Black gold, red ink: Oil’s spiral drowns the Tuscaloosa Marine Shale and a hoped-for economic boom
BY TED GRIGGS theadvocate.com May 28, 2016; 9:15 p.m.
Black gold has turned to red ink for major players in the once promising Tuscaloosa Marine Shale.
From 2011 to early 2014, with oil prices topping $100 a barrel, the Tuscaloosa Marine Shale might as well have been abbreviated TM$.
Dozens of landmen swept through East and West Feliciana, St. Helena and Tangipahoa parishes, leasing hundreds of thousands of acres for energy companies lured by an estimated 9 billion barrels of crude stretching through the state’s midsection.
Energy industry experts said the Tuscaloosa could dwarf the Haynesville Shale, a natural gas formation that dumped $22 billion into north Louisiana’s economy in 2008 and 2009.
By 2013, state and local officials worried it might already be too late to develop enough workers and housing to take full advantage of the coming boom.
Then the Saudis, with their market share threatened by fellow producers, opened the oil spigot a notch. Prices cratered, and $100 a barrel fell to less than half that by 2015. The Tuscaloosa — with deep and expensive wells — was the first casualty.
“It was a good run, but I can tell you it’s as dead as can be,” said landman Dan S. Collins.
Several oil companies that targeted the shale have filed for bankruptcy protection; drilling in the formation has been abandoned, with lease renewals uncertain.
Collins assembled a lease package of about 50,000 acres, anchored by properties owned by the Harvey Jackson family, of Jackson, eventually selling the leases to Encana. Those leases are coming up for renewal, but Collins said he has no idea whether they will be renewed.
A couple of years ago, Collins said, the Tuscaloosa was one of the hottest topics at the NAPE Summit in Houston, the biggest oil and gas dealmaking conference in North America. At February’s summit, no one had anything about the Tuscaloosa on their boards.
Tom Whitehead, a Natchitoches resident, leased most of his property in the Clinton area to Penn Virginia Corp. in late 2014. Nothing was ever done with the lease, and it appears unlikely that anything will. Earlier this month, Penn Virginia filed for bankruptcy reorganization, part of an effort to renegotiate the terms of its $1.2 billion debt.
Penn Virginia is not alone. In April, Goodrich Petroleum, the biggest player remaining in the Tuscaloosa with more than 300,000 acres under lease in 2015, filed a bankruptcy protection plan seeking to eliminate $400 million in debt.
Halcon Resources, which also has more than 300,000 acres under lease, has announced a bankruptcy restructuring to eliminate $1.8 billion in debt. It’s been more than a year since Halcon included the Tuscaloosa in its financial reports. In a May 2015 conference call with stock analysts and investors, Halcon CEO Floyd Wilson said the company doesn’t spend much time talking about the shale.
Comstock Resources, which has 81,500 acres leased in the formation, drilled one well in 2014 but nothing since then.
Sanchez Energy Corp. has 62,000 acres under lease but isn’t drilling.
Five years after the rush began, only 27 wells are producing in Louisiana’s portion of the Tuscaloosa, according to the state Department of Natural Resources. Seven wells have been drilled but not fracked to produce oil.
Oil production from 2011-15 totaled 1 million barrels. By contrast, the more developed and prolific Eagle Ford Shale in Texas averaged more than that amount daily.
To get an idea of how far and how fast the Tuscaloosa’s prospects have fallen, one need look only to West Feliciana Parish.
By late 2013, most of the available property in the parish already had been leased. One of newly elected parish President Kevin Couhig’s early priorities was working out road-use agreements to make drillers cover the repairs from an anticipated flood of 18-wheelers. Fracking a single well requires 600 to 1,000 one-way trips to haul in tons of sand and millions of gallons of water and chemicals used to crack the oil formation.
Asked about the Tuscaloosa recently, Couhig responded with a joke: “The what? I’m not sure what that is.”
The shale is not on the parish’s list of priorities right now, given the price of oil, he said. Oil industry executives say it will take at least $75-a-barrel oil for the Tuscaloosa to be economical, and that’s not likely to happen anytime soon. The price, having bottomed at less than $30, is hovering around $50.
The road-use agreements? Never put in place, Couhig said. The plans to train residents for oilfield jobs or to develop housing barely made it to the talking stage.
There are still those who believe the Tuscaloosa isn’t dead. Charlotte Batson, owner of energy consulting firm Batson & Co., said some companies are interested in the formation.
New Orleans-based Helis Oil & Gas plans to drill a well in St. Tammany Parish, although some legal challenges may remain. It’s possible the shale could see new activity within “the foreseeable future,” Batson said.
Most people, landowners included, think nothing is happening if there are no rigs drilling. But that isn’t always the case, Batson said. Some top leases — leases that become effective when the existing leases expire — have been signed.
“I think there’s actually a lot of things happening right now. I think we just need to let it play out the next two or three months to see what happens,” Batson said.
What will it take for energy companies to again target the Tuscaloosa?
“The short answer is price. Right before the crash, most publicly available estimates for cost of developing the Tuscaloosa were in the $75 to $85, $90 a barrel range,” said David Dismukes, executive director of the LSU Center for Energy Studies.
Overall production costs have dropped by $10 to $15 per barrel just because service companies are now willing to take less money, Dismukes said. But even if drillers moved back to the Tuscaloosa, it still would be the most expensive formation in the country.
“Prices don’t have to get up to $100 a barrel to get that play going again, but they’ll have to get up substantially from where they are,” said Kirk Barrell, president of Amelia Resources in The Woodlands, Texas. The price will have to be at least $60 for a rig to get working.
“I think to get any consistent activity, we need to see $70 a barrel,” he said. “A lot of people are saying $50 for most plays in the country, but the TMS is a little more expensive, and it’s been a little more mechanically challenged.”
Higher prices are just part of the picture.
Drilling companies will have to believe those prices are stable; so will investors and lenders. “There’s probably some money out there waiting on the sideline to take advantage of that opportunity, to pick up an emerging play. But we don’t know what that is right now,” Dismukes said.
The hedge funds that have the resources to pick up leases in the shale will have to be comfortable about energy’s prospects and the ability to turn a profit on Tuscaloosa wells. Even then, equity funds will be more likely to look at low-cost formations, like the Permian and Eagle Ford in Texas. Banks also will need a much higher comfort level before they start making loans again to drillers.
There are other factors. The oil and gas industry must still work through the bankruptcies of drillers and service companies. Dozens of firms nationwide have filed for bankruptcy, and more are probably coming, Dismukes said.
Although oil prices have recovered recently, the fundamentals supporting the increase aren’t strong. For example, if prices stick at around $50 a barrel, wells that have been drilled but not completed easily could be brought into production, and that production will drag down prices again.
“That’s why I think it will be some time coming,” Dismukes said.