Friday, February 6, 2009

More On The Barnett Shale Gas Play, Devon Energy

Very interesting. New technology, horizontal drilling, geology, high stakes, big money, Texas. Stay tuned. Note: This article was written "way back" in 2005.

Devon Energy Marks Milestone in Barnett Shale Play
Aug. 8--OKLAHOMA CITY -- In the third week of July, Devon Energy of Oklahoma City lifted its one-trillionth cubic foot of natural gas from the Barnett Shale field near Fort Worth.

A "T," as energy people call it, is a milestone under any condition and more so in this case because it represents almost 70 percent of the 1.45 trillion cubic feet of natural gas taken from the Barnett Shale field since 1993. It puts Devon on track to repeat as the biggest gas producer in the Barnett Shale, Texas' largest gas field, and as the top natural gas producer in Texas.

It was also a payoff for Devon, the acquisitive company that has become both the pioneer and biggest player in drilling and production in the Barnett Shale field.

Today, the company has 18 rigs working in the Barnett Shale. Most significantly, five of them are in Johnson County, south of Fort Worth. For Devon, the expansion beyond its original base in Wise, Denton and northern Tarrant counties marks a significant turn in the investment it made in 2002 when it bought Mitchell Energy and its pioneering base in the Barnett Shale for $3.5 billion.

Since 2002, Devon has drilled almost 2,000 wells in the Barnett Shale, more than doubling Mitchell's 2002 production to the current 560 million cubic feet a day. Up to 1,000 more wells could be drilled on the company's leased acreage in western Wise County, as well as Johnson, Parker and Hood counties.

The Barnett Shale is merely the highest-profile field in which Devon operates. The company, through its 2002 purchase of Ocean Energy of Houston, was already a player in the Carthage Field in East Texas, the state's second-most productive field. Devon also has significant acreage in the Permian Basin in West Texas and in the old South Texas gas fields near the Mexican border, much of it acquired when it bought Pennzoil's exploration and production unit in 1999 (a purchase that had eluded Fort Worth-based Union Pacific Resources two years earlier).

In addition to the 20 offshore Gulf of Mexico wells Devon plans to drill this year, the company is a big player in Canada and the Caspian Sea region. It is also making inroads in China. Still, 88 percent of its production is in North America.

This year, Devon received permission from the Texas Railroad Commission to reduce the spacing between gas wells from 40 acres to 20. Although that hardly brings back the early 20th Century practice of drillers putting derricks literally against one another, Devon hopes that the closer spacing will add production.

Devon, too, is going back to some of its older wells and refracturing them. Fracturing involves injecting water mixed with fine sand at high pressure to create hairline cracks in the tight shale. More than any other technology, it has made the difficult Barnett Shale play possible.

A "frac" is done after the well is first drilled, and Devon thinks that it can reverse the inevitable production decline (of up to 50 percent) that sets in over the first two or three years of a well's life.

"We've done some refracs in Wise and Denton counties, and we find that we can take a well that originally produced 1.5 million cubic feet a day and had declined over a few years to about a third of that, and then bring the production back to the original level," said Brad Foster, who heads Devon's North Texas operations.

Devon has kept its head down in Texas, putting its Barnett Shale field offices in Bridgeport and Cleburne rather than in a higher-profile setting in Fort Worth. The company reflects the low-key style of Chairman Larry Nichols.

Nichols, 63, is not the kind of Oklahoman to throw his hat into the air and start singing about the wind whipping down the plain at the thought of a Sooner State company being Texas' biggest gas producer.

Nichols, who has a geology degree from Princeton University and a law degree from the University of Michigan, once clerked for the late Chief Justice Earl Warren. Nichols was working at the Justice Department as an assistant to William Rehnquist, who is now chief justice, when he returned home to join his father, John, in the family's energy-investment firm.

Nichols may come from a pioneering Oklahoma family, but he isn't one to proclaim an Oklahoman dominance over Texas, at least in gas production.

"It's a nice thing to be Texas' biggest producer because it means we're doing good work," he said. "But it doesn't go any farther than that."

Independent energy analyst Kurt Wolff is among Devon's boosters. He describes the firm as "an independent that is still being run by the chief executive who has built its great long-term record."

At the time Larry Nichols joined the family firm, John Nichols, an accountant by training, had run it for two decades.

"Dad thought this was a great time to begin raising money in Europe for energy investment in the U.S.," Larry Nichols said.

The newly named Devon Energy ("We didn't want to call it 'Nichols Energy,' " Larry Nichols recalled), did a nice -- although quiet -- business investing in various drilling and production projects, mostly in the Southwest, but also in West Virginia gas fields. The energy boom of the late '70s and early '80s benefited Devon Energy nicely. Along the way, John Nichols, 91, who remains a venerable presence in Oklahoma City, turned over the company reins to Larry.

The younger Nichols proved to be an aggressive acquirer of properties, but it was a decision to not do something that saved Devon. In 1982, the company was poised to join the so-called "Deep Anadarko" play in southwestern Oklahoma. The industry was abuzz about the play, which was 25,000 feet deep, and its supporters said it was going to be the next big thing.

But the Deep Anadarko didn't feel right to John and Larry Nichols. The industry bore all the signs of a boom about to go sour: overproduction, flagging demand and a vast oversupply of drillers. So the Nicholses decided to sell instead of going deep in the Anadarko.

The sale saved Devon when the price of a barrel of oil plunged from $34 to $10 over the next three years, taking three-quarters of the U.S. domestic energy industry with it. Devon Energy was still standing and able to go public in the late 1980s in order to make its mark as a pioneer in the coal-bed methane gas play in the San Juan Basin of New Mexico.

Devon's success in the San Juan Basin and other domestic fields gave it the capital to go after some of the goodies that were placed on the table as the energy industry consolidated during the 1990s doldrums: the venerable Kerr-McGee company of Oklahoma in 1996; Northstar Energy in 1998, which gave Devon a major foothold in Canada; Pennzenergy in 1999; Santa Fe Snyder (co-founded by Fort Worth oilman John Snyder) in 2000; and Anderson Exploration in 2001.

The San Juan Basin success also gave Devon the confidence that it could handle a new, unconventional natural gas play. It champed at the bit when Mitchell Energy of Houston began shopping itself in 1999.

"Mitchell was interesting because it had opened the Barnett Shale in North Texas, and we watched it closely," Larry Nichols said. "In 1999, when we first talked with them, we didn't think we were quite ready. Two years later, we were."

When Devon made the $3.5 billion deal to buy Mitchell, the Oklahomans made it clear that the Barnett Shale was, as Nichols said, "the prize of the transaction."

At the time of the purchase, Mitchell's aggressive beginning in Wise and Denton counties had resulted in 400 wells. By mid-2005, Devon had more than 2,000 wells in the Barnett Shale and had produced a trillion cubic feet of gas. Most important, as Wolff, the energy analyst notes, "Devon caused a lot of other producers to look hard at the Barnett Shale, and most of them eventually got into the play. But Devon was there early."


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Copyright (c) 2005, Fort Worth Star-Telegram, Texas

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