High costs, dismal production and low commodity prices have created a perfect storm of sorts in the Tuscaloosa Marine Shale. The result has been significant financial losses for some of the major players active along the shale stretching across central and southeastern Louisiana and into central Mississippi, bringing drilling activity to a near standstill across the entirety of the estimated 8 million acres comprising the oil-rich TMS.
Goodrich Petroleum Corp. of Houston, which holds about 300,000 net acres, is one of the largest land holders in the shale play and has undoubtedly been hit the hardest. In January, the New York Stock Exchange suspended trading of the oil and gas producer and began the delisting process after its stock closed as low as 16 cents per share. It’s a far cry from the heady days of 2013, when oil prices hovered above $100 a barrel and Goodrich was pumping significant resources into the shale—and its stock reached highs eclipsing $27 per share.
On April 15, Goodrich filed for chapter 11 bankruptcy protection to eliminate $400 million in debt, with the company saying it expects to maintain sufficient liquidity during restructuring to continue operations as well as pay employee salaries and suppliers. Despite the discouraging financial news, Goodrich President Rob Turnham feels a moderate upturn in oil prices will eventually get things moving again. About 25 to 30 Goodrich wells are still producing in the TMS.
“We’ve been pleased with the well results and service costs have come down, so clearly the play will work again in the future,” Turnham says. “We’ll just need $50 to $60 oil before we can generate sufficient rates of return.”
He admits other factors have to be considered. “Like everyone else, we’ll have to make sure we have enough capital and the balance sheet is in good shape before we can aggressively start drilling again,” Turnham adds. “The play will work; it just needs higher oil prices before we can spend the money. But as we sit here right now, it’s all about survival in this downturn.”
There’s some disagreement as to how high oil needs to be before drilling becomes cost effective. Don Briggs, president of the Louisiana Oil and Gas Association, feels oil may need to reach as high as $70 a barrel before development becomes profitable again.
“TMS is a high-price barrel of oil,” Briggs says. “You’re going to need sustained good prices. The finding cost is higher than other places. While there is production from wells that are already in place, drilling is out of the question.”
Geology is largely responsible for the higher costs. Unstable sand and clay formations have made both drilling and production more difficult. By comparison, wells at Eagle Ford Shale in south Texas can produce up to 4,000 barrels a day, while only about 1,000 barrels a day are coming out of the TMS.
‘GOLD RUSH FEVER’
Between 2011 and 2013, excitement over the TMS development was contagious. Despite widespread knowledge that high drilling and production costs were inordinately high compared to other shale plays around the country, most developers were unconcerned at the time due to oil prices in excess of $100 a barrel.
Steve Nathanson, owner of oil and gas consultant Nathanson Global Energy, with operations in Louisiana, says Goodrich did what most other producers did in those days.
“I’ve been in the industry for 40 years, and I know how emotions will catch up to you and send you over the top,” he says. “It was fairly inexpensive land as compared to south Texas and other places. They saw that tradeoff, the initial tests were pretty good and they got excited.”
At the peak of the TMS hysteria, the Baton Rouge Area Chamber held meetings to determine how to deal with the growing “gold rush fever” caused by the shale play. “There was a whole lot of churn, and a whole lot of money and expectations, long before any wells had been proven out there,” Nathanson says.
Unfortunately, the costs became more burdensome when oil prices nosedived in 2014. As with other shale plays, hydraulic fracking—the high-pressure injection of “fracking fluid” to create cracks in the deep-rock formations—was widely used in the TMS, but it proved costlier.
“The problem is that the shale is almost mushy, so it didn’t frack,” Briggs says. “Getting the right combination of being able to frack the wells and have them hold up is difficult. Shale is like slate, and some is softer than others.”
The depth of the shale adds additional expense. The play lies about 12,000 feet deep, as opposed to much shallower plays such as the Eagle Ford Shale in south Texas—where drilling can be successful at just a few thousand feet—and the Haynesville Shale in northwest Louisiana. Furthermore, additional casing is necessary to compensate for the over-pressurization of the oil in the TMS.
Still, despite the added costs, developers in the region say the tradeoff is hard to ignore. “The TMS has a much higher oil percentage than other shale plays,” says Turnham, adding the shale’s oil percentage is about 95%. “So it has its inherent advantages.” Another upside—the cost of drilling rigs, fracking, pipe and associated construction has come down in recent months.
“Anytime you go into a new play you’re going to spend more money, because it takes some time to figure out,” Turnham adds. “The last well we drilled was probably 35 percent lower in cost than when we first started drilling the wells. You just get better at it the more you do. Once you go to pad drilling, where you’re putting multiple wells off an existing pad, that’s when you drag your costs down even further.”