Magellan would like to thank our shareholders for the patience they demonstrated while Magellan resolved the high BTU/shut-in situation with the Thomas D. Martin and Robert Anderson Leases.
In late 2008, the federal government, through the agency FERC, mandated that any gas with a BTU count higher than 1100 is unsafe and should not be transported in interstate pipelines or sold to consumers. Gas originating from oil wells usually has a high BTU count, and this is especially true in the Burville area where the Anderson and Martin wells are located. As a result, Magellan, as well as many other area producers, had their wells shut in by Citizens Gas for the past six months.
To resolve the issue, Citizens Gas placed a large compressor in its Burrville gathering system where it ties into a 350 lb. pressure line. Citizens Gas receives its gas supply from the east Tennessee gas pipeline and from various local gas producing wells in Scott, Morgan, Fentress and Anderson counties, and will be "blending" the gas from all other wells in these counties to lower the BTU levels. All operators in the area, including Magellan's operator, TMD Energy Inc., have agreed to pay for the compressor lease.
The blending process for the high BTU gas from the Burrville system will ensure that the BTUs will not exceed the critical 1100 level. Magellan intends to sell gas through this system from both the Martin and the Anderson leases.
The long delay in resolving this issue can be attributed to a number of factors. Many parties were affected by the shut-in and each had to be part of negotiating the solution; many logistical issues had to be addressed; and in the end, the solution had to satisfy federal guidelines.
Work has virtually been completed on the wells and the production phase will commence very shortly. In order to gauge volumes, and therefore, revenues, we must let the gas run through the lines to achieve consistency in gas flow to obtain a true estimation of what is pushing through the lines. Consumption = Sales = Revenues. A meter placed on each well will measure the volume. The production must carry on for at least a week to achieve average volumes. An added benefit of gas production commencing is that the process will also increase oil production on the wells. As these values are established, Magellan will update its shareholders.
Magellan is gearing up for production at a time when the U.S. economy may have reached a turning point in the current recession, at least in some sectors and the overall outlook for natural gas seems to be optimistic. The Obama administration's energy policy hinging on reducing dependence on foreign energy, especially oil, is encouraging at a time when Magellan's natural gas and oil production is set to expand.
This is an exciting time for Magellan. While we certainly have faced challenges in our existing projects, we have worked diligently to overcome them and progress is being made on all of our properties.
We remain committed to creating shareholder value through development, efficient operations and strategic acquisitions.
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