Callon adds onshore, shale gas components

By OGJ editors
HOUSTON, Feb. 3
-- Callon Petroleum Co., Natchez, Miss., has added onshore and unconventional assets to its Gulf of Mexico properties and set a $61.7 million capital budget for 2010.

The budget is allocated 33% to Permian basin development drilling, 24% to Haynesville shale gas development, 9% to the gulf, and 13% for more leasehold acquisitions, and 21% is reserved for capitalized costs.

The revised strategy, 18 months in planning, is to reinvest cash flow from Habanero and Medusa deepwater gulf fields into onshore conventional oil and shale gas properties acquired in fourth-quarter 2009.

Callon plans to begin drilling this month and drill as many as 16 wells in 2010 and add more rigs in 2011 and 2012 in a Permian Basin Wolfberry low permeability oil play. It acquired a property with 1.6 million boe of net proved reserves and 350 boe/d of production. The operated property has 22 producing wells and 148 locations on 40 acres.

Estimated gross ultimate recovery is 80,000-100,000 bbl/well at $1.5 million/completed well. Spacing could be halved to 20 acres.

Callon will drill two horizontal wells starting in mid-2010 on a 577-acre Haynesville shale unit in Bossier Parish, La., on which it acquired a 70% operated interest for $3 million. Offset wells have flowed at initial rates of 20 MMcfd. As many as seven horizontal wells are possible. Estimated gross ultimate gas recovery is 6.4 bcf at $9 million/completed well.

Callon has 15% working interest in Murphy Oil Corp.-operated Medusa field, where eight wells averaged 2,000 boe/d net to Callon in 2009. Most wells are producing from their primary completion and have proved reserves behind pipe. Medusa has a proved reserve life of 7 years and is 89% oil.

Callon has an 11.25% working interest in Shell Offshore-operated Habanero field, where two wells averaged 1,000 boe/d net to Callon in 2009. Callon believes important proved reserves will be accessed by sidetracking updip from the existing wells.

Callon’s gulf shelf assets averaged 14 MMcfd of net gas equivalent production in 2009. The company is evaluating options for monetizing the shelf assets and may retain its shelf operations if no viable alternative exists.

The company’s gulf operations will generate the majority of Callon’s operating cash flow in 2010. With minimal offshore capital requirements, this cash flow will be used to fund the onshore transition.

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