Fervor grows for Tuscaloosa Marine Shale

05 18, 2013 by Mississippi Business Journal

Mississippi’s leaders expect a parade of oil drillers to converge on the southwest corner of the state and are happy to cover the cost of striking up the marching music.

When a potential to fill seven billion barrels awaits, let’s get cracking, they say.

So far, state officials are getting the answer they wanted when they extended a lucrative tax break to energy production companies prepared to drill horizontal wells more than 10,000 feet below ground to reach what is known as the Tuscaloosa Marine Shale (TMS). The expectation is to extract Texas-size amounts of oil and liquid natural gas drillers have known about for decades but only in recent years have perfected a cost-effective hydraulic fracturing technique that frees the oil and gas from the shale deposits in which it has been trapped for eons.

shaleHouston’s Goodrich Petroleum is as close to fully committing to the TMS play as a company gets without an outright declaration. “In all, it is shaping up to be a busy and exciting time in the TMS during the summer and into the fall of 2013,” said Walter ‘Gil’ Goodrich, company CEO and vice chairman, in a first quarter earnings report last month.

“We have recently spud [started] our next operated TMS well, the Smith 5-29-1, and plan to drill at least three additional operated wells in 2013,” Goodrich said.

Mississippi legislators revved up the enthusiasm of Goodrich Petroleum and counterparts such as Canada-based Encana in this year’s session with a severance tax cut that drops the levy on oil and gas extractions by 80 percent.

Goodrich Petroleum says the drop in tax payments on oil and liquid gas extracted from its wells will further enhance a bottom line that has been helped by the company’s progress in lowering the per-well cost to around $13 million.

Walter Goodrich called the severance tax reduction from 6 percent to 1.3 percent for the next five years “a very significant improvement in the economics of the early-time wells.”

In the earnings a report, Goodrich emphasized to investors that Mississippi “is very much focused on the Tuscaloosa Marine Shale, very much hoping and expecting it to become a full-fledged play with lots of activity that can bring business in and, in particular, jobs back to the state of Mississippi.”

Encana estimates the 80 percent state tax cut will save it $700,000 to $800,000 “of additional cash flow” for each well it puts into operation after July 1. Encana has six deep ground horizontal wells in the TMS and plans two more in the current quarter, though presumably the company would delay the new wells in order to qualify for the reduction in severance taxes.

“This five-year program supports the pursuit of commerciality by positively impacting Encana’s economics for the emerging Tuscaloosa Marine Shale play,” said the company created through the merger of PanCanadian Energy Corp. and Alberta Energy Co. Ltd. in 2002.

Encana and Goodrich are among a handful of companies already working the deep horizontal wells in the 2.7 million acre TMS. Also active in the region are Devon Energy Corp. of Oklahoma City, Denbury Resources of Plano, Texas; Indgo Minerals and EOG Resources, both of Houston.

Drilling of each deep well so far has run from $11 million to $20 million.

Encana — which led the pack with 290,000 acres leased in Mississippi midway through 2012 — has decreased its drilling costs from around $20 million to $17 million a well, said spokesman Doug Hock. That cost is expected to go even lower, he added.

“We’re budgeting an average cost of approximately $15 million per well for the year,” he said. “This is related to technical changes and gaining an understanding of how to most efficiently access the resource.”

Encana is “gaining confidence in the potential of the play as it nears commerciality,” the company said in its first quarter earnings report.

The state tax cut applies to oil and gas extracted from horizontally drilled wells for a period of 30 months or until the payout of the well, a term used to mean that the oil and gas drilled by the well equals the cost of the well. The legislation applies to all qualified horizontally drilled wells between July 1, 2013 and June 30, 2018

Just how much the lowered taxes will cost Mississippi in revenues is unclear. Much would depend on the level and pace of new horizontal drilling. The money the drillers pay at the 1.3 percent rate will go to the counties in which the drillings is done.

Mississippi takes in around $80 million annually in oil and gas severance taxes, with the oil severance tax accounting for the bulk of the tax revenue at about $67.5 million.

Oil and gas experts say the TMS situated in Southwest Mississippi and Southeast Louisiana is at depths of 11,000 to 15,000 feet but modern drilling techniques make the extraction more affordable and effective than in the past. The quantity of oil and gas that can be removed from the TMS is uncertain but energy companies are betting it is substantial, with industry estimates putting daily production for each well at 1,000 barrels.

Goodrich, for example, last year announced test results for the Encana Anderson 17H-1 well (in which it owns a 5 percent working interest), in Amite County, of 1,082 barrels of crude oil equivalent per day, said Charlotte Batson of shale oil industry consulting firm Batson & Co. in a study done last June on behalf of Amite, Wilkinson and Pike counties.

“Enhancing its attractiveness to the industry is the fact that the hydrocarbons present are of good quality (called “sweet”) that are likely to obtain a premium price at market,” Charlotte Batson said.

Batson’s conclusion: Shale oil plays such as the TMS will be the global epicenter of the oil industry for years to come.

State officials are wagering that Batson is correct, chief among them Gov. Phil Bryant, who predicted in a press statement last week the Tuscaloosa development will be one of the “most active shale plays in the United States.”

In the meantime, Bryant is letting the oil and gas sector know Mississippi expects to be among the “most competitive states in the nation when it comes to attracting companies that explore and develop shale plays.”

The prospect of an economic bonanza led Bryant to make the cut in the severance tax part of his Energy Works: Mississippi’s Energy Roadmap plan.

While the so-called “sweet spot” of the Tuscaloosa Marine Shale play is said to be in the Mississippi counties of Amite, Wilkinson and a speck of Pike, Bryant and legislative leaders designed the measure to stay competitive with neighboring Louisiana, which is home to a portion of the TMS that lies across the Mississippi River and in the parishes below the Mississippi counties.

Louisiana has designed a severance tax on horizontal drilling wells that does not kick in until the company recoups its cost of drilling the well or for a period of 24 months, whichever comes first. After the two years or recouping of production costs, the tax on horizontal drilling extractions reverts to the state’s standard 12.5 percent.

While Louisiana gave up $125.3 million through the tax break in 2010, it gained $367.7 million, according to a study by Louisiana State University economist Loren Scott. The study concluded that for every dollar the state sacrificed through the tax incentive, it received $2.49 in revenue.

State Rep. Bobby Moak, a veteran legislator who represents Southwest Mississippi, said he views the tax break as a worthwhile trade off to bring prosperity to a region largely devoid of other industries. “Where do the drillers go? Louisiana or Mississippi? I think that was one of the reasons for the legislation,” he said in an interview this week.

He said he doesn’t think anyone knows for sure whether the resources deep below ground can be profitably mined. “This is one of those things — do you take a shot at it? Is it going to work out economically in the best interest of the counties? I think that remains a little to be seen.”

Mississippi Development Authority geologist and oil industry veteran Jack Moody is not entirely exaggerating when he talks of the Tuscaloosa Marine Shale region having Texas-size potential. He cites geological similarities between the multi-billion-dollar South Texas Eagle Ford play and the TMS, noting nature deposited the oil and gas in both locations about the same time and both are in regions close to the Gulf of Mexico.

The theory is that there could be a continuous band of shale oil and gas running from the Eagle Ford east to the TMS. “Wells are being drilled to test that hypothesis,” said Moody, program director of the MDA’s Office of Mineral Leasing.

The University of Texas-San Antonio Center for Community and Business Research put the 2011 economic impact of the 14-county Eagle Ford drilling operations at $25 billion and 47,079 jobs supported.

“The formations in Eagle Ford are a bonafide proven up-and-running shale play,” Moody said. “The Tuscaloosa is a wannabe.

“And it’s doing well in its efforts to become. When it grows up it would like to be Eagle Ford and the progress we’ve seen makes you hopeful they can do it.”

For Energy companies such as Goodrich, Encana and Devon, the play involves more than just finding oil, Moody noted. “The idea is not to find oil. The idea is to make money finding oil. In this game there is a very big difference.

“We’re on the verge of getting there.”

90-degree turn, rock fractures key to successful fracking

Eric Smith has a pair of simple answers to why hydraulic fracturing, or “fracking,” is held in such favor today by an energy industry that has known of the technique for capturing a wider swath of oil for decades, including periods of severe worldwide petroleum shortages.

One is that drillers have figured out how to do fracking without it costing the moon. Second, says Smith, associate director of the Tulane University Energy Institute: “With $100 oil you can do it all day and make money.”

So how, exactly, do you do it?

Think of an oil well as a vertical bore hole, Smith says. This way you’re done once you’ve drilled and exhausted whatever is at the bottom of the bore, he says.

“But if I can make a 90-degree turn and drill out to shale for a mile, instead of 100 feet exposed to shale (oil bearing rock) I have 500 feet.”

The problem is that the oil is trapped in the shale. To extract it, Smith says, “You use high pressure water (as well as sand and chemicals) that is forced into the well bore. It creates tiny fractures.”

As drillers reduce pressure, the oil (and in some instances liquefied natural gas) seeps out.

Put simply, Smith explains, “Instead of looking for the oil that has managed to seep up and somehow get caught in the sandstone traps, we’re now drilling into the source rock.”

Look for economic transformation to set in once TMS profitability questions answered

Always alert to the pitfalls of overstatement, economic development executives resist the term “transformative.”

They reserve the adjective for developments that have already achieved momentous economic importance or ones that are about to.

You can put the Tuscaloosa Marine Shale play into the “about to” column, according to Manning McPhillips, chief administrative officer for the Mississippi Development Authority, who said if drilling in the counties of Amite, Wilkinson and Pike follows the pattern set by the multi-county Eagle Ford shale oil trend in Southeast Texas, Southwest Mississippi could see a several billion-dollar annual impact and creation of tens of thousands of jobs in support of the drilling.

“We feel it will be really transformative for Southwest Mississippi,” McPhllips said in an interview this week. “It doesn’t appear that way in Mississippi because it is not there yet.”

Don’t look for an official timeframe, says Jack Moody, a former oil field geologist and now program director of the MDA’s Office of Mineral Leasing.

“Each company is kind of conducting its own experiments,” he said.

The companies compete in the market “but are pretty good about sharing their drilling and completion techniques,” Moody added. “Everybody knows they aren’t there yet. They are after the common goal. The all want to crack this nut.”

Transformation has indeed come to the small towns and rural areas around the country where the nut has been cracked — essentially advancing to the point of profitable extraction of oil and gas through hydraulic fracturing.

“What we have seen in other plays around the United States — whether it is North Dakota, Pennsylvania, Ohio or Texas — is an enormous impact,” the MDA’s McPhillips said.

The Eagle Ford shale region takes in 14 counties near the Gulf of Mexico west of Houston. The economic transformation happening there is occurring across a vastly larger stage and some differences exist in the characteristics of the Texas and Mississippi shale regions, says Karen Bishop of the MDA’s Energy and Natural Resources Division.

Eagle Ford’s development is also much further along. Nonetheless, Bishop said many professionals familiar with both regions have noted that of active shale plays, “The Eagle Ford is probably the best comparison to what we could expect from the TMS.”

That would be enormous, according to an economic impact study of Eagle Ford completed in 2012 by the University of Texas-San Antonio’s Center for Business and Community Research. Based on a scenario that reflects only “moderate” changes in the number of oil fields and rigs and changes in productivity, the study projects that by 2021 the Eagle Ford region should see a $62 billion impact, 82,645 new jobs and revenues of $890,000 to local governments and $1.6 billion to state government.

Supply-chain in place, opportunities ahead

Like many parts of Texas, Southwest Mississippi has a history in the oil and gas businesses. Over the decades, the region has built up a supply-chain infrastructure that should serve it well as shale oil and gas production ramps up, energy sector experts say.

“One of the advantages Mississippi and Louisiana have is a fair amount of infrastructure. It’s all over the place,” said Eric Smith, associate director of the Tulane Energy Institute.

Smith calls it “a gathering system,” such as pipelines, refining capacities and people who have worked rigs — assets you would not find in shale plays in, say, New York state.

Charlotte Batson, principal of New Orleans energy sector consulting firm Batson & Co., has divided the opportunities ahead for Southwest Mississippi’s into “Upstream, Midstream and Downstream.”

Upstream takes in the supply-chain that supplies the exploration and drilling activity and includes a variety of items, from heavy equipment to instrumentation to chemicals, said Batson.

Batson detailed the three categories as part of a study of infrastructure needs and economic opportunities the TMS development could create for Amite, Wilkinson and Pike counties.

Upstream, she said, also includes “opportunities for local businesses.” For this, she listed everything from drilling equipment, mud and cement to restaurants, RV parks, grocery stores, dry cleaning services and movie theaters.

Midstream, she said, takes in the part of the supply chain used for the processing and gathering of the gas and oil and transportation network used to get the products to market. The transport is from the wellhead to downstream processing facilities and end users, according to Batson.

“Southwest Mississippi is located at the confluence of the largest pipeline networks in the country, with access to all petrochemical and refining facilities, export terminals, rail, the Mississippi River, the Port of Natchez (which recently announced an expansion to handle increasing cargoes of frac sand), and other important infrastructure,” Batson said in her 400-plus page report titled “Best Practices in Shale Oil and Gas Development.”

The abundance of natural gas in the North and Midwest has led to a flipping of pipeline directions, causing increased volumes of oil and gas to be moved south to Gulf coast terminals. “Increasingly, capacity is available in northbound pipelines, creating an opportunity for the right company,” Batson said.

The downstream part of the supply chain includes the processing of oil or gas into gasoline, chemicals, liquefied natural gas (LNG), polymers, or plastics, Batson said, predicting the United States is positioned to become a low-cost leader in chemical manufacturing, especially for products in which natural gas is a feedstock.

“Southwest Mississippi’s location in the middle of one of the largest transportation corridors in the U.S. is a critical factor for petrochemical facilities, nearly all of which are located on or very near these lines,” she said.

Waiting for the light to change

You can already see signs around McComb and other parts of Southwest Mississippi that the status quo is about to get knocked for a loop. J. Britt Herrin, director of the Pike County Economic Development District, has been watching it unfold for some time now.

“We’re already seeing pretty much our hotel rooms are full,” he said. “I had a prospect come in and I had trouble getting him a room during the week. The restaurants are slap full.

“Everyday if I go by the WalMart lot or Applebees, I see a different truck with ‘XYZ Energy’ or something like that on it.

Speaking of trucks — drivers for them are probably going to be the most in demand once the Tuscaloosa Marine Shale region goes into development, Herrin said.

“Everything has got to be moved – sometimes thousands of barrels a day,” he said.

“Studies show it takes 2,500 truck movements to get a deep ground hydraulic fracturing well up and running and 1,000 movements of trucks a week to support the operations of the well once it is going.”

New jobs across all occupations on both the Mississippi and Louisiana sides of the TMS play could number anywhere from 30,000 to 90,000, according to reports Herrin says he has received from the oil and gas companies. “One is the low number and one is the high number,” he said. “The jobs will be spread from Alexandria, La., to Tylertown, Miss.”

Herrin figures for now the energy companies are weighing their bottom lines and asking just where and how they can be sure of making money. “They are going to know the answers. And when that happens, all hell is going to break loose.”

But it will break loose in a good way, he adds.