Mississippi Limestone Emerging As Top-Flight Horizontal Liquids Play
Mississippi Limestone Emerging As Top-Flight
Horizontal Liquids Play
By Gregory DL Morris
Special correspondent
THE AMERICAN OIL & GAS REPORTER
As of late, domestic exploration and development has been all about resource
plays—primarily shales—and for good reason. Shales are opening huge new reservoir targets with vast hydrocarbon deposits in basins all across the country.
One of the high-profile shale plays to emerge over the past decade is the gas-bearing
Woodford. But on the way down to the Woodford Shale (downdip to the southwest of the Mississippian play area), producers had to drill through the Mississippian formation—a thick, porous carbonate deposition that extends over millions of acres in northern Oklahoma and southern Kansas. Woodford operators realized the formation had porosity, permeability, and lots of hydrocarbon shows. In fact, the Mississippian has produced commercially from thousands of vertical wells for more than 50 years.
However, what suddenly has jumped the Mississippi formation to the front of the line as a top-flight onshore oil play is the same set of technologies that independent operators are deploying to enable economic shale development: horizontal drilling and multistage completions. With the industry’s focus turning to liquids-rich plays, the horizontal Mississippian oil play is right in the thick of the action.
Yielding high-grade crude oil and natural gas, the play offers compelling economics fortified by strong oil prices, low development costs and relatively high estimated ultimate recoveries.
In fact, the Mississippian play in the Mid-Continent region has cost advantages to other emerging plays because of its shallow drilling depths and low horsepower requirements for hydraulic fracturing. The added bonus for Mississippian operators in Oklahoma and Kansas is that they are working in the heart of the Mid-Continent, with ready access to transportation infrastructure, services, equipment and skilled personnel.
Major Land Positions
Oklahoma City-based SandRidge Energy was an early mover in the Mississippian horizontal play and is in the process of putting together a second major land position. Although Matthew Grubb, president and chief operating officer, cannot publicly disclose exactly where the new acreage holdings are being acquired because of leasing considerations, he notes that the geological characteristics are very similar to its original Mississippian play, and there is good reservoir control and production history because of the thousands of vertical wells that have been drilled in the area.
“We have identified and are actively pursuing acreage in a second Mississippian play,” says Grubb. “Our original position is 900,000 acres in northern Oklahoma and southern Kansas. In the new Mississippian play, we have leased about 400,000 acres with the goal of ultimately leasing I million acres. It is the same type of rock, depth and vertical production characteristics that we see in our original Mississippian play.”
Grubb is plain spoken about SandRidge’ s goals for the Mississippian formation in general and the new play in particular. “Given our drilling success and having completed more than 100 horizontal wells in the original 900,000-acre play area, we have generated nearly $15 billion in net asset value for the company from this play alone. If we can lease another 1 million acres as we have set out to do, we are well on the way to building a second large position with generally similar reservoir characteristics and net asset value. Best of all, the entry point is very attractive since this play has very low acreage costs if you know where to buy.”
Not only are those two strong pillars on which to grow the company, but Grubb notes that they also complement the large lease position SandRidge holds in the oil-rich Central Basin Platform of the Permian Basin.
Grubb characterizes the Mississippian carbonate in back- to-the-future terms. “If you look at the history of the industry, we tend to develop the low-hanging fruit or the best reservoirs first. That equates to the easiest and cheapest places to find and produce hydrocarbons. For many years, that meant sandstone and carbonate reservoirs. Eventually, some companies felt that there was limited growth potential from those positions and the trend in the industry has become all about shales.
“The Mississippian is a conventional carbonate reservoir with superior economics because of its low development cost, production characteristics and estimated ultimate recoveries. There is also long-term value potential and tremendous growth opportunity because of the scale of the play,” Grubb continues. “In a shale play, the shale is the source rock, so you know the hydrocarbons are there. The question is whether they can be accessed economically through drilling and hydraulic fracturing.
“In contrast, the Mississippian, because of its proven history of production from vertical wells, may not have the commercial risk of some of the new emerging plays.
Our focus area for the Mississippian is shallow, which means it is less expensive to drill and complete,” he points out. “Plus, the Mississippian has a proven production history from decades of vertical drilling, and therefore, well known geological and reservoir characteristics that we can map and understand.”
Low Frac Horsepower
The Mississippian is located at an average depth of 6,000 feet and formation thickness is 200-300 feet, according to Grubb.
“Cost in our industry is directly a function of depth and pressure. We try to stay shallow in all our plays, including the Mississippian formation, so we can better manage costs and minimize mechanical risk to give ourselves a high level of confidence in our ability to execute our capital plan. Vertical well control is also very important, because the data help us to understand the reservoir so we can optimize placing the horizontal laterals. Once we have that information, the process is very simple.”
In general, Grubb says SandRidge drills a 4,000-foot lateral for maximum reservoir contact. With a cemented liner in place, it perforates and fracs eight to 10 stages spaced 400-500 feet apart. “One of the characteristics of this play is low horsepower requirement for stimulation,” he relates. Surface treating pressure is typically less than 5,000 psi at treating rates of 80-100 barrels a minute.”
Noting that water sources can be difficult to secure for fracturing operations (especially with the drought experienced in Oklahoma last summer), Grubb says SandRidge has established enough production that it can use produced water to subsidize its hydraulic fracturing operations. “This is a very efficient and cost effective process,” he remarks. “We also use very few chemicals; some friction reducer, biocide and scale inhibitor, but that is about it.”
Grubb adds that SandRidge typically pumps about 5,000 barrels of fluid for each stage and uses 75,000-100,000 pounds of conventional sand per stage. Drilling and production equipment , services and personnel are readily available, he points out.
“Both Oklahoma and Kansas have rich histories of oil and gas activity. There are generations of skilled workers, strong infrastructure and suppliers, and the regulatory process is very straight forward,” he states.
Another advantage is proximity to the Cushing, Ok., crude oil storage hub, although when asked about the disparity between WTI and Brent crude prices, Grubb says the potential tightness in storage capacity at Cushing is worthy of keeping an eye on if additional pipeline capacity is not added in a timely fashion to move oil to Gulf Coast refiners.
“We have seen some storage tightness develop in the Mid-Continent earlier this year both from increased domestic oil production in areas such as the Permian Basin, Williston Basin and Mississippian play, but also oil coming from Canada. Three years ago, inventory was 15 million-I8 million barrels. Last April, it was 42 million barrels, which was getting close to capacity.
Nameplate capacity at Cushing is around 50 million barrels, and 80 percent of capacity is considered full, Grubb notes. Reports indicate that storage levels in September had declined from last spring’s peak to around 32 million barrels. Ongoing system expansions are expected to increase regional nameplate capacity to about 55 million barrels by the end of this year, and reach 61 million barrels by the end of 2012.
“Additional storage at Cushing certainly will give short-term relief, but the real issue is not so much storage at Cushing, but pipeline capacity from Cushing to the Gulf Coast,” says Grubb.
“That is what really is widening the gap between West Texas Intermediate and Brent. Last January, the differential was around $10 a barrel. Today, it is about $25 a barrel. That is mostly caused by the inability to get oil to the Gulf Coast.”
Unlike the current storage capacity pinch at Cushing, he adds that there are no prospects of relief in terms of accessing new pipeline capacity to the Gulf Coast until late 2012 or 2013.
“Cushing is landlocked, so there is no barge option. There have been discussions of sending crude to the Gulf region by rail, but this does not appear to be a viable or practical solution to the situation, ” Grubb concludes.
Early Entrant
Eagle Energy of Oklahoma, based in Tulsa, is another early entrant into the Mississippi Limestone, holding about 75,000 net acres in northern Oklahoma. Steve Antry, chief executive officer, says the company has brought in a third rig, and will have four rigs operating by January. He says Eagle Energy has a fairly consolidated lease position, but still is making bolton additions from “a healthy budget.”
It actually was not the Mississippi Limestone that initially brought Eagle Energy into Woods and Alfalfa counties, Ok., but the Hunton Limestone, according to Antry. “We were in with very few data points and got a strong core position,” he says. “We made nine acquisitions in the Hunton, which is a little deeper than the Mississippi Limestone, and is primarily a gas play. But the horizontal Mississippian was on our radar screen, and it quickly turned into the primary play.”
That core position was in place by the end of 2009, and Eagle Energy started drilling in May 2010. By September 2010, the company was drilling its 30th well. As a result of being an early mover, Eagle has the unusual challenge of having some acres with no cost basis, but on average, Antry says his firm’s core holding was acquired at a cost of less than $500 an acre. “Leases now are going for $1,500 an acre and higher,” he notes.
Eagle produces about 5,000 barrels of oil equivalent a day in the western part of the trend and expects to exit 2012 producing 10,000 boe/d with a four-rig drilling program. Its highest-performing well had initial production of 2,224 barrels and 4.7 million cubic feet of gas for the first 24 hours on a 29/64-inch and 7-inch casing choke with 750 psi of reservoir pressure. “Average daily production for the first six days on line was 1,980 barrels of oil and 4.3 MMcf of gas,” Antry reports.
Mike O’Kelley, Eagle Energy’s president and chief operating officer, notes that everyone produces the Mississippi Limestone a little differently. “I worked the Woodford Shale for years with its low porosity and permeability,” he says. ”The Mississippi Limestone is a true reservoir. We use low-pressure hydraulic fracs pumping at a rate of about 100 barrels of water a minute in small stages. On a 4,000-foot lateral, we use eight 400-foot stages. Each one uses 1,500-1,600 barrels of water. The produced crude varies from API gravities of 20 to 30 and a mix of half sour and half sweet. “We have a very favorable regulatory environment because we have worked hard to establish a favorable relationship,” says O’Kelley. “The same with the farmers and the ranchers in the area. They understand the industry and are easy to get along with.”
He adds that in some cases, it can be a trick to secure rigs and service equipment. “In the early days of this play, service companies came knocking on your door and were glad to have the work. Now with the level of drilling activity, you have to go knocking on the service companies’ doors,” O’Kelley quips.
The sulfur content of the produced oil puts another variable into the crude price differential equation. “Our sweet oil gets about $2 a barrel off the WTI price for transport, while the high-sulfur oil has to go by truck at a transport cost of $6-$8 a barrel,” says O’Kelley. “Of that, $2 is for the truck and the rest is for the sulfur discount. There has been some discussion about a high-sulfur-crude pipeline to eliminate some trucking, so in a few years, I expect we will be on an even keel with WTI for sweet or sour.”
O’Kelley notes that his firm has increased its estimated total oil in place to 470,000 boe. “That makes the type curve very attractive. With costs about $3.4 million a well, the net present value of the typical well is $7 million for an initial 82.5 percent rate of return and a total rate of return of 130 percent,” he details.
Back To Kansas
With such a favorable economic profile, it may seem surprising that the Mississippi Limestone was not picked off long ago. Bob Murdock, president and chief executive officer of Osage Resources in Hutchinson, Ks., says that is largely the result of the complex geology of the limestone formation.
“The rock fabric was understood for decades as a conventional reservoir, but that paradigm has changed to unconventional. We were early movers in understanding the play as it is known today,” he holds. “Historically, the majority or the blanket formation was considered too tight to produce, based on drill stem tests. Porosity ranges from zero to 25 percent, and permeability can be low. So in many tests, historical operators got false negatives as to hydrocarbon content.”
In the 1990s, Osage had significant experience in these same fields, but Murdock says the company walked away “because of low prices relative to the economics for vertical wells and the standard stimulation techniques of the day. Since then, we have gained a lot of experience in tight formations in the Rocky Mountains, and brought that experience back to Kansas. We did reservoir studies applying a vastly different reservoir and engineering paradigm.”
Osage Resources has been running production tests with vertical wells for more than six years, and is producing 400 boe/d consisting of 25 percent black oil, 25 percent natural gas liquids, and 50 percent natural gas. Starting in October, the company expected to begin its horizontal drilling program with four wells before the end of the year.
“We have approximately 200 engineered horizontal drilling locations and expect to drill an average of 30 horizontal wells a year in 2012 and beyond,” states Murdock. “We are starting with one rig, and will have two by the middle of next year, and then plan to add one more in 2013 and another in 2014 to get to a total of four rigs. Targeted production by 2014 is 14,000 boe/d.
“I have looked at a lot of plays in my career, but this looks like the best economics I ever have seen,” Murdock reveals. “But leasing costs are increasing dramatically. I have heard that a recent transaction of 200,000 acres to the east of our lease position averaged $3,300 an acre.”
Strategically Positioned
Superior Oil & Gas is positioned strategically in the heart of the Oklahoma and Kansas Mississippi Limestone play with a large and growing acreage position in nine sections in Oklahoma’s Logan and Payne counties, and four sections in neighboring Garfield County. In addition, Superior has an option to purchase oil and gas leases on 15,000 contiguous acres located in Cowley County, Ks., according to Dan Lloyd Jr., Superior’s president and chief executive officer.
Lloyd says that for years the Mississippi Limestone “was a bad word. You would get four or five barrels of oil for every 100 barrels of water you produced. But that was before the horizontal drilling play.”
Superior’s drilling and production plan is set to kick off early next year with the initial goal of developing all 13 of its sections. “Other companies scatter themselves around in the shale plays, but we decided to build a concentrated position in this play,” says Lloyd. “This is a fundamental play that is going to be around for many years. As long as oil stays above $40 a barrel, the Mississippi Limestone is going to make people happy.”
Expanding Leasehold
AusTex Oil Limited holds 6,000 acres in the Mississippi Limestone play and is seeking to expand its leasehold to as much as 25,000 acres, reports Managing Director Dan Lanskey. AusTex is a one-company geography test: Just as its name implies, Lanskey—an Australian national—says he formed the company with his partner—a born-and-bred Texan—to produce the Mississippi Limestone in Oklahoma.
The company is traded on the Australian Stock Exchange and on the premier international tier OTC QX, and is in the process of applying to be listed on the Toronto Stock Exchange Venture Exchange (TSX-V).
“As a compliant company on the Australian exchange, there is a streamlined process for listing on the TSX-V,” Lanskey says, noting that once an updated resource report is completed in October, the TSX-V process could take only six weeks. “It is possible that we could be trading in Toronto before Christmas.”
To date, AusTex has drilled two vertical wells and the production results will determine whether it takes a vertical or horizontal drilling approach for future wells, Lansky offers. “Our objective is to grow our lease position and take whatever drilling approach provides the best all-round economics,” he states.
Superior Oil & Gas holds a large acreage position in the Mississippi Limestone play with nine sections in Oklahoma’s Logan and Payne counties, four sections in neighboring Garfield County, and an option to purchase oil and gas leases on 15,000 contiguous acres in Cowley County, Ks. Shown here is the company’ s Windy Vista No.1 well in Garfield County.
