Texas Producers Look to Low-Permeability Coal for CBM Payoff

Abstract: Magnum Hunter has formed a joint venture with privately owned CDX to apply "leaf" pattern horizontal drainage in New Mexico's San Juan Basin area. The goal is much earlier CBM gas flow and minimized produced water management.

Analysis: Not so very long ago, producing coalbed methane (CBM) profitably had become an elusive goal that often kept slip-sliding away.

First off, producers looked for coals that exhibited high permeability. That limited the CBM search to coals located in such regions as the Black Warrior Basin of Alabama, certain areas of the Appalachian Basin, the San Juan Basin area of New Mexico and Colorado, and the Powder River Basin of Wyoming and Montana.

The problem with CBM production is determining how much methane is actually contained in specific targeted coals, and how quickly it can desorb from the coal as a result of dewatering. In many cases, the producer really couldn't be totally sure about either methane quantity or quality without drilling many wells and then waiting for the required dewatering process to reveal the slowly emerging answers. It was a mixed blessing. On the one hand, most CBM drilling involves shallow holes, which keeps individual well costs relatively low. On the other hand, operators usually have to drill numerous wells (with 80-acre spacing or wider) to drain targeted seams effectively, so the overall savings on drilling costs aren't that spectacular. And then the dewatering process is lengthy, at best, often taking several months before the methane begins to desorb from the coal in commercial volumes.

Additionally, and perhaps more importantly, there is the challenge of what to do with the high initial volumes of produced water. If water quality is high, it could usually be discharged at the surface directly into nearby streams or rivers. However, if it contained higher volumes of salts, organic compounds, metals, and the like, it might then have to be discharged into specially built filtration ponds for settling and evaporation. Even lower-quality water usually must be reinjected. The latter two alternatives, of course, raise operating costs considerably. And both surface disposal and reinjection of produced water raise questions among landowners and environmental groups, particularly in western states.

But the industry is coming up with ways to reduce the costs--and headaches--associated with producing CBM and managing the produced water. The most obvious way has been to cut back on the number of wells drilled, yet still get sufficient coverage of the target coals. Horizontal drilling technology has helped that along. Additionally, producers are finding ways to reinject the water without first having to bring it to the surface. Progress is being made in both areas, and advances in CBM drilling and production technology promise to expand the industry's ability to develop methane from even low-permeability coals.

In fact, Dallas-based Magnum Hunter Resources last week announced it's teaming up with CDX LLC, also based in Dallas, in a joint venture to develop several large CBM prospects in New Mexico located near--but not smack-dab in the middle of --the prolific San Juan Basin. Both companies are contributing leasehold acreage to the venture totaling some 576,000 acres. The properties include leases owned by Magnum Hunter in McKinley, Sandoval. and San Juan counties, and CDX's Southeast Cabrito, Rio Puerco, and Zed projects in the same general area. The co-venturers will concentrate on developing the Upper and Lower Menefee coals of the Mesa Verde Group, CBM targets that heretofore have not been developed, due largely to overall low permeability of the coal in that area. Additional prospects may be added to the venture later.

The New Mexico joint venture will be Magnum Hunter's first foray into CBM. The company, formed in 1996, is a fast-growing independent engaged in conventional oil and gas exploration and production, natural gas gathering, transmission and marketing, and managing and operating producing properties for others. Its E&P activity is centered in the U.S. Mid-Continent, Permian Basin, South Texas, and shallow-water areas of the Gulf of Mexico.

Gary C. Evans, Magnum Hunter president and CEO, said the joint venture acreage "is one of the most exciting projects that I have ever been involved in my over 18-year tenure...The reserve potential of the unexplored region significantly exceeds our company's current proved reserve base."

Evans said by bringing CDX into the venture, Magnum Hunter will be able to exploit the new asset with minimal capital outlay, since CDX will foot the brunt of the up-front cost (about $11 million) for drilling more than 50 stratigraphic and core test wells and pilot drainage wells. Average well depth will be 3,500 feet.

Formed in 1991, CDX is a privately owned drilling and exploration company whose objective is to develop "game-changing" technology to produce nonconventional oil and gas reserves economically. They've specialized in CBM, shale gas, and other hard-to-produce hydrocarbons, and currently have CBM and tight gas production in West Virginia, Oklahoma, Arkansas, Indiana, and in Canada's British Columbia and Alberta provinces. In fact, CDX has a similar joint venture with Talisman Energy for CBM development in Alberta.

A CDX subsidiary, CDX-DART Drilling & Technology, LLC (CDDT), apparently has answers to questions about the low permeability, the number of wells drilled, and the best way to manage the produced water from the Menefee coals beneath the co-ventured leases. They plan to apply patented horizontal drilling/coal seam drainage techniques and possibly could institute downhole water separation that would allow high-rate methane production almost immediately from fewer surface well locations. The company currently operates 10 drilling rigs with drilled depth ratings ranging to 5,000 ft. So far, two of the rigs have been dedicated to the New Mexico joint venture. CDX-DART plans to acquire 10 additional rigs by the end of 2004.

Central to the co-venture is CDX's Z-Pinnateā„¢ Horizontal Drilling and Completion System, which involves multiple wells drilled from a single location. In practice, a single vertical well is drilled to the target coal seam or seams. For each seam, drillers ream a cavity that acts as a water accumulation chamber or sump. Then, a nearby directional well is drilled from the same location. That well is geo-steered to intercept the cavity, then is drilled ahead laterally through the coal seam. From that lateral, additional branch laterals are drilled, forming the shape of a leaf (hence, the name "pinnate"). The company is able to drill three additional main laterals from the single vertical well. Branch laterals are then drilled from each of them, forming a 360-degree drainage pattern covering roughly 1,200 acres. This pattern, along with the sumps in the vertical well, optimizes both dewatering and production, and negates the need for 16 conventional vertical well locations on 80-acre spacing. The company has a patented downhole water separation system that could be used for reinjection, should that be necessary.

All wells in the system are drilled underbalanced, wherein the pressure in the well's circulating annulus is maintained at less than the pore pressure of the reservoir and without using conventional drilling fluid. This prevents damage to the wellbore or reservoir often caused by drilling fluid entering the formation due to high pump pressure.

According to Doug R. Wight, CDX vice president of corporate development, some advantages of the Z-Pinnate system include recovery from low-permeability reservoirs of up to 85 percent of gas in place within 36 months at flow rates ranging from 1.2 to 3.5 million cubic feet per day. Recently, Wight compared a 500-million-cubic-foot horizontal Pinnate well with a similar, fracture-stimulated conventional vertical well also producing 500 million cubic feet. The Pinnate well, he said, produces immediately, during the dewatering process, and depletes in a little more than six years. On the other hand, the conventional CBM well starts producing very slowly, due to the wait for dewatering, and then takes up to 15 years to give up the same volume of gas.

Core drilling already has begun in the first phase of a three-phase drilling program. A total of 25 wells are expected to be completed by February 15, 2004. The second phase, involving another 25 wells, is expected to be completed by July 1, 2005. Phase three will consist of drilling several pilot projects comprising both vertical and horizontal wellbores, Wight said.

It's likely other producing companies with leaseholds covering low-permeability CBM and tight gas formations will keep an eye on the Magnum Hunter/CDX joint CBM venture in New Mexico. Wight said CBX would consider similar mutually beneficial arrangements in other areas of the U.S. and Canada.