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Shale oil: market correction or longterm direction?

SHALE-OIL graphic_rgbBy Jack Weatherly

The golden age of hydraulic fracturing began about 10 years ago “as oil and gas producers began to explore the nation’s massive shale formations in earnest,” according to an essay on the American Society of Mechanical Engineers website.

Expansion of the technique in subterranean shale formations has pushed the United States toward oil and natural gas self-sufficiency in one decade.

Because of this boom and oversupply, oil prices naturally have dropped. But since mid-2014 they have fallen nearly 50 percent, thanks in part to Saudi Arabia’s strategy to hobble America’s production by keeping oil value low — cutting profit margins at oil companies, especially smaller ones. Softer global demand has also pushed prices downward.

West Texas intermediate crude — benchmark oil for the United States — opened Tuesday at $54.03 a barrel, the lowest in five years. It closed at $105.79 on June 14.

Three or four years ago, exploration companies started drilling wells in the Tuscaloosa Marine Shale formation, which encompasses all or part of three counties in southwest Mississippi and eight parishes in southeast Louisiana.

Government officials have braced for the negative impact of the oil production on water supplies, as well as roads, which have already been severely damaged by heavy trucks. Worsening matters is the fact that the oil and natural gas severance tax was lowered by the Legislature to 1.3 percent from 6 percent effective July 1, 2013, thus reducing the payment to counties for roads maintenance.

Officials of Amite and Wilkinson counties are preparing a plan for a water district they say will enhance fracking operations while generating dollars for road and bridge maintenance. Treated sewage would be piped daily from McComb, Liberty, Gloster and other southwest Mississippi communities for drilling companies to use in breaking up shale.

Layout 1Now there is talk in that the upside of the drilling boom may have to wait — at least for a while.

Put simply, the price is not right to go full bore in the Tuscaloosa Marine Shale.

Even so, and although the Tuscaloosa formation is an “emerging” play and not fully commercialized, it has already been lucrative for some mineral rights owners, said Bernel McGehee, a certified public accountant and co-owner of the tmshorizons.com website.

Royalties run from 18.7 percent to 20 percent of the money realized from the oil extracted. Some mineral rights owners have gotten several hundred thousands of dollars, he said.

Despite challenges in production and negative impact on roads, the oil industry has been a shot in the arm for some local businesses as well.

Renee Priest opened the Loblolly Lodge in Gloster (Amite County) on Dec. 1 after a 75-day renovation. Priest says the 15-room motel, formerly the Glostonian, had been closed for five years. It is currently 50 percent booked, she said.  She plans to add modular buildings to accommodate long-term guests.

“There is a lot of oil there, but it’s an early-stage development [with a] high-cost,”  Halcon Resources Chairman and Chief Executive Floyd Wilson said in a Nov. 11 webcast the day after the Houston-based exploration company announced its third quarter financial report.

“We’ll not be devoting a significant portion of our resources to the [Tuscaloosa Marine Shale] in the near term,” Wilson said.

Encana Corp. of Calgary, Alberta, Canada in a Nov. 12 webcast suggested it might shift “to a more moderate pace of development” in the play.

Encana has not pulled out of the Tuscaloosa play, and Is “cash flush,” said Wiggins-based oil and gas consultant Charlotte Batson. Instead, is selling off its properties and out West, said Batson, who has a petroleum engineering degree from Louisiana State University.

Meantime, Goodrich Petroleum Corp. of Houston — which realized 45 percent of its oil production from Tuscaloosa Marine in the third quarter — had big plans for the play in 2015, until the price started tanking.

Goodrich announced last week that it is encouraged by cost-saving strides in drilling there and projects a capital expenditure budget for 2015 of $150 million to $200 million, 95 percent of which is allocated solely for the Tuscaloosa play.

Layout 1The company said in the news release that its hedging should have the effect of bringing its per-barrel price up to $81 to $83.

Goodrich will start 2015 with two to three rigs, concentrating in Amite and Wilkinson counties, along with Tangipahoa Parish in Louisiana, said Daniel Jenkins, director of corporate planning and investor relations.

It has had a breakthrough in its drilling technology, saving the company $1.1 million each on two wells in 2014.

McGehee said the number of rigs in operation in the first quarter will be six or seven in the Mississippi play, compared with nine at the high point in 2014. However, he said the number could drop to two or three after the first quarter.

The Tuscaloosa play is the most technologically challenging shale formation in the United States because of its rock formations, which are “mushy” compared with the hard-rock formations, consultant Batson said.

Hydraulic fracturing got under way with the Barnett Shale, near Dallas, followed by the Bakken formation in North Dakota, the Marcellus in Pennsylvania, the Eagle Ford in south Texas the Haynesville near Shreveport and later the Fayetteville Shale in Arkansas.

There is much “lateral heterogeneity,” or unpredictability, in the Tuscaloosa, she said. Also, the formation in Mississippi and Louisiana is much deeper than the others. Hydraulic fracturing is achieved horizontally after the initial vertical drilling. Shale is then fractured at strategic points by injection of fluids mixed with sand and chemicals.

Some drilling material suppliers have been told to hold off for now, Batson said, though she declined to name them.   Calls for this article to several suppliers were not returned.

Still, while the Tuscaloosa oil comes at a premium, it sells at a premium, McGehee said. Called Louisiana light sweet crude, it sells for $2 to $10 more per barrel than other benchmark oils, such as west Texas light sweet crude.

Despite the recent downturn, the “rumors of the death of shale exploration are greatly exaggerated,” said David Dismukes, director of the LSU Center for Energy Studies.

Dismukes sees the price falloff as the equivalent of a stock market correction. He expects a first-quarter turnaround, with plans for extraction following suit at some point, though he would not venture a guess as to when that might be.

Dismukes said that low oil prices are also the result of the stronger U.S. dollar,  in which oil is traded in international markets, a softer demand from countries, especially China, and a growing confidence in fracking as a method that can sustain its output.

Saudi Arabia, the largest oil producer in the world, has refused  to cut its output, but it cannot indefinitely exert its influence over the Organization of Oil Exporting Countries and hobble the United States’ production, he said.

Mississippi State University likewise is taking the long view on the future of oil and gas exploration.

It announced earlier this month that it would resume its petroleum engineering program after a hiatus of 20 years. It was discontinued in 1995 due to budget trimming.

The decision to reestablish the program next fall was more because of hydrofracking in general than the Tuscaloosa play, said Jason Keith, interim dean of the Bagley College of Engineering.

Keith said the school worked with “world-renowned experts” to set up the curriculum.


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About Jack Weatherly