Goodrich grabs big stake in Tuscaloosa formation

07 24, 2013 by The Advocate

Move expected to increase oil drilling activity

Goodrich Petroleum Corp. has acquired a major stake in 277,000 acres in the Tuscaloosa Marine Shale, with plans to step up drilling activity in the area.

Goodrich acquired Devon Energy Corp.’s two-thirds share of the 277,000 leased acres in the Tuscaloosa for $26.7 million. The deal lifts Houston-based Goodrich’s holdings to 320,000 acres in the Tuscaloosa and makes the company the largest player in the formation.

Goodrich President and Chief Operating Office Robert Turnham Jr. said Tuesday that the company will spend $50 million this year drilling wells in the Tuscaloosa, but plans to kick up its activity on the newly acquired acreage.

Goodrich could spend as much as $150 million on Tuscaloosa wells in 2014.

“Under the right scenario, we would love to even double that number and spend as much as $300 million,” Turnham said.

The Tuscaloosa, which stretches across the state’s midsection and to eastern Mississippi, could produce an estimated 7 billion barrels of oil. Industry members and public officials believe the formation could launch the same kind of economic boom in this region that the Haynesville Shale — a mostly natural gas formation — did in the northern part of the state.

Goodrich believes it has “cracked the code” on how to complete wells in the Tuscaloosa, from where to land the horizontal drilling sections that span out from a well to the recipe for fracking fluid used in cracking rock formations to release trapped oil and natural gas. And Goodrich believes it can apply that code to about 75 percent of the leases it just bought.

If recent results are any indication, Goodrich has reason to be confident.

Goodrich’s Crosby well, in Wilkinson County, Miss., produced an average of 1,137 barrels per day during its first 30 days of production. Goodrich’s recently completed Smith well, in Amite County, Miss., had initial daily production of 1,000 barrels of oil and 255,000 cubic feet of natural gas.

By contrast, Devon’s seven Tuscaloosa wells were producing the equivalent of 750 barrels of oil per day in March.

In order to get to the $300 million drilling budget Turnham envisions, Goodrich would have to bring in a partner or raise additional capital, he said.

A budget that big would mean that instead of one drilling rig, Goodrich could run two or three. Ultimately, Goodrich wants to have six or seven rigs working in the Tuscaloosa Marine Shale, but the company will have to build up to that.

Amelia Resources LLC President Kirk Barrell, who authors the Tuscaloosa Trend blog, called Goodrich’s acquisition “a brilliant, strategic move.”

Devon’s approach, on the other hand, he described as “baffling.”

Oklahoma City-based Devon spent about $50 million to acquire its leases in the Tuscaloosa. Devon probably spent about $17 million to drill each of its seven wells, or about $119 million in total, Barrell said.

“You see the price they sold at yesterday, it’s dumbfounding,” Barrell said. “It’s impossible to explain in my mind.”

China’s Sinopec bought a one-third interest in Devon’s acreage in January 2012, so it’s possible the Chinese firm helped cover some of the drilling costs. Even so, Goodrich picked up a $170 million project for a fraction of that investment.

Turnham said Goodrich was excited about the acquisition and the production from Goodrich’s Smith well.

Barrell said Devon had two major problems:

  • Unlike Goodrich, Devon didn’t drill the horizontal sections of its wells in the most productive layer of the formation, which is 100 to 250 feet thick.
  • Devon also didn’t use as much proppant, which keeps the fractures open, as it should have.

In hydraulic fracturing, or fracking, drilling companies crack the rock formations underground to release oil or natural gas. The drillers use millions of gallons of water and a mixture of sand and chemicals to keep the cracks open.

Devon used anywhere from 91,600 pounds to 317,500 pounds of proppant for each section of well fracked. Encana, which has about 300,000 acres in the Tuscaloosa, has used up to 1 million pounds of proppant per stage, while Goodrich used 453,556 pounds per stage in its Crosby well.

Don Briggs, president of the Louisiana Oil and Gas Association, said the Tuscaloosa is “a very mushy shale.”

When a driller fracked the Haynesville, it was like cracking slate. But in the Tuscaloosa, the rock is less brittle and the fractures tend to close.

Turnham said Goodrich has been able to accelerate the learning curve by applying the expertise it gained from the Eagle Ford Shale, an oil formation in Texas roughly the same geologic age as the Tuscaloosa, and in the Haynesville, where wells are drilled to similar depths — 11,000 to 13,000 feet.

In the Tuscaloosa, some of the clays swell when the fluid hits, acting more like a sponge, Turnham said. It’s more difficult to fracture the rock. Even if it fractures, the cracks want to close. So it’s important to figure out what to pump, how to pump it and how to prevent the clays from expanding.

Turnham said Goodrich is working to reduce its well costs to about $10 million per well. The firm’s Smith well cost $13 million to drill.

It took 41 days to drill the Smith well, and it costs $100,000 a day to lease a drilling rig. Goodrich expects to reduce drilling time to 30 days, which would save $1 million. The company also plans to frack multiple wells at the same time and to use pad drilling, where multiple wells can be drilled from the same site.

Once the play becomes more successful, all the service companies come in and that helps drive down costs.

Turnham expects other energy companies, including the majors, to move into the Tuscaloosa.

“The play just looks like too much potential here. And, of course, you get high oil prices, like Louisiana sweet,” Turnham said.

Louisiana light sweet crude is trading at about $7 more per barrel than the benchmark West Texas Intermediate. In addition, the state allows energy companies to delay paying royalties until they recover the cost of the well or for two years, whichever is shorter.