Arena Resources, Inc. has signed a definitive agreement to produce and sell gas from its Fuhrman Mascho properties in Andrews County, Texas, to Odessa Fuels Marketing, LLC, an affiliate of Aspen Pipeline I, L.P. and Aspen Pipeline II, L.P. of Houston, Texas. The Company announced it had signed a letter of intent in June 2007 and has been in negotiation with Aspen to finalize this agreement.
The gas, produced from the Yates formation at an approximate depth of 3,000 feet, has a high nitrogen content and is often considered too costly to produce because of the need to remove the nitrogen before transporting. Aspen has signed a definitive agreement with Odessa – Ector Power Partners, L.P., a wholly owned subsidiary of PSEG Texas, LP, which in turn is a subsidiary of Public Service Enterprise Group, Incorporated, that will lead to the construction of a dedicated pipeline to the PSEG Texas 1,000-megawatt energy generation facility just outside Odessa, Texas, which can consume a gas blend containing Yates formation gas without removing the excess nitrogen.
Arena's Fuhrman Mascho properties comprise in excess of 22,000 acres. The Company initiated a development program at the Fuhrman Mascho in April 2005 and has currently drilled approximately 245 wells to a deeper, oil bearing formation at approximately 4,800 feet. Arena has the drilling rights to the Yates gas formation on approximately 18,000+ acres, and has agreed to dedicate the Yates gas reserves to the project for the life of the reserves. Based on 40-acre spacing, the Company estimates there are 450 potential locations, including approximately 100 idle or temporarily abandoned well bores which were drilled prior to Arena's acquisition of the properties. These wells were drilled to the deeper, oil bearing formation, and are excellent candidates to be re-completed at the shallower Yates formation. The agreement is for a primary term of 15 years, with the intent that it will last thereafter for the economic life of the dedicated reserves. It requires Arena to drill or recomplete 60 – 90 wells per year for the first four years, and to strive on a best efforts basis to attain a volumetric goal of 30,000 MMBtu (Million British Thermal Units) per day or more. It is estimated that construction of the pipeline will reach the properties by the end of the fourth quarter 2008, or beginning of the first quarter 2009. Arena will receive a price equal to 70% of the Platts Gas Daily, Daily Price Survey, Permian Basin Area, El Paso Permian Basin, Midpoint Posted Price ($/MMBtu), less a $0.30 per Mcf charge for compression and dehydration services provided by Aspen.
Mr. Tim Rochford, CEO stated, "This agreement provides us the opportunity to significantly improve the economics of our Fuhrman Mascho properties by providing a very favorable market for the Yates gas with limited cost to Arena. In preparation for the arrival of the pipeline, we have begun pressure testing the integrity of the estimated 100 existing idle well bores, which we have identified as potential Yates wells through recompletion, and are pleased with the results to date."
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