This article originally provided by The State Journal

November 7, 2007

Digging for Treasure

Natural gas businesses flocking to the state to tap ample reserves

Story by Beth Gorczyca Ryan

Drive down any given highway in West Virginia on any given day, and you will see signs of the future.

Trucks loaded with pipes and drilling equipment rumble down the road, destined for soon-to-be developed natural gas wells. Pipelines and low, wide natural gas tanks stretch up hillsides and dot the landscape.

But unless a person knows what he or she is looking for, those telltale markers of West Virginia's steadily growing natural gas industry can be overlooked.

What can't be overlooked, however, are the seemingly steady announcements coming from companies, such as Dominion Exploration & Production, Chesapeake Energy, Cabot Oil & Gas Corp., Triana Energy and many others. All of the announcements proudly tout new jobs being created and new investments being made in West Virginia, a state known more for its mountains of coal than the pools of natural gas that have been lying in the bedrock for millennia.

So why now? Why are companies suddenly investing tens of millions of dollars in West Virginia? And what does the future look like?

Folks entrenched in the industry said the answers to those questions are simple. West Virginia sits in the heart of one of the richer natural gas reserves in the country. And thanks to higher energy costs and greater need for energy in this country, tapping into those reserves makes more financial sense than ever.

"We believe we have a great opportunity here," said Mike John, vice president of operations for Chesapeake Energy, which announced earlier this year it was building its eastern region headquarters in Charleston. "There is a lot of untapped potential for gas recovery in West Virginia and all of the Appalachian basin."

In its most basic form, it all comes down to the simple capitalist law of supply and demand. West Virginia has a supply. America has a demand.

"There is an energy crisis this country is facing, and the solution to it requires cooperation by everyone. There is no one single source for energy," said Nicholas "Corky" DeMarco, director of the West Virginia Oil & Natural Gas Association. "Unless we work together, we will be at the mercy of foreign governments' agendas for years to come. We have no other choice."

Reserves

To prove the boom is happening, just look at permitting activity in the state. Right now, the state is home to about 45,000 active wells, and each year nearly 3,000 new well permits are granted.

If that isn't convincing enough, take a drive through one of the top 10 natural gas-producing counties in the state -- Wyoming, McDowell, Kanawha, Lewis, Harrison, Logan, Mingo, Doddridge, Lincoln and Ritchie counties. New well sites, about the size of a football field, seem to be popping up all over the place. And existing wells are as common as brown dogs sitting along the road watching cars speed by.

Other numbers show the boom, too. Right now, the natural gas industry directly employs 14,020 West Virginians, according to Charlie Burd, director of the Independent Oil and Natural Gas Association. Indirectly, the industry employs 67,085, and the induced jobs it creates in businesses like gas stations, grocery stores and restaurants equals 68,073. And if all of the headlines and announcements from the producer companies are to be believed, the number of actual employees in the industry is increasing every month.

"We think everything is going, and will continue to go, very strongly," Burd said.

Even individual companies are telling stories of rapid growth.

Tom Liberatore, vice president and regional manager of Cabot's eastern region, said when he started with Cabot in 2002, the company drilled 44 new wells a year. By 2004, that number had climbed to between 150 and 160 new wells. This year, the company, which has 165 employees in West Virginia, will drill 260 new wells.

"And everything we're doing, 99.9 percent of it, is in West Virginia," Liberatore said. "We made a $600 million investment through 2007, and we're looking at $200 million more of investment in 2009."

Cabot isn't alone, either. DeMarco said all of the natural gas companies combined invest more than $1 billion in the state per year.

"That's not new pipeline," he said. "That's just in production."

But for the industry to succeed, there has to be reserves here for drills to tap into. So just how much natural gas is under the state? Opinions vary on the exact amount, but just about everyone agrees: The amount is huge and relatively untouched. That's because just about all of the wells currently operating in the state are gathering natural gas that is relatively close to the surface. The new gas development will occur much deeper.

"What makes this so exciting is so far all of the development has been with shallow wells," John said. "We like to say the Appalachian basin is the most developed but least explored."

In fact, the entire Appalachian natural gas basin is thought to be about as big as the other huge gas reserves in the nation, including the one that stretches through the country's midsection. As luck would have it, West Virginia sits neatly in the middle of those reserves.

According to the federal Energy Information Administration, the Mountain State in 2005 had a predicted 4 trillion cubic feet of dry natural gas reserves. In terms of natural gas liquids, the state has 85 million barrels of reserves.

The state is producing a lot as well. According to the EIA, West Virginia produced almost 210 billion cubic feet of dry natural gas in 2005. In 2001, the state produced a significant bit less -- about 180.8 billion cubic feet.

Of that 207 bcf, Burd said, about 70 percent of it is currently being exported.

The state's gas-exporting business should grow in the next few years, too. National groups predict the demand for natural gas will increase by about 54 percent in the next 15 to 18 years. Some of that is simply due to the nation's ever-expanding demand that seemingly consumes as much energy as it can produce. More power plants are needed, and natural gas will be an option.

"In the past 15 years, virtually all of the new electric power plants built in the United States have been powered by natural gas because it has cleaner qualities. They create less air pollution," said Dan Donovan, a spokesman for Dominion, which employs 1,400 people in West Virginia and recently announce a slew of new hires at its Jane Lew headquarters.

In addition, oil prices seem to be tiptoeing closer to $100 per barrel. That figure strikes fear into the hearts of many people in the northeast who use oil to heat their homes. Natural gas, on the other hand, only costs about $7 to $10 per thousand British thermal units. The price difference is so huge, Burd said, that many people are considering switching how they heat their home.

"(Natural) gas is a much better value," he said.

But not all of that northeastern demand will be met with natural gas from West Virginia. It may come from the Rocky Mountains.

Construction already has started on the $3 billion Rockies Express, or REx, pipeline, which will run from Colorado to eastern Ohio. The 1,350-mile pipeline is one of the largest pipelines built in recent years, and, when completed, it is supposed to send 2 billion cubic feet of natural gas from the isolated Rocky Mountains to the energy-starved Northeast.

Donovan said the REx project is an exciting opportunity for the area, opening up a new major pipeline to huge East Coast markets. But some other producers worry the pipeline will divert a lot of the natural gas they already ship up north and strand them with extra supply.

When Burd was asked how it could impact IOGA's members, he had a simple answer: "Oh. Dramatically."

"On the surface it will displace about 2 bcf of gas a day from the Appalachian Basin. And that impact could make our gas less valuable," he said, but he later added the pipeline also could open up new markets in places such as Canada.

Apparently producers aren't concerned enough about REx to stall or halt their plans to develop wells in prime natural gas locations. Instead, they seem to be moving ahead on projects as quickly as they can. There's a lot of work for them to do in this region of the country.

Wells

Right now, most of the wells in West Virginia are considered shallow wells. That is, they only go down about 6,000 feet, or, more specifically, they stop 20 feet into the Ondonga limestone lying far below the Earth's surface.

But in the next few years, more and more companies are planning to develop deep wells that go 10,000 to 20,000 below the surface to access reserves tucked in rocks and formations there.

"The technology has improved to allow producers to get to reserves that were once unattainable," Burd said.

Those reserves are where the majority of the untapped natural gas is believed to reside. And that is where the big money and big payoffs will come. For the 100-plus years that West Virginia has been a gas state, most companies never focued on drilling that deeply. A few wells went down into the Precambrian basement at 20,000 feet and Ordovician and Cambrian formations between 13,000 and 17,000 feet. But those wells were hugely expensive and had varied degrees of success.

But now everything has changed. Technology coupled with the need for more natural gas has made deep wells a better investment for companies.

As a result, most companies say a plethora of new super-deep wells are only a year or two away.

"In 2006, only one-half of one percent of all wells drilled went to a depth of 7,500 feet," John said. "But there are rock formations and sediment rock well below 20,000 feet that we believe hold natural gas. And a vast majority of that basin has been untapped."

Chesapeake is positioning itself to be a leader in tapping those deep reserves. The company is investing a lot of money, time and manpower into seismic imaging to try to get a grasp of just what exactly is lying under the surface. And since Chesapeake is about twice as big as its next largest competitor, it has the resources available to launch into this kind of project.

"It has become essential to us," John said.

Right now, he said, Chesapeake doesn't have a deep well in operation. But that could change by 2008, when the company is hoping to start tapping gas reserves at the 10,000-foot depth.

"And we will be looking for sites to drill deeper than that," John said.

Chesapeake isn't alone in its deep-well adventure.

Both Donovan and Libertore said their companies are looking at investing in deeper wells. It may not happen as quickly as Chesapeake's projects, and they may not go as deep as Chesapeake hopes to go, but they plan on tapping those deep reserves if they can.

Donovan with Dominion said the interest in deep drilling started about five years ago, when people realized deeper depths could be an economical way to fill the demands for gas in the nation.

"So now we are drilling on the same sites, but deeper," he said.

In addition, a number of companies are looking at drilling near coal seams to gather coal-bed methane. Removing the gas makes good sense for companies like Dominion. And it also makes good sense for coal companies since methane can ignite, causing left-threatening explosions.

Right now, Burd said, coal-bed methane makes up only 7 billion cubic feet of the 210 billion cubic feet of natural gas the state produces. But he said it offers yet another way for West Virginia to compete.

"And it's a good thing because it degasses a coal mine before they start mining it, which is always good," he said.

Landowner Rights

Not everyone is happy to see the boom in natural gas. And not everyone thinks the companies are doing all they can to be the good neighbors they claim to be.

Last month, a group of landowners from around the state formed the West Virginia Surface Owners Rights Organization to protect landowners from abuses they say oil and natural gas drillers have levied upon them. They say the companies come onto their land and set up rigs within weeks of getting permits approved. Frustrated landowners say they are given little notice that a well will go in and are given no recourse to stop the drilling.

"The playing field is tilted about as far as it can go in favor of the drillers," one of the group's organizers, Gary Zuckett, said in a news release.

But more than not having a say in how drilling takes place, members of the group say the wells have ruined valuable property. One member said a new well ruined the woods where his daughter planned to build her home. Another member said the well and the road leading to it ruined his hayfield, making it impossible for him to grow anything on it. Despite the destruction, the landowner said he still has to pay taxes on the ruined field.

"Drilling permits in West Virginia have skyrocketed from 900 per year to over 3,000, so we're hearing from ... furious land owners who believe they've been run over," Dave McMahon, a public interest lawyer who helped to form WV-SORO, said in the news release.

The group currently is in the middle of a fall membership drive with the goal of recruiting enough people before the start of the regular session of the Legislature in January. At that time, the group hopes lawmakers will agree to introduce and then pass a Surface Owners Bill of Rights to level that playing field. The group says, right now, its members simply want to have more say in where wells are located, where access roads are put in and how oil and gas companies go about exploring for resources on private property.

The group also believes the state's oversight of the oil and natural gas industry is woefully understaffed. They said the state's Division of Oil and Gas only has about 14 inspectors to handle 45,000 active wells.

"Even the laws dealing with surface and water protection now on the books can't be effectively enforced with such a lack of inspection," McMahon said.

The frustrated landowners aren't the only ones upset with the industry. Landowners who have been receiving royalty checks from natural gas companies recently filed a class-action lawsuit against Chesapeake in Roane County, accusing the company of gypping them out of millions of dollars.

The lawsuit went to trial and January, a Roane County jury awarded a $404.3 million verdict against the natural gas company. The jury's verdict awarded $134.3 million in compensatory damages. The remaining $270 million in the verdict was considered punitive damages.

The lawsuit's huge result was a wake-up call to disgruntled landowners who saw that giant companies may be fallible, and that even if state code doesn't offer them redress, the state's courts might.

Natural gas companies also took notice. The ruling was huge, and, at least for a time, made some companies evaluate the risks of doing business in the state. But it also made them review their current royalty agreements to see how they are written to make sure people know how the system works. And they are reconsidering how they will calculate those royalties in the future.

There have also been several bills introduced that try to make rules for royalties. So far, those bills haven't gone far in the Legislature.

"We want the people to know the ground rules going forward," Donovan said.

He said Dominion, like other companies, is watching the Chesapeake lawsuit closely and watching what lawmakers do to address the situation. But the decision hasn't been enough to scare Dominion out of West Virginia, he said.

"We're going to drill more," he said. "(The state) is rich in natural resources, close to major markets and close to infrastructure that can get gas to those markets. West Virginia is in an ideal location right now with what is going on in the gas industry, and we are here to stay."