THE BLOG
09/16/2013 11:04 pm ET Updated Nov 16, 2013

Tuscaloosa shale drilling revs up in Louisiana and Mississippi

(This article is published in "The Louisiana Weekly" in the Sept. 16, 2013 edition.)

Many northwest Louisiana residents were enriched by Haynesville, the nation's top shale play before its wells started producing less. Farther south, activity in the Tuscaloosa Marine Shale or TMS deposit--thought to contain 7 billion barrels of recoverable oil--is accelerating now. Extending across central Louisiana, the TMS play gets as close to New Orleans as St. Tammany Parish. It includes the state's Florida parishes and several Mississippi counties located above the foot of Louisiana's boot.

The eastern swathe of the TMS is near oil infrastructure, including the St. James petroleum reserve terminal and major refineries between Baton Rouge and New Orleans.

Tuscaloosa drilling dates to the 1970s and earlier. But the play's wells, boring down about 11,000 feet and then drilling horizontally, are costly. "The main, added expense for these wells over most others drilled in South Louisiana is their long horizontal laterals," Patrick Courreges, Louisiana Dept. of Natural Resources spokesman, said last week.

Drillers fracture the Tuscaloosa formation in stages, forcing water, mixed with sand or ceramic material and chemicals to crack the shale. The cracks open, releasing oil. Tuscaloosa rock is softer and more clay-like than many other shales, however. Rather than cracking as intended, it can absorb injected fluids. What's more, the clayish rock sometimes closes the opened cracks.

The Tuscaloosa play was sporadically drilled without much success for decades. But companies kept trying new techniques. "Sixteen wells have been completed in Louisiana in the past couple of years and are currently producing, while two more were drilled and are awaiting completion," Courreges said. Most of Louisiana's production to date has been from wells drilled in St. Helena Parish, he said.

St. Helena, two parishes away from Orleans, is east of the Mississippi River at the top of the foot of boot. Just north of it are Wilkinson and Amite Counties in Mississippi--both lively, drilling spots now, mainly because of that state's shale-friendly policies.

"Encana has eleven wells total in the Tuscaloosa play and all of them are currently on production," Doug Hock, spokesman for Encana Oil & Gas USA in Denver, said last week. Encana Corp. is a natural gas and oil producer based in Canada. "Eight of our wells are in Mississippi and three are in Louisiana," he said. All three of Encana's Louisiana wells are in St. Helena Parish.

Two other Encana wells in Mississippi, the Anderson 17H-2 and the Anderson 17H-3, will enter production in the next few weeks, Hock said. Most of Encana's Tuscaloosa acreage is in Mississippi, where the company's first Tuscaloosa well was drilled in Amite County in 2011.

Hock said the company's three, latest Tuscaloosa wells cost about $16 million each to drill, complete and bring into production. The company is still in the exploration or design-of-experiment phase, and hopes to reduce its costs.

Encana's Haynesville wells have been only slightly cheaper to drill than its Tuscaloosa units. Estimates for its Haynesville wells were in the $14 million range in Encana's second-quarter 2013 conference call on July 24, Hock said. The company's goal is to reduce its Tuscaloosa price tag to $12.8 million per well. "Our costs have steadily declined as we've drilled these wells," making Encana more confident that it can profitably operate in the TMS, he said.

"Once we've figured out the best well design, providing the most economic and efficient resource recovery, we can drill multiple wells on a pad in a repeatable fashion and create a truly commercial play," Hock said.

Encana doesn't release production data. But analyst Patrica Wells with Louisiana's DNR said as of May--the last, required reporting time--Encana's top St. Helena well, Weyerhaeuser 60 H No. 001, produced 976 barrels of oil daily. One of the biggest landowners in the TMS is timber giant Weyerhaeuser, headquartered in Washington state.

As for oil and gas distribution from that site, "we don't have gathering lines and infrastructure currently from wells in St. Helena Parish," Hock said. "We sell at the lease to our buyer, and they have multiple options as to where they take the crude. Trucks come to the lease and pick up the product."

Tuscaloosa wells mostly produce Light Louisiana Sweet crude, which fetched $108 to $109 a barrel early last week. Assuming 976 barrels of crude at $108 a barrel, gross revenue from Encana's Weyerhaeuser 60 H totaled $105,408 a day. LLS crude sells at a premium to West Texas Intermediate because it's easier to refine.

Meanwhile, other companies that have drilled the TMS include Goodrich, Devon Energy, Indigo Minerals, EOG, Halcon, Denbury Onshore and Justiss Oil. Houston-based Goodrich controls 320,000 acres, the largest area in the play, after it acquired Devon's two-thirds share of 277,000 leased acres for $26.7 million this year.

"We've been running one rig full time for most of the year in Mississippi," Robert Turnham, Jr., president of Goodrich Petroleum, said last week. "That will grow to two in Mississippi in October because we're completing our Foster Creek well there now."

A second rig will drill the company's Weyerhaeuser site in St. Helena in October, and then it will head to Tangipahoa Parish, Turnham said. "We'll likely run two and a half rigs in 2014, spread between Louisiana and Mississippi, with the locations not yet finalized," he said. A half rig operates six months of the year. The company's Weyerhaeuser site is a former Devon property.

In addition to St. Helena, other Louisiana parishes where TMS drilling has occurred include East Feliciana, West Feliciana, Tangipahoa, Rapides and Vernon.

In St. Helena, oil and gas companies have dealt directly with landowners, Randal Cooper of Cooper Real Estate in Greensburg said last week. "So far, we only have a few wells here in the northern part of the parish," he said. Landmen, or mineral consultants, aren't swarming the way they did around Shreveport, La. because of Haynesville and have done in Wilkinson and Amite Counties in Mississippi. "We've heard about drilling interest in St. Helena for at least two years now but people aren't jumping up and down and hollering about it," he said.

While rural St. Helena doesn't have any red lights and traffic isn't an issue, Amite and Wilkinson County officials are wondering how to pay for road maintenance as drilling there attracts huge trucks and heavy equipment.

As for lease rates, most of the promising TMS acreage was lapped up by late last year, Dan S. Collins, minerals consultant and landman in Baton Rouge, said last week. In 2010, rates were around $150 an acre for three-year leases but they grew to $300 to $450 an acre last year, he said. Leases in the TMS are unlikely to ever reach the tens of thousands of dollars per acre seen for awhile in Haynesville.

"Haynesville leases peaked at over $30,000 an acre but that was during oil-and-gas price escalation," Collins said. "People thought oil and gas would keep rising but they didn't." WTI prices dropped after reaching $134 a barrel in June 2008.

Collins discussed the recent flurry of interest in Mississippi. "Mississippi passed a severance-tax reduction law this year that's a little better than Louisiana's," he said. "It trumped Louisiana." A severance tax is a levy on the removal of nonrenewable resources, including oil and natural gas. Effective in July, Mississippi's tax rate on hydrocarbons from horizontal wells was cut to 1.3 percent from 6 percent for the first 30 months of production or until the well pays out. During the first two years of drilling in Louisiana, the state has no severance tax on sales of oil produced. But Louisiana's tax jumps to 12 percent after two years.

Another reason operators are gravitating to Mississippi is its "forced pooling" if a landowner doesn't want to sign a lease, Collins said. In Mississippi, if Tuscaloosa operators can lease a third of the mineral rights in an area, they can "force-integrate" holdouts by giving them the terms of the best lease they gave to the first third.

Also in Mississippi, the State Oil and Gas Board has permitted very large drilling units, exceeding Louisiana's--which range from 640 to 1,520 acres, Collins said. With bigger units, companies can hold onto their leases but drill fewer wells. "I anticipate Louisiana will follow Mississippi in the future so I look for much larger units in Louisiana as well," Collins said.

Meanwhile, the U.S. Environmental Protection Agency is assessing possible impacts of hydraulic fracking on drinking water resources at the request of Congress. A draft report from that study should be released next year for public comment. end