April 29, 2002; Penn Virginia Scores With Horizontal Drilling in Coal

The traditional vertical well is starting to appear primitive compared to the pinnate spiders drilled by Penn Virginia.  The coal and natural gas producer has a joint venture with a service company to apply new technology to degasify coal seams.  The original aim was to remove methane from coal seams to be mined by the long wall technique.  James Dearlove and Baird Whitehead of Penn Virginia backed an alternative application with the primary objective of producing natural gas from coal seams.  As Mr. Whitehead explained, coal seams draped over an anticlinal structure may be fractured in such a way that makes them more suitable for natural gas production (and perhaps less suitable for mining).  Penn Virginia has had surprising success trying the technique on its Mingo, WV property acquired in 2000.

The spider, or pinnate, pattern of well may involve three horizontal laterals from the vertical hole.  Then each of the main laterals may have a half dozen further laterals, or branches.  Thus a single well “trunk” ends up with many “limbs and branches” that expose many times as much perforated pipe surface to a coal seam as does a single vertical well.  The initial well produces at 2.3 million cubic feet daily.  Instead of being produced over 30 years from a vertical well, the reserves in the area of the well may be produced in just three years.

It may be too soon to put a number on the economic value of the technique.  Considering that Penn Virginia through Penn Virginia Resource Partners controls nearly a half billion tons of economic coal reserves, the potential appears intriguing.

Both PVA and PVR stocks have done well recently, aided perhaps by accumulation by two parties who have filed with the Securities and Exchange Commission.  We know one of the principals, but have had no contact with the person for several years.

Perhaps Mr. Dearlove’s most important innovation has been to create PVR, a limited partnership to hold the company’s coal reserves.  We have a problem with the general partner tax, but the lucrative (onerous) provisions have not begun to bite.  We suspect, but have no concrete indication of such, that the hidden appeal in PVA is the potential value of the general partnership to one who wants to exploit it aggressively.