2006 New Albany Shale update

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2006 New Albany Shale update

• Bob Cluff
• The Discovery Group Inc.
• Denver, Colorado
• Presentation to IOGA Annual meeting
• Evansville, Indiana
• 2 March 2006

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Outline

• Why the sudden buzz?
• How does the New Albany compare to other shale
  gas plays?
• Why is the action in Indiana and Kentucky instead
  of Illinois?
• Whats in this for me?

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The Buzz

• What has changed
• Gas prices rose dramatically
• Technology advanced in the Barnett play
• Better reserves than ever expected
• Result a huge interest in resource plays built
  up in Denver, Calgary, Tulsa, Ft Worth Houston

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(No Transcript)
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Some conversions

• 1 BCF 1,000 MMCF 1,000,000 MCF
• 6 MCFBO on BTU basis
• Currently 5 to 7 MCF per bbl on wellhead basis
• historically closer to 8 to 101
• For back of the envelope economics, a 40 MBO oil
  well is worth about the same as a 250 MMCF gas
  well

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Resource plays

• Tight gas sands, coal bed methane, and shale gas
  all considered resource plays
• Repeatable, predictable blanket-like
• Gas Factory model for development
• Thought to be primarily engineering driven as
  opposed to geology driven

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Southern margin shale plays
Schlumberger, Shale Gas white paper
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Southern PZ margin
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Resource players

• EnCana, Devon, Chesapeake, Anadarko, Southwestern
  Energy, Vintage, others
• Shell, ExxonMobil are watching or currently
  testing the water
• BP, ConocoPhillips, Chevron appear to be
  sitting it out (for now)
• Shale gas is the hottest thing going in 2006!

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Technology advances

• Huge water fracs
• Work in Barnett as well or better than gel fracs
• Substantially lower total cost
• Open up enormous drainage areas to well bore
• Horizontal wells
• Can now drill, steer, frac a horizontal well in
  shale shale is competent and stays open
• Almost 2X deliverability of vertical well

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Barnett water frac

• HUGE water fracs with a light sand load
• gt1,000,000 gallons H2O 50,000 sd
• Object is not to place a conductive sand pack in
  the fracture, but rather to open up a very large
  area of natural fractures (joints)
• Sand might be acting like an abrasive to improve
  natural asperities
• Fm is so tight (nanodarcies) that ANY fracture
  will be orders of magnitude better

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Barnett Shale- the big hitter

• Started slow, fewer than 100 wells in first 15
  years
• Late 1990s, figured out GIP was much greater
  than previously thought
• 1999 discovered water fracs
• 2002 figured out how to drill and frac
  horizontal shale wells

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AAPG Explorer, Feb 2005
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Barnett vs. New Albany
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Barnettstructure
Discovery Group, 1994, Proprietary report
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New Albanystructure
GRI-00-0068, after maps constructed in 1976-1981
by ISGS, IGS, KGS
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Lower Barnett thickness
FW D
Discovery Group, 1994, Proprietary report
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New Albany thickness
GRI-00-0068, after maps constructed in 1976-1981
by ISGS, IGS, KGS
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Barnettmaturity( Ro)
Humble Geochemical www.humble-inc.com
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New Albanymaturity( Ro)
GRI-00-0068 after Barrows Cluff, 1984
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New Albany RhoB vs TOC
EGSP data, 1976-1979
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Barnett Shale type curve
n 925, EUR gt 1.4 BCF
IP30 660 MCFD
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New Albany (Corydon area)type curve
IP30 90 MCFD
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Why so much activity on the east side of the
basin?

• Historic NAS production has all been in Indiana
  and Kentucky
• Biggest are Shrewsbury, Corydon, Laconia
• Lots of small fields in IN reef trend, e.g.
  Loogootee, with high reported gas rates
• Several small fields south of Pennyrile fault
  zone in KY

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• Thick section of black shale in Kentucky
• High maturies to the west, approach the Barnett
  analog in places
• Extensive faulting might mean better fracturing
  higher perm
• Open acreage, reasonable terms
• Major pipelines cross the area

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And why not Illinois?

• Shawneetown N.F. blocks out a large prospective
  area
• More problems with HBP lands shallow
  production- hard to build large blocks
• Less attractive lease terms
• Fewer shows, less encouragement from historic
  activity, only one small gas field discovered

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2005 activity
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New Albany reserves reserve expectations

• Corydon-Laconia 0.1 to 0.3 BCF/well
• Maple Branch unknown, probably similar to
  Corydon
• Shrewsbury unknown, but small
• Daviess Cty, IN 0.5 BCF/well??
• Union-Crittenden Cty, KY 0.6-1.0 BCF/well
• Horizontal wells are a wildcard- generally hope
  to get about 2X vertical well reserves or better

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Whats in it for me?

• If you are in the southern part of the basin,
  youve got mature New Albany under you
• Gas is probably there in significant quantities
• Opinion the NA is fully saturated with gas
• Deliverability is the big question/risk
• Lots of historically tight tests of the shale
• Current testing not far enough along

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What should you do?

• Adopt a wait, watch, learn approach
• Partner up with other local operators and drill a
  science well to test your area
• Objectives are to
• prove up gas content get data to map GIP
• determine fracture stress orientations for
  horizontal drilling
• test deliverablity with modern gas shale frac
• provide an economic baseline to evaluate vertical
  well performance

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Coring program

• Full diameter core
• Lithology fracture description
• Sample on site for gas desorption
• Lab protocol includes porosity, bulk density,
  TOC, maturity, minerology, methane adsorption
  isotherms

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Logging program

• Triple combo of resistivity, density, neutron,
  a spectral gamma ray
• Dipole sonic for stress and frac design
• Imaging logs to determine fracture density and
  orientation
• NMR other specialty logs have not proven very
  useful

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Completion

• If you have a lot of gas in place,
• Then frac the bejeepers out of it
• (per Kent Bowker)
• Proof of concept well gives you the backup you
  will need to promote your position to a larger
  independent

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The future

• Future of the New Albany play is still uncertain
• Deliverability reserves are unknown
• Activity in 2006 will be more big acreage plays,
  drilling completion of science wells, and
  horizontal wells to test the play
• It will probably take 50 to 100 wells before we
  really know if it will work