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Yesterday, August 14, 2011, was the ten-year anniversary of the announcement by Oklahoma City-based Devon Energy of its intention to acquire Houston-based Mitchell Energy and Development for $3.5 billion. The prime target of interest lay about halfway between the two company headquarters, in the Barnett Shale surrounding Fort Worth, Texas. Mitchell had figured out how to use hydraulic fracturing to produce gas from shale formations, and was beginning to add horizontal drilling to its mix.

As Jack Smith explains in the Fort Worth Star-Telegram‘s Barnett Shale blog:

At the time, it had drilled about 400 wells in the Barnett, and executives saw the potential for 1,200.

But over the decade, Devon would advance the ball significantly with improved horizontal drilling and an expansion of drilling far beyond areas north of Fort Worth where Mitchell Energy had focused. The result would be a drilling boom that by 2008 would draw numerous rivals into the field and make the Barnett the biggest gas-producing area in the U.S. Tarrant and Johnson counties would emerge as the top two gas-producing counties in Texas.

Contrary to reports by some people that shale gas production is economically doomed, Devon says things are looking up:

In the Barnett, “our drilling costs are down, our production is up and our efficiencies are increasing,” said Brad Foster, senior vice president of Devon’s Central Division, which includes Barnett operations.

Devon has achieved, or is on the verge of, several Barnett milestones:

It posted record production in this year’s second quarter, averaging the equivalent of 1.28 billion cubic feet of gas per day, even while keeping only 12 drilling rigs busy. That’s less than a third as many as it ran in 2008, before gas prices cratered.

Devon’s total Barnett production since the Mitchell acquisition is expected to hit the equivalent of 3 trillion cubic feet by year’s end, spokesman Chip Minty said. It’s at 2.8 trillion now.

Despite weak gas prices, now about $4 per 1,000 cubic feet, Devon is realizing solid returns from the Barnett because “our ability to drill wells economically just gets better every year,” said Chairman Larry Nichols, who was CEO during the Mitchell acquisition.

The story continues with some details that help make sense of various claims made by the industry. On the one hand the industry claims that hydraulic fracturing is an old, frequently-used technology that has been time-tested and proved safe. On the other hand, companies assert they are rapidly improving methods to cut cost and need trade secret protections for their hydraulic fracturing fluids.

The truth is hydraulic fracturing has been around for a long time, but its combination with horizontal drilling techniques and application in development of oil and gas from shale is much more recent. As the immense economic potential of shale-based production has become clear, many companies have sought out ways to do the job better.

More from Smith:

When Devon began drilling in the Barnett in 2002, it took three to six weeks to drill a single horizontal well, said David Fortenberry, Devon vice president of technology.

“The rigs we used were really too small and underpowered for horizontal wells,” he said.

Now, with higher-efficiency rigs and much more experience, Devon averages only about 12 days to drill a Barnett well, and “we’ve actually drilled some wells down in southwest Johnson County in about six days,” Foster said.

Drilling-rig design “has improved dramatically in the past 10 years,” with rigs now “ideally suited to drill these horizontal wells,” Nichols said.

Devon uses a “walking rig” device to scoot a 156-foot-high rig between surface well bores at its southwest Tarrant pad site. If well bores are 20 feet apart, the rig can move that far in just an hour. Without the walking device, it could take two days to disassemble a rig and set it up 20 feet away.

The Barnett wells that Devon has drilled this year have provided “some of the best results we’ve ever gotten,” Nichols said.

Ample supplies from dramatic increases in U.S. shale-gas production have kept prices low, as the industry has become “in part … a victim of our own success,” Nichols said.

Devon has dropped to 12 drilling rigs because it can keep production at least flat at that level of activity and because “at this time, the country just doesn’t need any more natural gas,” Nichols said.

Production declines have been lower than expected in Barnett wells, he said. There will be “steep declines in the first year, but it flattens out a lot sooner than we originally thought” — often after 12 to 18 months of production, he said.

Natural gas consumers are not complaining. Even while oil prices have moved much higher post-2008, domestic U.S. natural gas prices remain held in the $4 to 5 MMBtu range. And with natural gas prices playing a significant role in competitive wholesale power prices, electric consumers are seeing some benefits, too.

ALSO: Another good story on Devon’s acquisition of Mitchell and development in the Barnett Shale appeared in The Oklahoman yesterday.

Knowledge Problem, 15 August 2011