Barnett Shale Joint Venture
 The Barnett Shale field is the largest natural gas play in the continental United States producing 900 MMCF of gas per day and is considered one of the few domestic areas with sizable, remaining resource potential. Nitro Petroleum is seeking to fund the development of a Barnett Shale Project in which NITRO will obtain working interests and become the operator of all existing and future wells. This Barnett Shale project has demonstrated successful drilling and production record in the area.
In January of 2003, a privately held Fort Worth-based energy company (REO Energy) began acquiring Barnett Shale leases with the intent to commence drilling operations on its acquisitions. The current value for this acreage has been estimated to be as high as $10,000 per acre with total proven reserves of approximately 450 billion cubic feet of gas (BCF). Morgan Stanley developed an in-depth sector report on the Barnett Shale and estimated that reserves in the area could be as high as 150 BCF per 1,000 acres. Due to these estimations and our research, we will continue to focus our efforts to continue developing an acreage position through on-going drilling programs which can provide proven reserves in excess of 200 BCF.
REO Energy has spent more than $12 million to acquire the above mentioned mineral interests, which now total almost 7,000 acres, fund its portion of the drilling interests in existing wells and build a pipeline to service their acreage. NITRO/REO are seeking $15 million to fund the expansion of this Barnett Shale Project. Currently, there are 24 wells operating and connected to existing pipelines, five wells that have been drilled and awaiting completion and one well currently being drilled. This funding will allow NITRO/REO to acquire additional leasehold interests and drill wells on the current and newly acquired acreage. NITRO is proposing an initial equity raise of $15 million to further the development of this project with hopes of expanding the play to ultimately accommodate 300 wells.
Barnett Shale History
The first Barnett Shale wells were drilled and completed in the early 1980’s by Mitchell Energy of Houston, Texas. The primary impetus for drilling these wells was a government tax credit for the completion of experimental tight gas formations. The cost of penetrating or fracturing (frac or fracing) the reservoir then was 2 or 3 times the cost today. These stimulation techniques have been refined from information learned from the original drilling and as a result the cost of fracturing has been greatly reduced. With lower costs and more efficient completion methods, the economics of drilling in the Barnett Shale have vastly improved. Mitchell Energy started activity in this region with the drilling of hundreds of Barnett Shale wells north of Ft. Worth, Texas. Now 75 rigs are drilling in this area with nearly 4000 completed wells.
The most important characteristic of the Barnett play is in certain areas, where completion methods were effective; wells are still producing at high rates or even better rates than initial production, which occurred almost 20 years ago. The Barnett Shale is very thick pay zone and produces numerous intervals. Each new fracture opens up previously un-accessed intervals, which typically yields comparable production and effectively provides three to six additional producing intervals. This is the most significant aspect of the Barnett Shale drilling prospects – multiple pay intervals in a very large Barnett Shale zone plus additional pay zones such as the Forestburg and Marble Falls, all contained within in one well bore. Furthermore, if one interval or zone is not producing to expectations or has declined in production, the operator can access another interval at relatively minor costs, adding longevity to the revenue streams and increasing returns to investors.
Summary of Production History
REO Energy is currently producing approximately 400 barrels of oil per day and 2.5 million cubic feet of gas (MMCF) per day. This production is from the 18 wells mentioned above. Four of the wells have sub-par production due to severe retrograde problems and in the future Nitro Petroleum will attempt to re-enter the well bore to access different zones that might be more prolific in their particular area. Five wells have been drilled, but not yet completed and they anticipate production to occur in October of this year.
The completed wells that have not experienced severe retrograde problems all employed a high pressure, water and sand fracturing technology, along with a retrograde mitigation solution that has yielded impressive results and will make up the bulk of our production after this Barnett Shale project is funded.
Strategic Development Plan
The Barnett Shale Project currently covers 7,000 mineral acres located predominately in northeastern Montague and southwestern Cooke counties. Both locations are within an area that third party geologists have determined to be highly productive with 600’ to 1500’ of reservoir thickness. Reservoir thickness, for what is considered to be the core area to the south and has produced enormous amounts of gas, is notably less at approximately 300’.
In November of 2005, NITRO took a 10% working interest in REO’s Boyd # 1 well and a 10% working interest in REO’s Inglish # 2. These wells were drilled to depth of 8,800 feet. Both wells are currently awaiting completion.
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The strategy for developing the Barnett Shale Project is to continue drilling on the initial Barnett Shale acreage west of the fault structure in a northwestern direction. We plan on acquiring additional acreage between both Montague and Cooke county locations in order to establish a contiguous block and exploration control over the designated Barnett Shale Project area. Additionally, REO is expanding the existing pipeline through its ownership in the Tri-County Gas Gathering System to accommodate its own further drilling as well as those drilling efforts of other operators in the area.
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