Replies to This Discussion

Permalink Reply by Skip Peel - Mineral Consultant on December 28, 2010 at 13:33

IMO, this is an exploration, not a production well.  It is not intended to be economic.  It is intended to provide science in support of the prospective value of the MNLU lease block.  The science generated will determine the nature and extent of that potential.  And the value will remain largely undetermined until future production wells are drilled and completed in those zones.  MNLU needs to get a Core Lab analysis that will be sufficient to attract one or more JV partners and drive additional investment interest.  In a 22,000' vertical hole there is likely to be shows in numerous zones.  I doubt that MNLU's business model is to operate.  I suspect it is to identify prospects by research, assemble a corresponding lease block and then drill a "discovery" well.  IMO, it's not a bad strategy and was developed from the MNLU experience with the Haynesville Shale.  The real test of the success of the Burkley-Phillips #1 will not be if individual investors buy in, it will be if the industry buys in.  Those following the Buena Vista prospect may need to be patient.

Permalink Reply by Buck Marshall on December 28, 2010 at 16:57

Hi Skip,  I'm reposting here, as I ought not to have posted out of sequence.

A JV partner is sure likely, but here below is what I've been told as a Lessor:

 

The projections I've heard on production are 20 - 25 million, with 20K mcf a day being the lower end of the range.  Thats 600K mcf a month.  At $4/mcf that comes to 2.4 million a month.  After paying landowner royalties, they'd have roughly 2 million a month.  Thats 24 million a year off of this one well. 

 

Whether or not 20,000 PSI is a reality and 20K mcf/day is a real production potential remains to be seen.  But Chevron logs showed that PSI and higher. 

 

I don't see how 24 million a year isn't economically viable.  The cost of the well is close to 14 million, not 8.5.  So the company has to spend 14 million to get a well worth 24 million a year.    I'm comfortable with that cost/benefit ratio.  I expect Guggenheim is comfortable with it too.

 

********

I can see the scenario you describe is essentially what they did in DeSoto Parish.  But what I'm not sure of is why you'd say they wouldn't have the intention to produce on this well.  If it doesn't work, for whatever reason, then what you describe sounds like a fall back position.  But it sure seems viable to me, and Guggenheim is already involved, so why wouldn't they buy in for a larger interest than the 8% they have now?

 

And patience.  How much do you think we need?  Six months?  I'm told there's only additional capacity of another 5K mcfd in the existing pipeline.  So if they have an IP of 20K mcfd, they can only get 5K through the pipe.  The plan I heard was to sell the 5K mcfd for the value of that production, while they work on expanding the existing capacity.

 

This is all just what I've heard, but it sure seems logical to me.  I appreciate your insights.

Permalink Reply by Skip Peel - Mineral Consultant on December 29, 2010 at 2:33

The Initial Production (IP) on the #1 well doesn't make or break the Buena Vista prospect.  It would be good for MNLU to get the completion design substantially correct the first attempt but it's not required or likely.  Every shale play has it's own eccentricities when it comes to the frac design.  And all have improved incrementally as each new well is drilled.   Once Core Labs has completed all its tests and the results are available, a completion design will be formulated.  The actual frac operation will likely take 2 to 6 days depending on the number of stages.  I am interpreting Atencio's comments regarding 20,000' as an attempt to complete in the shale.  I did not mean to give the impression that the well was not meant to produce, only that it was not designed for maximum production.  Sorry for being unclear.  IMO, the well was designed to safely reach Total Depth and generate the science required to evaluate the pay zones intersected and bolster the value of the entire lease block.

Permalink Reply by Buck Marshall on December 29, 2010 at 5:40

This makes sense, and the point is well taken that there are many, many things that can go wrong.  Some time back there was an amendment on the permit to 22,200 feet, but they've stopped at 22,000 feet.  It may be that difference does mean they want to complete in the shale.  If the production potential is less than what they've promoted, thats when the economics of these deep wells comes into question.  The claim is that this well is potentially much more profitable than NW LA wells that are cheaper to drill, but also have much lower flow rates.  So we'll see.  There's no sign of high water before March.  Thanks.

Permalink Reply by Les Bamburg on December 28, 2010 at 17:59

Skip, I would not be surprised to see this well frac'ed and produced to determine some initial flow capability.  Core and log data really needs to be supplemented with some flow data to evaluate the prospectivity of this play.

Permalink Reply by Skip Peel - Mineral Consultant on December 29, 2010 at 2:36

Agreed, see above.

Permalink Reply by macrobend on December 29, 2010 at 5:25

Ray, you are very right...I wish this play were liquid-rich. However, today's context is totally different from the early 80's when Cheron drilled here. Their intention was not to look for nat gas and they did not have the technology to drill safely to the depth Mainland has drilled and complete the well. Further, nobody would even imagine the revolution shale gas those days - we are almost floating over shale gas today. I have confidence in management and I am pretty sure they have seen something in Chevron drilling logs that made them belive that this play could be highly rewarding. Also, Guggenheim has done their DD before invloving themeselves in this venture. IMO, this is a high-risk, high-reward play.

Permalink Reply by Bob Nies on December 29, 2010 at 9:31

How do we know they have stopped drilling at 22,000'? I have not seen any definitive information on that.....

It would be incredible to me to believe that they would spend the kind of money thus far and not drill through the whole of the Haynesville and not test at least the top Smackover formation, which could have more "present value" than the Haynesville.

 

If Mainland (per Skip), is not intending to be a producing company, but rather a resource play or as Skip said "I doubt that MNLU's business model is to operate.  I suspect it is to identify prospects by research, assemble a corresponding lease block and then drill a "discovery" well, then you would think that they would drill down to the Luanne Salt and test the Norphlet along the way and set up the whole structural play on this one exploratory well and be done with it as a prospect worth x-amount based on independent analysis of each of the prospective zones.

So whatever the Tuscalousa, Hoosten, Cotton Valley, Haynesville, Smackover, Norphlet zones (or any other prospective zones) estimate of reserves by whom ever is contracted for such, would determine the present and future value of this play.... Skip is 100% correct that patience and time will be required to find a price/value on MNLU and AEXP shares if this play is not set up as a production company operation.

I do see drill stem tests of various zones and fracking of the Hosteen/Cotton Valley, Haynesville with CAOF's to see what the production potential of this well may be, as critical to finding valuation of reserves and a determination of possible stock value. This however is going to take time, along with the fact that this structure is gas prone and probably more dry than wet indicates lower valuation at least until we see a recovery in natural gas prices... This again will take time.... so patience will be necessary for some time.

 

Some time ago I gave some ideas on stock values which many felt were too conservative.... I stick by those "possible" values today, because the time value of future production is greatly discounted today.

Permalink Reply by Skip Peel - Mineral Consultant on December 29, 2010 at 15:12

Bob, IMO there is considerable risk in MNLU drilling deeper.  In fact the company has risked a lot to successfully reach 22,000', or whatever depth is currently accurate.  A successful completion along the lines that several members expect would not only return the initial investment but stimulate a major increase in the stock price.  IMO, neither of those very optimistic results would provide the capex required to commence full scale development even if that only entails drilling to HBP.  If the shale, whatever name it goes by, is productive then a decision will be made to expand the lease block and drill to define the extent of the play.  And an initially successful completion will still be scrutinized over time to determine a type curve and ensure that there are no permeability problems like those experienced in the Tuscaloosa Marine Shale.  Except for a total failure we will likely be discussing this well for much of 2011.

Permalink Reply by Bob Nies on December 29, 2010 at 16:05

Appreciate your points Skip... there is much we do not know on this well. As mentioned this might not even be the Haynesville Shale, but a new discovery shale!

 

To drill deeper (assumes that its safe or engineered to handle the BHP and temperature) is MNLU's decision.... to have a complete picture on this well is going to take some time and deep into 2011 is probable... we likely will see a spring melt from the mid-west to contend with this year in March and April.

I'm encouraged about the cased Hosston/Cotton Valley intervals and the target shale section remains to be seen.

Of course, its possible they could case the shale section and feel comfortable from an engineering point of view of drilling deeper. If thats an option I think we will soon know.

Permalink Reply by jeff boler on December 30, 2010 at 2:54

The major Oil & Gas Companies believe that this Play (the Haynesville Shale) extends from North Louisiana to Cuba. It is well documented across both LA, MS & Southern AL. It has been drilled and logged as far south as Mississippi Canyon 392 and Desoto Canyon 353. I have posted petrophysical data proving the Hynesville's Presence @ MC-392. Furthermore, I have never read a log or drilled a foot of Haynesville Shale that didn't yield noteworthy hydrocarbon shows of some sort. 

However, the Anticline associated with the Buena Vista Lease is vastly more limited in scope. If Shale Gas is still their focus, then I see little benefit from the anticline other than perhaps providing increased formation thickness and perhaps less depth to the target. I am still holding faith that one of the 75 other shows has productive potential and then the anticline will definitely help our cause. If the Smackover has permeability, we are talking about significant reserves.

Last I heard the Mud Weight was 18.2 lb/gal at a depth around 20,700 ft [MD/TVD]. Assuming that MNLU did stop at exactly 22,000 ft, then the Bottom-Hole-Pressure can be no less than 20820.8 psi (under static conditions). Though I would think that it is safe to say that the Mud Weight was increased between 20,700 & 22,000 ft, and it was certainly increased prior to tripping out of the hole. So, 20820.8 psi is the least possible bottom-hole-pressure at 22,000 ft [TVD].

Any number of things can go wrong with a frac-job, I agree. But this day and age, with as much as core laboratories is charging, they can get pretty darn specific on fracking guidlines. It always helps when 20820.8 psi is pushing the hydrocarbons into the fracs and from the fracs to the well-bore. This formation has too many Carbonates or Limestone to suffer the same fate as the Tuscaloosa Marine Shale - That's my opinion anyway, but there are other hurdles, with regards to fracking, that have yet to be discovered.

I would have thought that this Haynesville would have been much tighter than the Haynesville of North LA, based on depth alone. However the recorded drill gas (or background gas) was unrealistically high (2500 units) while drilling ahead with an ROP of 30-40 ft/hr. The highest drill gas I ever recorded in the Haynesville Shale of North LA was 1700 units, but this was recorded while averaging 170 ft/hr drilling Horizontally on the Red River Bend et al 25-1H. Many factors influence the rate that gas breaks out at the shakers, but if these numbers are taken at face value it indicates that the Shale of the Berkley Phillips could have recieved its initial charge from the Smackover while still you in geological terms. With an increased pore pressure, the Haynesville (at least in this area) would have fought compaction, and ultimately retained more porosity than one would expect for a shale at such a depth. I believe that a geologist studying the well would either throw these drill gas numbers out because there is too much uncertainty, or arrive at this conclusion if he thought the numbers had value.

Permalink Reply by Skip Peel - Mineral Consultant on December 30, 2010 at 4:08

jeff, I have several maps of the Haynesville formation onshore running from coastal Mississippi in a convex arc across N. LA. and terminating in central TX.  They do not delineate where the formation is shale and where it is sand however.  We do have hundreds of Haynesville Sand wells in N. LA.  and many hundreds more to deeper formations such as the Gray Sand that have tested the Haynesville.  They are still being permitted and drilled today.  A number of those wells are by companies that are capable of recognizing and developing HA Shale and are doing so in other fields but not where they are drilling vertical sand wells. I would very much like to see the map you refer to which depicts where the formation across its full extent is shale.

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