Company completed the first breakthrough Marcellus gas well in 2004
Executive photos by Brandon Parscale
EDITOR'S NOTE: OGFJ recently contacted senior executives with Fort Worth, Texas-based Range Resources to discuss the company and how it has evolved over the years, including its pioneering role in the Marcellus shale play. Jeffrey Ventura, president and CEO; Roger Manny, EVP and CFO; and Ray Walker Jr., EVP and COO, brought us up to date.
OIL & GAS FINANCIAL JOURNAL: October 2014 will mark the 10-year anniversary of the industry's first commercial Marcellus well - a well that was drilled by Range Resources. Can you put this 10-year journey into words for us?
JEFFREY VENTURA: The last 10 years have been remarkable, not just for Range and the Commonwealth of Pennsylvania, but for the nation as a whole as it relates to the shale gas revolution. The Marcellus discovery in 2004 has exceeded all expectations and is now the largest producing gas field in the United States. Over the past decade, the industry has continued to improve Marcellus well results using new technologies and enhancing completion designs. To put some context around this, our estimated well recoveries are higher than initial estimates by a factor of four.
RAY WALKER JR.: Range is the largest producer of natural gas liquids in Appalachia. This level of production and the de-risked resource of our Marcellus acreage have enabled Range to sign industry-leading contracts to sell and market natural gas liquids in both domestic and international markets. The company's net production is now more than one billion cubic feet equivalent per day from the Marcellus and natural gas is being delivered to a customer base that stretches from the Northeast to the Upper Midwest, the Gulf Coast, and the Atlantic Coast.
I remember when I first went to Pennsylvania to work on the Marcellus. There's a funny story, but when I first got the call about the Marcellus, I was a consultant. And for the entire phone call I thought they were talking about Pittsburg, Texas until they asked me about booking a flight. Today, Pittsburgh, Pennsylvania is like a second home to me. It's really exciting to see how far the industry has come over these last several years and where we're headed in the future.
VENTURA: While I live in Texas and have for many years, I grew up in Pittsburgh and a lot of my family is still there. To see this happening in my hometown and knowing that Range's discovery unlocked an industry that now supports more than 240,000 jobs in Pennsylvania and has generated billions of dollars in state and local taxes and royalties for landowners is quite special. In fact, our regional headquarters in Pittsburgh and the well that unlocked the Marcellus, the Renz #1, is not far from the house I grew up in.
We have an opportunity for a new renaissance in Pennsylvania, and the Pittsburgh region in particular, because of natural gas. And really this isn't a new story for Pittsburgh. I recently read a New York Times article from October of 1855 on the benefits of natural gas and the lead sentence read, "Natural gas is King in Pittsburgh." That could just as easily be written today, nearly 160 years later.
Overall, no one could have foreseen the positive impacts the Marcellus would create. It will be interesting to see what is in store over the coming decades.
OGFJ : When Range Resources was last featured on the cover of OGFJ in July 2008, the Marcellus shale was still considered an emerging play and your 19% yearly production growth was a first for the company. Plenty has changed since then.
VENTURA: One thing has remained the same though, and that's the importance of the team-first approach here at Range. It's not about individuals here. It's really about our people and the culture that we have collectively fostered.
ROGER MANNY: We have nearly 1,000 employees and every woman and man that makes up Range Resources plays a critical role in our team. Our assets and opportunities are only as strong as the individual and collective members of our team. Over the past five years, the Range employee voluntary turnover rate has been approximately half the peer group average.
Every full-time member of the team is provided an opportunity to be a company shareholder through our equity award program. To help foster a shareholder perspective, we have granted annual equity awards to virtually all of our full-time employees for more than 20 years.
VENTURA: The Range team has made remarkable progress unlocking the Marcellus and the Upper Devonian, which sits above the Marcellus and the Utica/Point Pleasant, which sits beneath the Marcellus in our core operating area. We have approximately one million net acres in Pennsylvania that are prospective for shales. When considering all three horizons and their stacked pay potential, it's a total of about 1.9 million net acres, with 975,000 acres prospective for wet gas and another 950,000 prospective for dry gas.
Arguably the total resource potential of the Marcellus shale alone could make it the second largest gas field in the world. When you take into account the potential of the Upper Devonian and Utica/Point Pleasant, this could ultimately be the largest gas field in the world.
OGFJ : During the second quarter 2014, Range produced about 1.1 bcfe/d. You plan to triple those levels to reach 3 bcfe/d. How do you get there?
WALKER: We have the wells identified, infrastructure planned with the contracted takeaway capacity to profitably grow production to 3 bcfe per day net, driven primarily by the Marcellus. We also have exciting assets in the Nora field area of Virginia, which also have stacked pay potential with coalbed methane, tight gas sands, and the horizontal Huron Shale. In the Midcontinent, Range has the Mississippian Chat and St. Louis plays, with potential in the horizontal Granite Wash, Cleveland, and Woodford on existing acreage that is already held by production.
MANNY: Our strategy is simple: we focus on per share growth of production and reserves at top-quartile or better cost structure, while high grading our inventory. We maintain a simple, strong financial position, operate safely and are good stewards of the environment and the communities where we work.
OGFJ : Unit costs have always been extremely important to you and your team. Since 2008, RRC has reduced its unit costs by approximately 38%. How have you been able to generate such large production increases at such as a low cost?
VENTURA: Since the 1960's in the United States, and maybe before that, we believe that the best example of a company growing its net production organically from a single discovery was Arco after discovering Prudhoe Bay. They grew their production to 2.6 bcfe net per day. Prudhoe Bay was the largest oil field discovered in the United States. Similarly, Range has discovered what has become the largest gas field in the United States: the Marcellus Shale. We believe we have the potential to grow our production to greater than 3 bcfe net per day. It is this growth that we believe will drive per share growth in production and reserves for years to come.
OGFJ : Tripling your current production levels will require significant investment. What's your philosophy on debt and how will Range manage its balance sheet through this process?
MANNY: We will continue to prudently manage the balance sheet to support the growth of the company, utilizing debt judiciously to improve shareholder returns. Range leads with its operating strategy, not its financial strategy. What this means is that we craft our financial strategy around the specific attributes of our assets and operations. For example, Range has one of the highest ratios of proved developed reserves to production, meaning that our reserves are long-life properties depleting slower than many other companies. This allows us to spend less of our cash flow every year to replace production and more to grow, which greatly reduces the need for additional capital. The same can be said for our low cost structure; lower cost means we are spending less of our cash flow on operations leaving more to spend on growth. Lastly, the quality of our resource base, anchored by the Marcellus, Upper Devonian, and Utica, helps improve our capital efficiency by recovering more hydrocarbons for each dollar spent, again, allowing us to grow production, at high rates, within cash flow, thereby minimizing our need for additional capital.
OGFJ : Domestically, your company has been the pacesetter for finding new markets for natural gas and other NGLs. Talk about the innovative gas and NGL marketing strategies you've implemented and some of the recent deals you've inked.
WALKER: Range has a track record of innovation - from discovering the Marcellus to recycling water and developing other best practices. The same can be said for our exciting marketing agreements.
Our marketing strategy has been to move our products to multiple markets in order to support our planned growth. As a result, Range currently sells its natural gas on 11 major pipelines into 21 different pricing indices. Recently we signed our first two LNG supply agreements, two additional ethane sales contracts, and an agreement to transport up to 400,000 MMbtu per day on Energy Transfer's Rover pipeline. The Rover system will provide Range the flexibility to move Marcellus natural gas north to Dawn, Ontario and south to the Gulf Coast. Being a foundation shipper on the planned Rover system, residue natural gas will be picked up at the tailgate of a new processing plant to be built, thus eliminating any gathering cost to move residue gas from the plant to a large diameter takeaway pipeline.
Importantly, we work towards having a portfolio for all the products we produce. One of Range's unique qualities is our disciplined approach of finding multiple options to choose from. You can see this in our selection of stacked pay acreage positions, multiple NGL marketing arrangements, extensive customer base, and pricing indices. The more good options we have, the better decisions we are able to make.
OGFJ : Range has truly become a global story. You've built your Marcellus unit to capture full value of your gasflow through the extraction and exportation of ethane. How is this benefiting your realized prices?
MANNY: We have three ethane projects in our portfolio, which utilize Mariner West, ATEX, and Mariner East. Two of the three projects are up and running. When the third project, Mariner East, comes on line in 2015, we will be producing 55,000 barrels per day of ethane. Our portfolio results in greater than a 25% uplift in ethane revenue as compared to leaving the ethane in the gas and realizing the BTU uplift, and that's net of all costs.
OGFJ : How is exported ethane being used in the global market? What competitive advantages does this provide our country in the global economy?
WALKER: Ethane is being used globally as a replacement for more expensive petrochemical feedstock such as naphtha. Plays like the Marcellus have found such abundant supplies of low-cost natural gas and natural gas liquids, like ethane, that the United States has a price advantage over the rest of the world. For this reason, the United States is expected to significantly increase its ethylene production capabilities over the next several years. As an example, there are companies looking to build petrochemical facilities right in Appalachia. These expansions not only support jobs in the energy industry, but they support jobs in the trucking, steel fabrication, information technology, aggregates, heavy equipment manufacturing, finance, hotels, housing, and restaurants, among others.
VENTURA: There wasn't really an ethane market in Appalachia when Range began unlocking the Marcellus. Since discovering the play, Range has become the largest producer of natural gas liquids in Appalachia. Given the current level of NGL production (over 50,000 barrels per day gross) and future expectations for growth in the liquids rich Marcellus, the company has sought to diversify its customer base and not rely solely on a single customer or transportation outlet for its NGLs. This diversity of price and customers is shown in the ethane agreements we have signed. Altogether, these agreements provide Range with the ability to sell ethane in Canada, Europe, and at Mont Belvieu [Texas], as well as future petrochemical facilities in the Appalachian Basin.
OGFJ: With natural gas exports on the horizon for the US, what changes do you see in the natural gas market domestically? For example, will the US have a domestic and a global price for natural gas production? How will Range participate in delivering its natural gas to a global consumer?
VENTURA: Range has a diverse and dynamic portfolio of options for our products, including international markets for natural gas. We recently signed two LNG contracts. There is anticipated growth in natural gas demand both domestically and abroad. The International Energy Administration predicts a 40% growth in global natural gas demand in the coming decades. In fact, the IEA forecasts a potential 50% global increase in natural gas demand by 2035 in its Work Energy Outlook Global Age of Gas scenario. The US Energy and Commerce Committee recently completed a study that indicated strong support for increased natural gas exports from the US. This report indicated that exports would have a minimal impact on domestic pricing as demand continues to rise in the US and abroad.
Photo courtesy of Range Resources
OGFJ: Per unit costs have always been extremely important to you and your team. Since 2008, RRC has reduced its total per unit cost by 38% to about $2.75 per Mcfe. How have you been able to generate such large production increases at such as a low cost?
MANNY: There are a multitude of things we do at Range to keep our unit costs as low as possible, but the most important thing is to continually focus upon the importance of doing so. In a highly cyclical, capital intensive commodity business, history has shown that, over time, the most shareholder value is created by the lowest cost producers with large acreage positions, having the best asset quality. One of the methods we use to promote a low-cost structure is our practice of awarding equity to every full-time employee, every year. Our people spend company money as if it is their own, because, as owners, it is. This also helps ensure that we do not cut corners for the sake of cost. Just as an employee owner is reluctant to spend money carelessly, they are also reluctant to withhold money from something that is important to the company's long-term success. At Range, we view being a low-cost operator not as part of what we do, but part of who we are.
OGFJ: Range is experimenting with zones like the Upper Devonian and Utica/Point Pleasant above and below the Marcellus. Just how big is the prize for Range Resources in Appalachia?
VENTURA: Range actually drilled the industry's first horizontal Utica/Point Pleasant well in the Appalachian Basin in 2009 and also drilled the industry's first horizontal Upper Devonian well in the Northern Appalachian Basin that same year. These other zones are stacked above and below our core acreage in southwestern Pennsylvania, where we believe the highest gas in place potential exists. Of our 530,000 acres in southwestern Pennsylvania, where the highest gas in place exists, we believe we've only drilled approximately 9% of our potential Marcellus locations, not including other zones such as the Upper Devonian and Utica/Point Pleasant.
We believe we have 35 to 47 trillion cubic feet of gas and 2.8 to 3.7 billion barrels of liquids, or 53 to 69 tcfe of net unproven resource potential in the Marcellus and Upper Devonian. This currently doesn't count our large position, which is approximately 400,000 net acres in the Utica/Point Pleasant in southwest Pennsylvania. We believe our core acreage sits atop the core dry gas area for the Utica/Point Pleasant and we're currently drilling a test well now, which could significantly increase our resource potential.
In summary, the prize is quite large. In fact, based on our expected trajectory, it will enable Range to become one of the top producers of natural gas and natural gas liquids in the United States.
OGFJ: Working your way from north to south in your areas of operation, how confident are you in the commerciality of these three zones in each of your focus areas?
WALKER: There's up to nine years of production data and nearly 8,000 Marcellus wells that have been drilled, which has derisked our core acreage and defined the productive boundaries of the Marcellus. Our acreage is highly prospective for the Marcellus, with low reinvestment risk and high rates of return. Because the Upper Devonian is above the Marcellus in much of our acreage we have considerable data on it as well. The Utica drilling has been primarily in Ohio, but the most prolific and promising wells are in the dry gas portion of the play, which has moved industry activity east towards our acreage in southwest Pennsylvania.
OGFJ: Your Midcontinent division is primarily focused on the Mississippian Chat. Recent wells have been providing stable oil and liquids growth for Range. As your natural gas business expands more globally, tell us about the long-term view for the Midcontinent assets within the Range Resources portfolio.
VENTURA: We have 360,000 net acres in the Midcontinent. This is currently being driven by the Mississippian Chat and St. Louis areas. We recently drilled our highest IP rate Mississippian Chat oil well with 1,263 boe per day and during the second quarter the Mississippian wells averaged 24 hour IPs of 755 boe per day with 75% liquids, which is the highest average IP of any quarter. Based on recent commodity prices, these wells have an expected rate of return of 71%. The St. Louis wells have an expected rate of return of 90%. We also have potential in horizontal Granite Wash, Cleveland, and Woodford on existing acreage in this division, which is held by production.
OGFJ: Range recently completed a transaction with EQT, which resulted in Range receiving EQT's interest in the Nora field in exchange for your former Conger assets in the Permian Basin. What does the future hold in Virginia?
VENTURA: We believe the Nora assets in Virginia have great upside and potential to create value for Range and its shareholders. Range now has ownership of EQT's operated interest of 138,000 net acres and 50% interest in 1,200 miles of gathering pipelines and compression in the Nora Field, giving Range 100% ownership of that asset and an additional $145 million in cash that we received in the exchange. The interest we have acquired represents production of 41 MMcf/d and have multiple vertical and horizontal stacked pay drilling opportunities in the coalbed methane, conventional tight gas intervals and Devonian shale horizons. Combined with our existing ownership in the area, the Southern Appalachia Division now has 111 MMcf/d of net production, 1,530 miles of operated pipelines, 83,000 horsepower of operated compression and 475,000 net acres.
Nora is strategically positioned to provide gas to Southeast US markets. In fact, many are predicting 3.0 bcf per day of new demand in Virginia and surrounding states, with 1 bcf per day of new demand in Virginia alone. We also have the ability to jointly market that gas with our Marcellus production, giving our customers diversity of supply.
OGFJ: The United States is truly fortunate to have tremendous natural gas reserves that support many important aspects of our economy. If the United States were to implement an energy policy, what one line-item would you include?
VENTURA: There's no one concept that will fully maximize the opportunity that shale oil and gas affords our nation. It's truly historic from job creation to increased tax revenues, royalties for landowners, and increased average household disposable income, while providing our nation and potentially our allies with a secure source of reliable energy. We need to ensure that these benefits are maximized with a robust approach to domestic energy development and expanded usage of this abundant and cleaner source of energy.
OGFJ: Thank you all for your time today.
