With the crude to natural gas price ratio (crude in $/Bbl divided by gas in $/MMbtu) continuing in historically high territory many energy companies are looking for more opportunities to shift from producing cheap gas to producing premium-price oil. For that reason, one tight-oil play long in the background—the Tuscaloosa Marine Shale (TMS) in central Louisiana and southwestern Mississippi—is attracting new attention; particularly from drillers who think they’ve figured out how to deal with TMS’s challenging characteristics. But is TMS all its fracked up to be? Today we begin a new series on TMS with a primer on this 6.6 million-acre shale play that’s said to have seven billion barrels of oil in place deep below ground but only a stone’s throw from the pipeline networks and refineries of the Gulf Coast.
In Part 1 of the series, we examine TMS in detail, and consider all we know about the geological conditions that make the shale play both so promising and so challenging. We’ll also look at the mostly failed efforts made since the early 1960s to make drilling in TMS pay, why things may be different now, and who is out front in testing the play’s potential. In the next blog, we will examine what these TMS pioneers have drilled to date, what they’re learning, and what their plans are for 2014 and beyond. We also try to answer the questions of whether TMS has the potential to become the next Bakken—the best-known tight-oil play--and what it would take for that potential to become a reality.
TMS is a sedimentary rock formation several hundred feet thick and between 10,000 and 15,000 feet below the surface across a relatively narrow swath of central Louisiana and southwestern Mississippi (see Figure 1).
Tuscaloosa Marine Shale play (shaded area)
Source: Louisiana State University’s Basin Research Institute
The dark gray marine shale within the formation consists of fine-grained, organic-rich sedimentary silts and clays deposited more than 80 million years ago along what is now the Gulf Coast. (The Eagle Ford deposits in South Texas were formed at about the same time, but they are closer to the surface--5,000 to 7,000 feet, typically—and the sediments washed down the Mississippi River gave TMS a different geological composition that could reduce the recoverability of oil from it.) A 1997 study by Louisiana State University’s Basin Research Institute estimated TMS has seven billion barrels of oil, and that may turn out to be conservative. Still, the depth and low permeability of TMS have scared off many a driller, as has the very thin layer within it that offers natural fracturing (and increased permeability). But as we’ll get to later, some companies active in TMS—EnCana and Goodrich Petroleum among them—recently have been successfully reducing drilling costs and, through increased use of sand, clay stabilizers and proppant, dealing with the softer rock and clay-like material in TMS that otherwise might self-seal and undo the “open-wide” effects of fracking (see Tales of the Tight Sands Laterals for more on hydraulic fracturing). Their efforts to improve the completion formula may increase the estimated ultimately recoverable (EUR) oil from TMS wells and, with that, the likelihood that TMS will emerge as a profitable and important play (see our The Truth is Out There series for more on drilling economics).
There’s other good news about TMS, particularly at a time when the oil-to-gas price ratio remains in 25-30X territory (see Figure 2). The crude-to-gas price ratio is a measure of the relative value of crude oil to natural gas (see Ratio GaGa for more on the crude-to-gas ratio and see RBN Spotcheck for a daily updated chart of the ratio). TMS is as close to an all-oil play as you will find: a 92% to 96% oil cut, by most accounts. Also, because TMS is so far below the surface and sandwiched between the upper and lower Tuscaloosa formations, the oil trapped within TMS is highly pressurized, making for great flow rates once a driller has zeroed in on the ideal completion formula. And, so far at least, per-acre leasing costs in TMS are a small fraction of what they are in the Bakken and Eagle Ford. Still other positives include ample water supplies, the ability to drill long laterals through TMS, and the premium prices the market pays for the Light Louisiana Sweet Crude the basin produces. TMS is also close to the St. James crude market hub meaning transport costs are low and takeaway infrastructure is already in place. The tax environment is positive as well. In Louisiana, there’s no severance tax on oil and gas recovered through horizontal drilling for the first two years or until the well cost has been recovered. And, to encourage drilling activity, Mississippi recently reduced its tax rate on oil and gas extracted from horizontally drilled wells to 1.3% (from the old 6%) for a period of 30 months or until the payout of the well. To qualify, a well must be drilled between this past July 1 (2013) and June 30, 2018.
Source: Energy Information Administration
Before we get to recent developments and current activity in TMS, let’s examine a little history on previous efforts—going back as far as a half-century—to drill for TMS oil. A vertical well drilled in Amite County, Mississippi, in 1962 ended up a dry hole, but passed through three feet of oil saturated TMS – indicating the potential to exploit the shale. A vertical well in Tangipahoa Parish, Louisiana, in 1975 produced 2.5 MBbl of oil over a 15-year period, and a well drilled two years later produced 24 MBbl over a 30-year period. The rest of TMS’s pre-2000 drilling history is uneventful, aside from a blowout while drilling a well through TMS in Wilkinson County, Mississippi, in the 1980s.
A small number of companies revived interest in TMS in the 2000s. Petroquest Energy drilled its Lambert H-1 well in Amite County—a conventional vertical well, with no fracking—and has produced 11.6 MBbl from it since 2001. The first horizontal wells were drilled a few years later, including at least two by Encore Acquisitions in 2007. One of the 2007 Encore wells, in Wilkinson County, has a 1,650-foot lateral and three frack stages; it’s produced 28.8 MBbl. Another Encore well, drilled in 2007 in East Feliciana Parish, has a 3,100-foot lateral and three frack stages; it’s produced 10.7 MBbl. In 2008, Encore drilled yet another horizontal well in TMS, this one in St. Helena Parish, Louisiana, with a 4,100-ft lateral and three frack stages. Production from that well so far has totaled 27MBbl. Permitting and drilling activity have picked up the past few months, and in the heart of Louisiana’s portion of TMS alone there now are 19 producing wells, and three permitted wells waiting on completion, fracturing, testing or other operations—at least as of mid-October (see Figure 3). No similar numbers are available from Mississippi, but activity there has been picking up as well, particularly in Wilkinson and Amite counties. Some think Wilkinson and Amite, just north of the most active areas in Louisiana, may turn out to be the core of the play.
Figure 3 (Click to Enlarge)
Source: Louisiana Department of Natural Resources
The current set of players in TMS—the pioneers assembling leased acres, seeking permits, tweaking completion formulas, and generally working on the science—include EnCana, Goodrich Petroleum, Sanchez Energy, and EOG Resources. EnCana and Goodrich, for example, each have more than 300,000 acres in TMS under lease. Goodrich and Sanchez in recent months have been expanding their holdings significantly, Goodrich through the July 2013 purchase of Devon Energy’s two-thirds share of about 277,000 TMS acres, and Sanchez through its August purchase of about 40,000 acres in the play.
In the next blog in this series we will examine in detail the permitting and drilling activity now under way, what the drillers are learning, and what that tells us about the future of TMS.
Continue to Part 2