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Fayetteville Shale play igniting natural gas drilling action Sunday, Sep 25, 2005 By Wesley Brown Arkansas News Bureau LITTLE ROCK - As natural gas prices rally to near record levels, drilling activity in western and northern Arkansas is booming, with out-of-state drillers joining such well-known Arkansas producers as Seeco Inc. and Hanna Oil of Fort Smith. To date, more than 38,000 permits to drill oil, gas and brine wells have been issued by the state Oil and Gas Commission, which maintains records on projects from the time permission is given to drill to when the well is plugged and abandoned. With the world's growing thirst and demand for cheap energy stretched to the limit and natural gas prices skyrocketing to record levels, producers are looking to strike it rich again in places like the Fayetteville Shale Play in north central Arkansas, part of the giant Arkoma Basin that runs through eastern Oklahoma and western Arkansas. Bill Hanna, president of Hanna Oil and Gas Co. in Fort Smith, said if the Fayetteville Shale region pans out on the scale some experts predict, Arkansas could once again become a net exporter of natural gas instead of using more gas than it produces. "Time will tell," said Hanna, whose company is active in drilling in more conventional regions of the Arkoma Basin and in Alberta, Canada. Hanna said the recent increased drilling activity in Arkansas has to do with a changing regulatory environment and the fact that oil and natural gas prices are skyrocketing due to "hurricanes and everything else." Crude oil for November delivery rose 1.3 percent this past week to $64.19 a barrel on the New York Mercantile Exchange. Oil surged to a record $70.85 on Aug. 30. Prices have risen 32 percent in the past year. The higher prices also extended to natural gas. Gas for October delivery fell 46.6 cents, or 3.6 percent, to $12.324 per million British thermal units on the New York Mercantile Exchange, according to the Bloomberg News. The contract is still up 11 percent this week after reaching a record $13.42 on Thursday. Hanna said prices are also rising because of tight supply-and-demand fundamentals and OPEC's lack of commitment to hike spare production. But "the higher commodity prices are at the top of the list," Hanna said of the new rigs landing in Arkansas. "That is the main reason for the increased drilling." According to Arkansas Attorney General Mike Beebe, the unconventional Fayetteville Shale play has become so active that he has had to warn landowners recently about protecting their mineral rights. Ed Ratchford, geology supervisor for fossil fuels at the Arkansas Geological Commission, said geologists and oil companies have known for years that the region has large natural gas reserves. But in recent years, new drilling technology has made the extraction process of natural gas from shale more cost-effective, Ratchford said. "We have known there has been gas there for decades, but they couldn't get it out," Ratchford said, adding that the gas cannot travel easily through the shale rock medium with conventional drilling techniques. The Arkansas geologist said shale gas is essentially natural gas contained within a sequence of predominantly fine-grained rocks, dominated by shale. The state Geological Commission has seen increased requests from natural gas companies and producers seeking mapping information about the Fayetteville Shale region, a gas reservoir ranging in depth from 1,500 feet to 6,500 feet. But now, because of the new technology and new investment dollars, there has been a rush to obtain the mineral rights on the formation and begin exploratory drilling, the attorney general said. "Some of the calls we have received include questions regarding the difference between leasing and selling mineral rights," Beebe said. "Often landowners, faced with varying offers relating to the mineral rights of their land, don't appreciate the significant differences in their options." To date, the state Oil and Gas Commission has established rules for development in the Fayetteville Shale for the Griffin Mountain, Gravel Hill and Scotland fields in Conway and Van Buren counties. Rules for the Cole Creek field will be established at a commission hearing this week in Fort Smith. "The rules for all four fields will be the same," said Lawrence Bengal, director of the state Oil and Gas Commission in El Dorado. According to Bengal, Arkansas produces about 180 billion cubic feet of natural gas a year. That amount could go up as much as 20 percent when production from the Fayetteville Shale ramps up next year. "We do anticipate next year that much more development drilling and gas production will be coming online," he said. Although the state has only established rules for the Fayetteville Shale in a two-county area, Bengal said that development of the reservoir's boundaries could eventually stretch over several northern and central Arkansas counties. "Where it will go is not known," he said. "Theoretically, it could extend over a much larger area." Katherine Brewer, chairman and CEO of Geomap Inc. in Plano, Texas, said the Fayetteville Shale has the potential to be on par with the Barnett Shale, the nation's largest natural gas producing region located in the Fort Worth Basin in Texas. "The story is the potential economic benefit to the area," said Brewer, whose company was founded the late Vernon Peppard, an El Dorado native and University of Arkansas graduate who founded the Texas oilfield mapping firm in 1959. "If it evolves anything like the Barnett, it will be a tremendous benefit to that part of Arkansas and to the producers." Brewer said her company is also getting inquiries from producers wanting information on the shale play in Arkansas. Like others, she said new technology and record natural gas prices make the area a reasonable investment in spite of the difficulty of getting the gas to market. "Interest is very high right now," Brewer said of the Arkansas natural gas play. The company that Brewer and others link to the current boom is Southwestern Energy Co., the Houston-based oil and natural gas producer once headquartered in Fayetteville. On. Sept. 15, a Houston Chronicle article said Southwestern has become a hot energy stock because of its position in Arkansas' Fayetteville Shale, "which is thought to be an even bigger play than the Barnett Shale outside Fort Worth." SEECO Inc., the company's Arkansas-based subsidiary, originally budgeted $132.2 million for the region in fiscal 2005, according to federal Securities and Exchange Commission filings. But just last week, Southwestern completed a public stock offering that about $580 million. Company officials said they will use the money in its 2005 capital budget to repay roughly $125 million in debt and to fund future expenses to develop the Arkansas natural gas reservoir. John Thaeler, senior vice president of Seeco Inc., said the current budget for the Fayetteville play now stands "upwards of $175 million." "We took a fair amount of risk in the genesis of this play," Thaeler said of the company's big investment in the region. "We spent a lot of capital without knowing the results." However, Thaeler would not compare the Fayetteville Shale to the Barnett Shale, which is getting interest ranging from large independents such as XTO Energy Inc. and Devon Energy to integrated oil giants such as Royal Dutch Shell. To date, the Texas shale gas field produces about 1.2 billion cubic feet per day - certainly more than the about 493 million cubic feet per day produced in all of Arkansas - from more than 3,800 wells, or about 300 thousand cubic feet per day per well. Wells are drilled between 4,000 and 11,000 feet at a cost between $400,000 and $2.6 million per well. According to an economic study on the Barnett Shale, which is estimated to contain more than 30-trillion cubic feet of natural gas, the annual economic impact on Tarrant, Wise and Denton counties in Texas is more than $1 billion. "It is the biggest field in the country now," Thaeler said. "But they had years to develop it. So far, we are very positive about the results ... but there is an awful lot we don't know." Although the Fayetteville Shale is not attracting the volume of companies Barnett is now seeing, other independent producers and wildcatters are setting up shop in and around Southwestern's acreage. Like others, Thaeler eventually believes the play could be an economic boom for his company and the region. Two weeks ago, Southwestern announced it was increasing its 2005 capital budget to $499.5 million, up from the $438.8 million capital program announced in July. The $60.7 million increase is targeted for SEECO's exploration and drilling program in the region, including the purchase of five new drilling rigs and $15.7 million for a natural gas gathering system. During the first six months of 2005, Southwestern and SEECO invested nearly $55.3 million in the Fayetteville Shale play, which included $33.3 million of capital for drilling 30 wells, $19.1 million for leasehold acquisitions. As of July 26, the company drilled a total of 50 wells and participated in one outside-operated well in the Fayetteville Shale play. The wells are located in eight separate pilot areas in Franklin, Conway, Van Buren, Cleburne and Faulkner counties in Arkansas. While the Fayetteville Shale play is getting all the attention, Bengal said he believes other undeveloped regions in the Arkoma Basin will soon get more notice from producers. In fact, Fort Worth-based XTO Energy Inc., one of the nation's largest independent oil and gas companies, has already acquired interests in about 1,500 wells and a gas gathering system in the giant Arkoma Basin that covers several Arkansas counties. The Texas company is now the largest gas producer in Arkansas, with control of 40 percent of the state's production and 500,000 acres under lease. The company's drilling inventory consists of 200 to 300 drilling locations in three areas: the Arkansas Overthrust Trend, the Arkansas Fairway Trend and the Oklahoma Cromwell/Atoka Trend. The company said it expects to drill 60 to 70 wells in 2005. Bengal and other believe other independent producers like XTO, which has annual revenue of more than $2 billion and a 2005 capital budget of more than $1 billion, will soon be making their way to the state for the next big strike. "As the shale develops, there will be other areas that will also be developed had it not been for the shale," Bengal said. "A lot of those areas have not been looked at for many years." |
