Seneca-EOG Marcellus joint venture to cut activity

By OGJ editors

EOG Resources Inc., which has earned a 50% working interest in 34,000 gross acres contributed by Seneca Resources Corp. to a Marcellus shale joint venture, has notified Seneca that it does not expect to meet the minimum drilling target for calendar 2012 specified in the JV, Seneca said.

The JV, formed in late 2006, initially called for EOG to ramp up to 60 development wells/year by 2014 (OGJ Online, Jan. 15, 2009). The JV afforded EOG the right to earn 50% interest in 200,000 Seneca acres and Seneca the right to earn 50% in all of EOG’s 120,000 acres.

Should EOG not meet the minimum drilling requirement, it would no longer have the right to earn further acreage from Seneca. However, both companies would retain their respective working interests in wells previously drilled and could drill additional JV wells on the acreage that has been earned.

Seneca’s parent National Fuel Gas Co. said the JV has met its goals because with a minimum initial investment Seneca evaluated its acreage, learned from an experienced shale gas operator, and developed its Marcellus operations team.

“Having full control of our largely royalty-free, contiguous acreage position unencumbered by a JV further enhances the long-term value of our Appalachian assets,” National Fuel Gas said.

As a result of the indicated reduction in JV activity, Seneca anticipates little drilling or completion activity on JV acreage in fiscal 2013 starting Oct. 1, 2012. This will lead to an inventory of previously drilled wells that likely will remain uncompleted until natural gas prices reach an acceptable level.

Even though Seneca had already discussed its plans to limit participation in future JV wells to its 20% overriding royalty interest, the change in EOG’s JV activity will further reduce Seneca’s previously announced capital expenditure and production guidance for its 2013 fiscal year.

Capital spending is expected to decline by $50 million, largely as a result of EOG’s anticipated postponement of completion activity, to a range of $400-500 million. Consequently, production is now expected to be 92-105 bcf of gas equivalent, reduced from the previous guidance of 100-115 bcfe.

Meanwhile, in Seneca’s wholly-owned Marcellus development program, production has been initiated on the first three wells of a six-well pad located on its DCNR 595 tract in Tioga County, Pa. These three wells had peak 24-hr production rates that averaged 7.9 MMcfd, with the best well achieving 9.3 MMcfd.

As of July 23, 2012, Seneca’s total net Marcellus production is 200 MMcfd, of which 44 MMcfd comes from 65 gross horizontal wells in the JV.

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