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Dozens of companies drill for natural gas



Published: Tue, September 5, 2006 @ 12:00 a.m.



The long life of wells in the area makes the prospect of drilling more attractive.

INDIANA, Pa. (AP) -- Deep in the wooded hills of western Pennsylvania, a 50-foot-tall drilling rig rattles and whooshes as it drives sections of metal pipe into the ground, one after another.

Hard-hatted workers have been operating the machine for less than a day, but soon they will have bored through 4,000 feet of dirt and rock that promises a rich reward -- natural gas trapped in layers of prehistoric sediment.

Their company, Linn Energy LLC, carved out this small patch of earth just days ago, building a gravel road into a forest of maples and oaks. In another day or so, they will dismantle the rig, move it to another site and start drilling again.

Linn is among dozens of companies that have been drilling natural gas wells at historic rates across much of the Appalachian Basin, an area that includes swaths of Pennsylvania, West Virginia, Kentucky and Virginia.

Soaring prices and demand, along with modern drilling technology, are making such wells economically feasible.

The proliferation of drilling is not confined to the region, the birthplace of the commercial oil industry. Oil and gas firms have stepped up exploration and production in Texas, Colorado, Oklahoma and other states in recent years.

What's changed

But Appalachia is relatively untapped and contains low-volume natural gas resources previously considered too difficult or expensive to exploit. It is also a premium market close to major cities such as New York and Philadelphia.

"You can run your economics now," said Michael Linn, Linn Energy's chief executive and a 26-year industry veteran. "The stabilized price, or at least the bottom part of the price, makes economic sense. That's what's kicked off this drilling."

Natural gas prices have held steady at $6 to $8 per thousand cubic feet for about the past 18 months, Linn notes, while the relatively long life span of wells in the area makes the prospect of drilling more attractive.

Area wells may produce gas for as long as 20 years, unlike those in the Midwest, which may last 10 years, or along the Gulf of Mexico, where wells may expire after seven years, he said.

The favorable conditions have enlivened the market. In Pennsylvania, about 3,600 drilling permits were issued in the first six months of 2006. If that pace continues, the number issued this year could eclipse 2005's record of 6,042 by 20 percent.

The number of natural gas wells in Pennsylvania grew almost twofold, from 23,822 to 44,227 between 1999 and 2004.

But industry representatives say the regional natural gas expansion is no gold rush. And it has been accompanied by problems such as lawsuits aimed at restricting drilling and long-standing shortages of equipment and workers.

"The profitability probably isn't as much as one would think because in line with the increase in prices is the increase in demand in services and drilling rigs and personnel," said Louis D. D'Amico, executive director of the Independent Oil & amp; Gas Association of Pennsylvania. "Everything has just gone up astronomically, and we're having a tough time finding people."

Cyclical industry

The energy sector has endured several boom-and-bust cycles in recent decades. A prolonged slump that ended only in the past five years discouraged a generation of would-be petroleum engineers from entering the industry, leaving companies short-handed.

The cost of drilling also remains prohibitively high for individuals who may want to extract gas. Linn Energy spends upward of $250,000 to drill a well and install a well head, a small cluster of pipes and cylinders. Its return on investment has risen to about 8 percent to 9 percent.

The process entails scouting land, acquiring leases, securing government permits, conducting exploratory seismic studies and linking wells to pipelines.

Some property owners have welcomed offers by companies to lease their land and drill on it for two to five years. In return, they may get free gas for their homes and an eighth of the well's gross proceeds.

Though energy sector heavyweights such as Exxon Mobil Corp. have not entered Appalachia, recent moves by large independent producers such as the Oklahoma City-based Chesapeake Energy Corp. have drawn attention to the area.

Last year, Chesapeake bought Columbia Natural Resources LLC of Charleston, W.Va., for $2.2 billion, allowing it to develop natural gas reserves throughout Appalachia and making it the third-largest reserve holder behind Exxon Mobil and ConocoPhillips.

Copyright 2006 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.




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