IGas Energy: CBM gas is the priority despite surprise shale discovery

Saturday, January 28, 2012 by Jamie Ashcroft

IGas Energy (LON:IGAS) doesn’t intend to get distracted by its surprise shale gas discovery in Cheshire.

On Thursday, the British oil and gas firm revealed an unexpected result in the Ince Marshes exploration well, south west of Warrington.

It said the find was very significant, with a shale section of at least 1,000 feet found in the well. 

At target depth the well was still in the shale section, it said. 

Gas indications were observed across the interval and a number of potentially prospective zones were identified. According to IGas, this area is part of the Bowland shale.

The company told Proactive Investors that coal bed methane (CBM) remains the priority despite the fact that the shale discovery may have raised a few eyebrows. 

Indeed, many investors may be quick to size up the potential of the shale discovery – because of the massive Bowland shale play discovered last year by Cuadrilla Resources further north, near Blackpool. 

IGas’ shale potential is no secret. The firm has highlighted the prospectivity of its acreage on a number of occasions in the past. 

But the group is keeping its sights fixed firmly on the development of a coal bed methane operation, for the near term at least.

“The well was targeting coal bed seams. It just so happened to encounter shales as well,” chief financial officer Stephen Bowler told Proactive Investors.

“There is no change in emphasis in terms of the group’s objectives or what we are drilling for.” 

The emphasis of the Ince Marshes well was on the coalbed, not shale rocks. It was designed to find out the thickness of the coal seams and to pinpoint their locations, Bowler explained.

The company’s focus is on CBM, he added. And at the moment it is too early tell whether the shale element of Ince Marshes will be explored or developed further. Instead Bowler says IGas needs to assess the findings of the well first.

Mainly, the emphasis will be on the Doe Green field development and establishing CBM production volumes from there, Bowler added.

At Doe Green, located between Widnes and Warrington, IGas has just completed the ‘in-coal’ phase of drilling for the DG-3 and DG-4 wells. The firm expects to start work on the production completion operations, which includes de-watering, for the two wells in the coming days.  

After that the wells will be tested and indicative flow rates are expected before the end of March.

IGas now has over 3,500 feet of lateral exposure to CBM seams in three wells. The DG-2 well already gave the firm 1,000 feet of exposure. Now the DG-3 well has added 1,500 feet of exposure and the DG-4 well added 1,000 feet.

On Thursday, it said that the DG-4 well was in an area that was more faulted than it had anticipated, particularly in the deeper seams. 

“Hopefully that’s an encouraging sign,” Bowler explained. 

Faulted coal beds are typically more brittle and the gaps between the layers of coal are often larger. 

While drilling, this makes for slower progress as the faulted coal bed is more complicated to navigate, as such wells in faulted CBM seams may have less exposure to the coal bed.

But from a production point of view it is a positive. 

A potential benefit of finding CBM in faulted seams is that more gas may have been trapped within the coal bed and it may potentially be easier to extract higher volumes of gas from the seam - because the gaps in the rock are larger.

“There was more time and complexity in achieving longer lateral lengths in DG-4, due to the faulting, but that could have benefits on the other side.”

However, this rule-of-thumb has yet to be confirmed at this particular site and gas flow test results in March will be revealing.

CBM, like most other unconventional hydrocarbon plays, requires many wells to be drilled. 

This is so that the coal seams can be properly mapped and gas extraction techniques can be tweaked and optimised for each particular seam.

For the uninitiated, CBM wells are drilled laterally across a coal seam to maximise the well’s exposure to the largest possible surface area of the coal seam. 

Water is subsequently drained from the well, via the ‘sump’ section of the well. The dewatering process causes a change in pressure which draws gas out from the coal and causes it to flow via the well bore to surface.

This kind of development work can become capital intensive and a drain on cash resources.

This is why the recent acquisition of Star Energy was such a significant move for IGas. 

It agreed to buy the onshore conventional oil firm in September in a deal worth £110 million. It brought an additional 11.1 million barrels of 2P reserves and gave the firm production in the order of over 2,000 barrels a day.

The earnings and positive cash flows from this traditional oil operation can potentially give the IGas balance sheet a degree of support, thus avoiding a constant drain of capital as the CBM development progresses in the coming years.

Star Energy has only been an official part of the IGas business for a little over 20 days, after the deal was closed in December but integration is already said to be going well.

On Thursday, IGas revealed that production, from all the group’s assets, is currently 15 per cent ahead of forecasts.

It is currently producing at a rate of 2,700 barrels a day. This daily production is mainly made up of 2,600 barrels of oil, while the rest is gas.

Around 1,500 barrels a day is currently hedged at a price of $93.4 per barrel, while the balance is currently being sold at more that US$106 a barrel. 

The production revenue is helpful, Bowler added, while saying that IGas will look to strike a balance between capital spending, production revenues and its debt repayment.

“Really (the future capital requirement) will depend on how we press ahead with the overall business, and a lot of that will come down to the upcoming results from Doe Green and the encouragement we get from that.”

No doubt investors will eagerly await the pivotal Doe Green results in March, as the prospect of the UK’s full scale commercial CBM gas production operation moves closer to fruition. 

In the meantime any further news on the shale gas front may also capture the imagination on AIM.