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Company Outlook

Appalachian Energy Holdings,  in its role as an integrated services company, is providing leadership & support to Appalachian  companies as U.S. energy demand continues to grow steadily.

The Energy Information Administration, a government agency that tracks data on the industry, forecasted in its 2009 International Energy Outlook Report  that “world marketed energy consumption is projected to increase by 44 percent from 2006 to 2030. Total energy demand in the non-OECD countries increases by 73 percent, compared with an increase of 15 percent in the OECD countries." Fossil fuels continue to supply much of the energy used worldwide, and oil remains a dominant energy source.

According to a recent article in the Wall Street Journal, the Energy Information Administration, predicts natural gas will cost $10 a million BTUs by the end of 2007, up from a recent close in the $6 a million BTUs range.  Gas cost $2.43 a million BTUs as recently as the end of 2001.  Gas is largely a local market, so upward pressure on prices will not easily be offset by increasing imports from overseas.  As reported in Econstats.com, the NYMEX saw Appalachian Coal prices go from $27.25 in January 2002 to $51.00 in July 2006.  While coal prices are more influenced by imports, it is widely believed that imports will only serve to offset some of the increasing demand for fuel by economic expansion and will not offset an increasing demand for domestic coal. EIA states, “Higher world oil prices increase the demand for and price of natural gas, making coal a more economical fuel source in the projections.”

Geographically, the Appalachian Basin consists of western New York and Pennsylvania, eastern Ohio, West Virginia, eastern Kentucky, eastern Tennessee, western Virginia and portions of North Carolina and Alabama. The area is proximate to a significant portion of the U.S. population and numerous major cities and industrial centers. As such, energy transportation costs are significantly cheaper than the national average which causes energy products produced in this region to sale at a premium. With offices located strategically throughout Appalachia, AEH  is positioned to play an integral role in the Region’s development..  (see location map.)  The Principals of Appalachian Energy have extensive experience operating in the southern Appalachian Basin which includes eastern Kentucky, southwestern Virginia, West Virginia and portions of Tennessee. 
 
The Appalachian Basin is an important source of natural resources and represents a significant contributor of U.S. domestic coal, oil and natural gas production. Natural gas production from Kentucky, Pennsylvania and West Virginia comprises over 2.2% of total U.S. natural gas production.  The Appalachian region is responsible for producing over 389 million tons of coal, representing approximately 35% of U.S. coal production.  Virginia alone accounts for approximately 27.4% of the U.S. coal production and approximately 16.9% of the total U.S. recoverable coal reserves, according to the EIA.  Relative to major producing areas of the U.S., crude oil production volumes in the Appalachian Basin are relatively small; however, crude oil production does occur in commercial quantities for many small independent E&P companies. 

The Appalachian Basin is generally characterized as a mature producing region with known geologic characteristics.  Most of the production from the underlying properties consists of high Btu natural gas, generally ranging from 1.030 to 1.251 MMBtu per Mcf of natural gas. Similarly, Appalachian Basin coal tends to be relatively high quality compared to other major producing regions in the U.S.  The higher Btu ratings combined with a closer proximity to the Northeast consuming region typically result in higher prices for natural gas and coal produced in the Appalachian Basin. 

U.S. E&P Activity
Appalachia has outpaced most other regions in the past 5 years:
	5 Year CAGR
Region	Reserves	Production
Rockies (CO, UT, WY, MT)	9.1%	6.1%
Appalachia (KY, WV, PA, NY)	5.5%	5.4%
Gulf of Mexico	4.2%	(0.7%)
Other	3.3%	(0.6%)
Mid-Continent (OK, AR, KS)	2.2%	2.6%
Permian/San Juan Basins	1.6%	(1.8%)
Gulf Coast (TX, LA, MS, AL)	0.1%	(0.8%)
West Coast	(2.8%)	(2.7%)
Source: EIA

Producing natural gas wells in the Appalachian Basin are relatively shallow and typically have stable, long-lived production profiles (+25 years).  Appalachian coal reserves are extracted by several mining methods including high productivity surface and underground mining techniques.  Coal seams range from greater than 20 feet down to thinner economically mine able seams of approximately three to four feet.  Higher prevailing and forward energy prices have increased the amount of economically recoverable oil and natural gas and coal reserves and spurred an increase of E&P activity in non-conventional and deeper natural gas trends, as well as less accessible coal reserves. This has reinvigorated the resource production sector in the region and significantly increased activity in the support services sector.  In the current market environment, the Principals have witnessed a significant increase of exploration and exploitation activities in the Appalachian Basin based on the sustained rise in natural resource commodity prices.

AEH maintains a prospectus for significant and sustained energy development, production and reclamation activity in the Appalachian Basin as favorable.  According to the U.S. Geological Survey (“USGS”), the Appalachian Basin has approximately 70 Tcf undiscovered natural gas potential, ranking it second only to southwestern Wyoming, in U.S. onshore natural gas development potential.  Additionally, the Appalachian Basin has an estimated recoverable reserve base of approximately 55 billion tons of coal, representing approximately 20% of U.S. coal reserves, according to the EIA. 

The Appalachian Basin energy service sector is relatively fragmented when compared with other major U.S. producing regions producing renewed interest and consolidation opportunities in the region. 

Nearly all E&P companies and numerous coal companies outsource the site preparation, pipeline construction, drilling and related tasks to predominantly smaller, specialized firms instead of employing capital in the equipment necessary to perform these functions.  Moreover, E&P companies typically retain staffs that are focused on crude oil and natural gas production activities, which are often spread out over multiple well locations.  As a result, site preparation and pipeline construction tasks fall outside the expertise and business focus of most E&P companies and outsourcing these tasks is the preferred alternative to moving crews and equipment around to scattered well locations on an as-needed basis.  This predisposition to outsource non-core activities supports a large, world-wide industry of energy service companies. 

Appalachian Energy Holdings uses its extensive management skill base to incrementally offer complementary, value-added services to its subsidiary gas, oil & coal customer base.  Management has implemented new lines of support in several areas including disposal of water by-product, contract drilling, well swabbing, work-over services, engineering and permitting by exploiting the existing supervisory expertise, equipment and crews.

Read more about the Appalachian Outlook.