CONSOL Energy Inc
Canonsburg, Pennsylvania-based CONSOL Energy Inc. (NYSE: CNX) is a multi-fuel producer of energy and provider of energy services primarily to U.S. power producers. It is one of the largest coal mining companies in the U.S. with a dozen bituminous coal mining complexes spread across six states with proven and probable coal reserves in excess of 4 billion tons. CONSOL's Gas Division was formed in the first half of 2010 when it acquired the remaining 16.7% outstanding shares held by outside stockholders of CNX Gas Corporation, a former CONSOL spin-off company, as well as all of the exploration and production business of Dominion Resources, Inc. located in the Appalachian Basin.
CONSOL controls roughly 760,000 acres, counting the 500,000 acquired from Dominion, of Marcellus shale primarily located in Pennsylvania and West Virginia. On a revenue basis, it is the leading gas producer in the Appalachian Basin.
Latest Operating Results
CONSOL had a busy first quarter during 2011, having drilled 13 horizontal wells, putting it on track, or slightly ahead of its goal, to drill 70 wells in the year. 7 of these were in its southwestern PA operating area, 4 located in central PA, and the remaining 2 were in northern WV.
In this same time frame, CONSOL had fracture stimulted 3 wells on its DeArmitt pad in Westmoreland County. These were the first ones fraced on the acreage acquired in 2010 from Dominion Resources. The acreage acquired from Dominion was in central PA and northern WV--formerly, CONSOL had primarily only drilled in southwestern PA.
By mid-April, 2010, the company had drilled 4 more wells bringing its total lateral footage drilled in 2011 up to 60,000 feet for the first 17 wells of the year versus a lateral footage drilled during the whole previous year of only 78,000 feet in total. It was averaging a mere 10 days to drill from kick-off point to total well depth with the company fielding 4 walking rigs deployed in both Marcellus and Utica shales. The first two wells fraced were the DeArmitt 1A and 1C--these two had combined flow rates of 15 Mmcf/d. The former well had been drilled with a 3,400 foot lateral and ten frac stages that were each 300 feet long. The latter well had a 4,200 foot lateral with fourteen 300-foot frac stages.
CONSOL had flowed 35.9 Bcf of natural gas during the first quarter of 2011 from all its operations (not merely Marcellus and Utica shales), and was on track to produce 150 to 160 Bcf by year-end 2011.
2008 Development Timeline
During 2008, CONSOL drilled experimental Marcellus shale wells on its acreage in southwestern Pennsylvania and northern West Virginia.
Drilling & leveraging CBM infrastructure - southwestern PA
As of September, the company had also commenced a drilling program in the Marcellus with one 8,000 ft. vertical well which had initial flow rate of 1.3 Mmcf/d. CONSOL/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 to be blended in with CBM production so as to take advantage of the company's existing very extensive gas gathering system. Additional wells were planned too. As of October, 2008, a second horizontal well had been drilled and was pending hydro-fracturing.
CONSOL/CNX was reported to have been actively leasing drilling rights in Greene County, Pennsylvania.
Investing in West Virginia's northern panhandle
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.
Solid production from first horizontal well
In December, 2008, CONSOL/CNX reported its first horizontal well had a flow rate of 6.5 Mmcf/d. It was located in Washington County and believed to be the same one previously reported in September, 2008 as a vertical well with initial production of 1.3 Mmcf/d.
2009 Development Timeline
During 2009, CONSOL both expanded its Marcellus shale leasehold as well as its horizontal drilling program.
Land holdings and horizontal drilling program expand
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 CONSOL/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 and later in the year with the Dominion acquisition to 760,000 acres). In early 2009, CONSOL's total Appalachian shale acreage including Marcellus, Huron and Chattanooga shales had been 633,000 acres. (Update: As of July, 2009 it was roughly 675,000 acres - probably 20K higher with addition in January, 2010 of more acreage. Counting Dominion later in the year, its leasehold was yet even much larger.)
CONSOL owns land outright - holds down costs
One factor distinguishing CONSOL/CNX from its competitors, if not all of them, is that much of its original Marcellus acreage before later acquisitions, technically speaking, had never been leased at all, but rather owned outright. That was to have a significant positive impact on its cost structure and meant that the company was under no obligation to drill in order to retain its land.
Gas Division (CNX) moves HQ as Marcellus production rises
In March, 2009 there was a report about CONSOL/CNX moving its corporate headquarters to Southpointe II in Canonsburg, PA where parent company CONSOL's headquarters were located. Marcellus shale gas production had started to be a very significant income producer for CONSOL/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.
Greene Co. horizontals
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, CONSOL/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 CONSOL/CNX's existing holdings in that area. In the second transaction, the Gas Division had leased an additional 20,000 acres from its parent company CONSOL Energy. While essentially a paper transaction, 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.
Well spacing reduced
This same July press release also mentioned that on the basis of its micro-seismic data analysis, CONSOL/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, CONSOL/CNX further stated that it had a new paired rig concept wherein it used 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. CONSOL/CNX estimated its finding costs were less than $1.00 per Mcf.
More drilling and a cost containment strategy
Also, in a second quarter, 2009 report, it was noted that, as of June 30, CONSOL/CNX was producing gas from 8 Marcellus shale wells.
An October, 2009 report found CONSOL/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 CONSOL/CNX's drilling strategy was to use pad drilling with multiple wells per pad. That strategy combined with CNX owning most of its acreage outright enabled the company to get its horizontal drilling cost down to $3 million per well.
2010 Development Timeline
The first half of 2010 saw important land acquisitions as well as consolidation of a major subsidiary.
2010 drilling plans
CONSOL 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.
In the third quarter of 2010, CONSOL had drilled its first Utica shale well in Belmont County, Ohio. The well was drilled to a depth of 8,450 feet where it first encountered a 200 foot thick layer of Utica shale. It had been a vertical, unstimulated well, and flowed 1.5 Mmcf/d in a 24-hour test.
More horizontal wells and acreage
A January, 2010 update from the company noted that it increased its Marcellus leasehold by 20,000 to a total of 250,000 acres. CONSOL/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 each pad. Laterals were to average 3,000 feet.
Dominion Resources acquisition
A press release appeared in March, 2010 to the effect that 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 tripled 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. Roughly 230,000 acres were located in central Pennsylvania and 270,000 acres were in northern West Virginia.
98% of the acquired acreage was 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.
Increases ownership of CNX Gas to 100%
A late-March, 2010 news account mentioned that CONSOL had obtained the financing to purchase the remaining 16.7% of CNX Gas Corp. that it didn't already own for $965 million, and it planned to do so.
First quarter Marcellus production up sharply
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.
CONSOL updated at the end of the second quarter of 2010 that preliminary EURs for all Marcellus wells drilled during the first half of 2010 had averaged 3.3 Bcf. Five of these had been drilled during the second quarter: one vertical well and four horizontal. Two of them, named the NV 17B and NV 17 D, had been fraced in July and were awaiting flowback in advance of being turned into production.
The company's Marcellus shale production was 2.3 Bcf during the second quarter of 2010, 187.5% higher than the 0.8 Bcf produced in the same quarter during the previous year.
High EUR horizontals in Greene County
As of early August, 2010, the company's five most recent Marcellus shale wells, tentatively each had reserves of between 5.5 and 9.9 Bcf. All five had been drilled in Greene Co., PA.
The first three of these five wells had been drilled on CONSOL's Greene Hill acreage in central Greene Co.
The last two drilled were in northern Greene Co. on the company's Nineveh tract. These wells, named NV 22 CV and NV 22A CV, had each been tied into line at the end of May, 2010. Both had relatively short laterals of only 2,200 feet. CONSOL was in the process of assembling a Patterson-UTI Apex Walking Rig at Nineveh where the company planned to eventually drill more than 50 wells.
Total Marcellus production during the third quarter was 3.3 Bcf up from 2.3 Bcf in the same quarter in the previous year. Also, in the third quarter, CONSOL had completed 6 horizontal wells--all in Greene Co.
CONSOL drilled 3 wells in 3Q10 using the newly assembled Patterson-UTI rig on the Nineveh 25 pad. A productivity record was set when these wells were drilled in only 35 days. There were a total of 34 stages in all three wells and each averaged a lateral length of 3,000 feet in the Marcellus shale. The wells were fraced in early October, and shortly thereafter flowed into sales. The three wells had combined daily flow rate of 8.8 Mmcf/d. The Patterson rig had then been moved to the nearby 5-well Nineveh 20 pad where it was used to drill a third well on that pad.
Other Marcellus drilling activity included:
- Nineveh 17 3-well pad in northern Greene Co. One of these wells, NV 17B, had a 2,200 foot lateral and 30-day production of 2.0 Mmcf/d with EUR of 3.5 Bcf. Another well on this pad, NV 17D, had a 2,400 foot lateral had a 30-day production rate of 1.4 Mmcf/d and EUR of 4.6 Bcf. A third well on the pad was abandoned due to casing failure.
- Nineveh 26 3-well pad. A Nabors rig (M-7) was in the process of drilling the second well on this pad. Once all three wells were completed the Nabors rig was to be moved to Upshur Co., WV where it was to start drilling laterals on the Alton 1 pad.
- A Les Wilson rig was to be moved to Westmoreland County where it was to begin drilling on a 3-well pad on the DeArmitt tract. This was to be the first pad drilled on the newly acquire Dominion acreage.
During the third quarter of 2010, three Marcellus wells had been drilled that were scheduled for completion during October.
CONSOL expected to have four rigs operating by year-end 2010. One was to be deployed on the company's newly acquired acreage in central Pennsylvania, another in northern West Virginia, and the remaining two in southwestern Pennsylvania. At the beginning of the third quarter, CONSOL had one rig operating in the Marcellus, and by the end of that same quarter was up to three rigs.
Belmont County, Ohio Utica shale well
In October, 2010 CONSOL announced the redeployment of the first rig it had used in Greene Co. to Belmont County, Ohio. There the company had drilled an 8,450 foot vertical well that reached 200 feet of Utica shale and flowed unstimulated at a rate of 1.5 Mmcf/d over a 24-hour period. The company planned to fracture stimulate this well, and if successful drill a second horizontal well on the same pad. CONSOL controlled more than 70,000 acres in Belmont Co. where this pilot well had been drilled, and planned to shift further development resources to the area.
Beaver Run Reservoir drilling program
A news item appeared in October, 2010 regarding CONSOL's plan to drill eight additional Marcellus shale wells in the vicinity of Beaver Run Reservoir and Dam in Washington Twp., site of Westmoreland County's municipal water treatment plant. CONSOL planned to bring its well count at the reservoir, both Marcellus and shallow wells, up to 60 by 2012. The plan, presented to the Washington Township Supervisors for approval, included a compressor plant. However, it was not to be utilized immediately. CONSOL also intended to widen a single lane access road to the site from Tower Hill Road in order to handle large trucks used in drilling. Drilling was already underway at the site, and a new drill pad with 10 more wells was to be added in January, 2011.
Year-end 2010 summary
During 2010, CONSOL had averaged expected ultimate recovery (EUR) per horizontal Marcellus shale well of 5.5 Bcf per well. These wells had a mean lateral-length of 3,400 feet. They had an average maximum 24-hour production of 3.7 Mmcf/d with a 3.4 Mmcf/d average for the first 30 days of operation. Production had grown from only 14 Mmcf/d per well at the end of 2009 up to 40 Mmcf/d per well by year-end 2010.
2011 Development Timeline
CONSOL planned to invest $225 million for development drilling. This sum included both Marcellus shale and unrelated coal-bed methane (CBM) drilling in Virginia. 70 horizontal Marcellus wells were planned for 2011. The company also had set aside $35 million in its budget to drill 6 exploratory Utica shale wells. An additional $200 million was to be plowed into pipeline investments.
Marshall County, WV activity
According to a March, 2011 news account much of CONSOL's Marshall County acreage is near Caiman Energy's Ft. Beeler cryogenic processing plant and MarkWest Liberty's cryogenic plant near Majorville. Most of this acreage was acquired during 2010 from Dominion Resources, Inc.
Joint Venture with Noble Energy
In mid-August, 2011, CONSOL agreed to form a joint venture (JV) with Noble Energy Inc. to help develop CONSOL's Marcellus shale assets in southwestern Pennsylvania and northwest West Virginia. Close of the deal was set for September 30, 2011. The two companies were to share operations with Noble Energy focusing on the wet gas area of the acreage. Terms of the JV agreement were that Noble acquired a 50% interest in 663,350 net undeveloped acres for $1.07 billion payable annually in three equal installments starting at the time of closing.
Noble also agreed to a carry of $2.13 billion of CONSOL's drilling expense to be spread over 8 years. It was to be limited to one third of CONSOL's drilling and completion expenses with an annual cap of $400 million. Under the JV agreement at gas prices below $4/MMbtu, the disproportionate funding on Noble's part was to be suspended. Noble also acquired a 50% interest in 70 MMbtu of production on the acreage as well as associated infrastructure.
- In the span of only one year CONSOL has gone from being a major coal company with s large spun-off E & P subsidiary to an integrated coal and natural gas conglomerate with top Marcellus shale acreage position. The company continued to integrate the former Dominion holdings into its drilling plans and identify core areas to drill.
- As being one of the first to implement pad drilling and its paired rig concept, CONSOL has been a consistent innovator. These kinds of forward looking moves have helped it to hold down costs.
- The company has extensive acreage that it owned outright as well as an already established CBM gathering pipeline system in its southwestern PA and northern WV operating areas that can be leveraged for also transporting production from Marcellus operations. These factors are continuing to help CONSOL contain costs as it ramps up Marcellus production.
- J. Brett Harvey is Chairman, President and CEO of CONSOL Energy, Inc.
- Nicholas J. DeIuliis is CONSOL's Executive Vice President and COO.
- William J. Lyons is Executive Vice President and CFO.
- Randy Albert is COO of CONSOL's Gas Division.
- Thomas (Tom) F. Hoffman is CONSOL'S Senior Vice President of External Affairs.
- Dan Zajdel is Vice President of Investor Relations.
- John Owsiany is Director Water Resources.
- Joe Zoka, Vince Galley, John Keeling and Craig Neal are CONSOL representatives in Westmoreland Co., PA.
- James McKinstrey is a CONSOL Associate Land Agent.