Alpha expands Marcellus shale gas stake

OREANDA-NEWS. July 06, 2015. Alpha Natural Resources is poised to resume drilling for natural gas in Pennsylvania after a long hiatus, marking the US coal producer's second attempt to diversify its production base in Appalachia.

Alpha will become the sole operator of Pennsylvania Services Corp. after buying out its joint venture partner EDF Trading Resources' 50pc stake for \\$126mn. The Marcellus exploration venture holds 25,000 acres in southwest Pennsylvania. Alpha and the North American energy trading subsidiary of French utility firm EDF formed the joint venture in 2013.

Alpha plans to start drilling in the next month and could have four producing wells by early next year, chief commercial officer Brian Sullivan said. The company's Marcellus properties hold a drilling inventory of 50 locations, including 14 permitted wells.

"Alpha has broad resource experience already in this basin, and this acquisition positions us to derive exceptional future value from these gas assets and operational benefits with our existing coal operations," chief executive Kevin Crutchfield said.

The venture is Alpha's second foray into Marcellus shale exploration. From 2010-13, the company accumulated Marcellus mineral rights in Pennsylvania but then sold a large portion of the acreage in 2014 to independent natural gas producer Rice Energy in exchange for cash and equity. Alpha said at the time it made \\$300mn off its \\$30mn initial investment.

Alpha's original intent in holding Marcellus mineral rights was to prevent potential disruptions to coal mining operations. But rising US gas supply, for which Marcellus plays a key role, and weakness in global coal markets has forced Alpha to slim down operations over the past year. Production at Central Appalachian mines controlled by the company fell by 16pc in the first quarter compared with a year earlier.

Marcellus now is the top producing US natural gas formation, with production nearing 16.5 Bcf/d (467mn m?/d). The abundant supply from the Marcellus and other US shale formations has forced natural gas prices lower in key US markets, which in turn has pressured coal prices as utilities and grid operators dispatch gas-fired generation more often at the expense of coal plants.

Low Marcellus realized gas prices and the decline in crude and NGL prices in the past year have forced many natural gas producers to cut drilling plans and postpone completions of previously drilled wells. Alpha earlier this year noted "dramatically lower well service prices" as a result of that slowdown and said it would result in significant development cost savings for its own Marcellus enterprise.

Consol Energy is the only other major Appalachian coal producer that has significant natural gas exploration and production operations.