Cracking the code

Cracking the code

2014 may be a big year for those drilling in the Tuscaloosa Marine Shale.



There's not much action today at the Murphy oil well site. Tucked away along a back road off La. 66 northwest of St. Francisville, the drilling rig is gone, although the wellhead remains, along with eight large tanks and a flare that burns off natural gas 24/7. The site manager says it's only producing about 60 barrels a day.



This is the only Tuscaloosa Marine Shale well drilled in West Feliciana Parish that's still producing oil, says Dennis Manshack, the parish's economic development director. After the flurry of leasing activity a few years ago, locals dreaming of oil riches are getting impatient.



But this well recently changed hands from Devon Energy to Goodrich Petroleum, which is expected to be far more aggressive than Devon ever was. Other companies also appear to be stepping up. And as many leases come up for renewal or expiration, it's put-up-or-shut-up time for the leaseholders. In short, 2014 may be the year the TMS finally lives up to the hype, or doesn't.



EXTRACTION CHALLENGES

It's been obvious for decades that the TMS rock formation held oil, perhaps as much as 7 billion barrels. The trick has been getting it out at a rate, and a cost, at which companies could make money. Advances in hydraulic fracturing, or "fracking," convinced some that they could.



About six years ago, recalls Baton Rouge landman Dan Collins, Encore leased some 300,000 acres in the TMS, centered around the Louisiana/Mississippi state line. Encore couldn't make it work, and Denbury Resources bought out the company in 2010.




But about three years ago, new companies, mainly Devon Energy, started leasing land in the Florida Parishes and into western Mississippi, Collins says. Most of those leases had a three-year term with a two-year option, so many of them are up for renewal this year or early next year. Which means companies either have to start drilling to hold on to the lease, spend more money to extend the lease, or bail out. Devon bailed.



Critics say Devon had been too conservative, cost-conscious and rigid, expecting the same fracking methods it had used in other plays to work here. But every play is different, and what works in North Dakota or Texas might fail in Louisiana.



In September, Devon unloaded its TMS acreage to Goodrich, which has budgeted $300 million for TMS development in 2014, up from $75 million this year. Goodrich got a sweet deal, but the big move also suggests Goodrich thinks it's got the TMS pretty much figured out.



"They may have broken the code," says Louisiana Oil & Gas Association President Don Briggs. "They obviously feel pretty good about it."



And if one company cracks the code, others may not be far behind.




"Oil companies are like sheep; they tend to follow each other," Collins says.



ENVIRONMENTAL CONCERNS

In some communities, fracking and shale play development have been highly controversial. Residents worry about everything from air and water contamination to infrastructure stress, noise and traffic.



THE COST OF DRILLING

The Tuscaloosa Marine Shale is geologically similar to the highly productive Eagle Ford play in Texas. But that doesn't mean figuring out how to make money in the TMS has been easy. It has been expensive to drill here, says Louisiana Oil & Gas Association President Don Briggs; as much $16 million to $18 million per well, he says. But companies are starting to figure out how to bring those numbers down.

"The problems that they've had have not been formation problems," says landowner Steve Thevenot. "They're having problems that are technical in nature." Drill bits that get stuck or coil tubing that buckles, for example.

The tricky part is choosing the right cocktail of water, sand and chemicals to "frack" the horizontally drilled hole, creating tiny fractures that producers hope will release petroleum and other fluids. Early on, there were concerns that the TMS might contain too much clay, which can collapse into the fractures and prevent oil flow. But Thevenot says companies are getting over that fear.

Still it remains unclear how many wells will need to be drilled before companies start to get it just right, or whether the TMS will truly prove to be economically viable.

Wilma Subra, a technical adviser to the Louisiana Environmental Action Network, says environmental concerns in areas affected by the TMS largely have been muted so far, but she urges residents to remain vigilant and aware about what's going on around them.



"For the most part, people are hesitant to speak out, some of them because they have already signed leases," she says. But as activity picks up, she adds, that may change.



Hamilton Willis has leased land to Encana, which plans to drill early next year, and says he also serves as a consultant to landowners with about 10,000 acres in the play. He says he has spoken with environmental regulators in Louisiana and Mississippi and satisfied himself that he won't encounter environmental problems.



"They're [drilling] way below the water table; you're down there two miles," agrees landowner Steve Thevenot, who also has leased to Encana. "I don't think we have nearly the exposure to [potential] fracking problems in this formation because it's so deep, and it's primarily solid rock."



As for infrastructure, Manshack, the West Feliciana economic development director, says the parish has worked out agreements with Devon and Encana requiring the companies to pay for upgrades and repairs to roads used to access drilling sites. While parish politics have been in flux, with a new home rule charter approved last year and an election for the new position of parish president Nov. 16, Manshack is trying to work with local leaders to formulate a TMS game plan and "get in front of this development." Zoning restrictions can be used to prevent a landowner from setting up a 200-trailer worker camp, for example. "We want to control how many people can come into this parish," he says. "Let someone else house them."



At the same time, Manshack wants to welcome the exploration and service companies. Any kind of industry can be a touchy subject in bucolic West Feliciana, but the parish needs revenue, especially as Entergy's River Bend nuclear plant depreciates, decreasing its tax value.



"I'm counting on a lot from the TMS," Manshack says.



AVOIDING A GOLD RUSH

Leroy Harvey has leased tens of thousands of acres in the TMS throughout East and West Feliciana and in western Mississippi. He has been paid a fairly typical rate of about $200 an acre, with about a 20% royalty. Many of his leases are up for a two-year renewal in April, and the companies say they plan to renew.



"There's going to have to be a lot of drilling in the next two years to hold these leases," Harvey says. "Right now, there's not a whole lot going on." But he expects that lull to be over soon.



Harvey is excited about the pending arrival of Halcón Resources, which already leased 75,000 acres in Louisiana. Multiple sources say the Houston firm is getting involved in the eastern portion of the play, which is thought to be the sweet spot, although the company has not yet announced the move.



Halcón is led by Floyd Wilson, founder of Petrohawk Energy, which sold for $15.1 billion in 2011. Needless to say, Halcón is well capitalized, having raised more than $1 billion in financing last year, according to the company's website.



"That's a splash," Collins says. "That is big news."



Of course, oil companies don't like to show their cards until they have to. They don't want to tip off their competition, and they certainly don't want to create the gold rush mentality seen in north Louisiana's Haynesville Shale natural gas play, where at one point land was leasing for as much as $30,000 per acre.



But "success is hard to cover up," Collins says. He thinks the TMS may have the potential to be the nation's next big shale play, and he expects 2014 will be the year we find out for sure.



WHERE THE DRILLERS ARE

A look at the companies hoping to in the Tuscaloosa trend.



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