operations in Green and Washington Counties, Pennsylvania and in the West Virginia counties of Marshall, Monongalia and Wetzel.

This July press release also mentioned that on the basis of its micro-seismic data analysis, CNX had started using only 40 acre well spacing for its horizontal Marcellus shale drilling program.

In its second quarter, 2009 report, issued about the same time as the press release, CNX further stated that it had a new paired rig concept wherein it was using a top hole rig to drill to a depth of 6,000 feet and then switched to a horizontal rig to curve into the almost 3,000 foot lateral portion of the well. This methodology had increased productivity so that two wells could be drilled per month instead of one. The company also increased the number of wells being drilled per pad. For example, the eighth well drilled by the company was the third one on its pad. The company planned to further increase the number of wells per pad to six. CNX estimated its finding costs were less than $1.00 per Mcf.

Also, in a second quarter, 2009 report issued by CNX's parent company, CONSOL, it was noted that, as of June 30, CNX was producing gas from 8 Marcellus shale wells.

An October, 2009 report found CNX having drilled along Wotring Road in Hopewell Township near Washington, PA. This area is located next to Cross Creek Park and around 10 miles northwest of the City of Washington in southwest Pennsylvania. This well site had seven wells stemming from a single well pad and utilized a special walking drill to move the rig around the drilling site for the different wells. CNX planned to use this kind of pad drilling with multiple well bores for most of its future drilling operations according to a company spokesman.

A further October update indicated that it CNX's drilling strategy is to use pad drilling with multiple wells per pad. That strategy combined with CNX owning most of its acreage outright has enabled the company to get its horizontal drilling cost down to $3 million per well.

A January, 2010 update from the company noted that the company increased its Marcellus leasehold by 20,000 to a total of 250,000 acres. CNX intended to expand its Marcellus acreage up to a goal of 400,000 acres. The last increase in acreage had been reported in July, 2009. Marcellus shale production during the fourth quarter of 2009 had been 1.5 Bcf -- up sharply from 0.1 Bcf in the previous year's fourth quarter. The company had drilled 13 horizontal wells to date and planned approximately two dozen more during 2010. These primarily were expected to be horizontal ones with several wells to a pad. Laterals were to average 3,000 feet.

A press release appeared in March, 2010 to the effect that CNX'S parent company, CONSOL Energy had, for a cash sale price of $3.475 billion, acquired the Appalachian exploration and production business of Dominion Resources, Inc. This acquisition triples the company's development acreage in the Marcellus Shale fairway to about 760,000 counting the addition of Dominion's roughly 500,000 Marcellus acres in Pennsylvania and West Virginia. 98% of the acquired acreage is held by production with an average net revenue interest of 87.5%. It also included overriding royalty interests in various farm-outs, 300,000 acres of Huron shale, and extensive Utica shale acreage. The deal was to close at the end of April, 2010.

An April, 2010 company update noted that to date the company had drilled 18 horizontal Marcellus shale wells. Reserves associated with the first 11 wells amounted to 35.6 Bcf or roughly 3.3 Bcf/well. The laterals on these wells averaged 2,000 feet. The company's total Marcellus production for the first quarter of 2010 was 1.4 Bcf compared to an almost negligible amount for the first quarter of 2009.

CNX planned to drill two dozen wells during 2010 with a budget of $110 million. Most of the Marcellus wells planned for the year were to be horizontal using multiple well pads. The company was moving to longer laterals with an average closer to 3,000 to 3,500 feet. The company expected to field a second drilling rig in June, 2010.

By July, 2010 the company announced that it planned to have four horizontal rigs operating in the Marcellus by year-end.

• J. Brett Harvey is Chairman and CEO.
• Nicholas J. DeIuliis is CNX's President and COO.
• Randy Albert is Senior Vice President of Emerging Business Units.
• Dan Zajdel is CNX's Vice President of Investor Relations.
• Laural Ziemba is Manager of Public Relations