Seneca Resources has extended and revised its agreement with a financial backer for the development of Marcellus Shale wells in the Clermont/Rich Valley area.
Seneca entered into an agreement with IOG CRV-Marcellus in December. The agreement was for a $200 million capital commitment for the first 42 wells, with an option for IOG to continue the partnership for an additional 38 wells and an approximately $180 million capital commitment.
That has been modified “to reflect mutually beneficial changes in Seneca’s drilling and completions schedule resulting from adjustments to gathering infrastructure plans and other operational factors,” reads a release from Seneca. “To date, 39 of the joint development wells have been either completed and turned to sales or drilled and in the process of being completed, leaving an additional 36 wells to be developed.”
IOG was also granted an option to participate in a seven-well Marcellus pad that will be completed prior to Dec. 31, 2017, which would increase the number of wells in the agreement to 82.
The royalty structure set forth in the agreement has been modified as well.
IOG continues to hold an 80 percent working interest in the joint development wells, with the remaining 20 percent held by Seneca. In the amended agreement, that structure will change.
Seneca’s royalty in the additional 36 wells was reduced from 10 percent to 7.5 percent, resulting in net revenue interest of 26 percent for Seneca and 74 percent for IOG.
Consistent with the initial agreement, Seneca’s working interest will increase to 85 percent after IOG achieves a 15 percent internal rate of return.
“At Seneca’s current Marcellus well costs, which have averaged an industry-leading $650,000 per 1,000 feet of completed lateral fiscal year-to-date, IOG’s obligation on the remaining 36 wells is expected to further reduce Seneca’s net capital expenditures by approximately $35 million in fiscal 2016 and another $120 million spread across fiscal 2017 and fiscal 2018,” according to Seneca Resources.
“In total, IOG is expected to fund approximately $325 million for its 80 percent working interest in the 75 joint development wells, which is approximately $55 million less than what was projected under the initial joint development agreement,” the release continues. “The decrease from the initial agreement is due to the reduction in the total well count and a $600,000 per well average improvement in Seneca’s actual well costs versus initial projections.”
According to the company, Seneca will continue to be the program operator, allowing it to maintain planned activity levels and further optimize Marcellus drilling and completion efficiencies. Production from all joint development wells will be gathered by National Fuel’s Gathering segment’s Clermont Gathering System.
Seneca spokesman Rob Boulware did not immediately return a message left seeking comment.
Ronald J. Tanski, president and chief executive officer of National Fuel, stated: “National Fuel is very pleased to extend our relationship with IOG. The joint development arrangement provides a number of operational and financial benefits to both parties. For National Fuel, it allows us to leverage the competitive advantage of our low cost, fee acreage in the Marcellus and reduce the level of capital investment in our upstream business over the next two years, while maintaining operational efficiencies and providing the throughput necessary to support our pipeline expansion projects. Given National Fuel’s large Appalachian footprint and the alignment of our strategic goals, we think there could be additional opportunities to work with IOG in the future to accelerate value creation for our shareholders.”
Marc Rowland, founder and senior managing director of IOG Capital, stated: “IOG and its partners look forward to this expanded joint development program with Seneca. Seneca has proven to be an effective cost efficient operator since the establishment of our agreement at the end of 2015. IOG’s capital permits operators to realize the full value of their proven assets through development drilling, by reducing the initial capital expenditure burden, and retaining the long term value of a project.”
