Rural Louisiana and Mississippi brace for accelerated Tuscaloosa drilling

Rural Louisiana and Mississippi brace for accelerated Tuscaloosa drilling
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(This article was published in "The Louisiana Weekly" in the Dec. 9, 2013 edition.)

North of New Orleans, ambitious drilling plans in the Tuscaloosa Marine Shale or TMS deposit--estimated to hold 7 billion barrels of recoverable oil--could be a windfall for some residents. But the search for crude has already harmed rural roads and left landowners worried about mineral rights and future drinking water. What's more, jobs are expected to go to oil workers from outside the shale play.

Extending east through central Louisiana and encompassing 17 parishes, the TMS includes the Florida Parishes in the state's "foot of the boot" and three nearby Mississippi counties. Drilling has gotten as close to New Orleans as Tangipahoa Parish, and St. Tammany--while untapped to date--is within the deposit.

"Roads are already torn up in the northern part of our parish, where the drilling is," St. Helena Parish administrator Virginia Bell said last week. "Trucks are bringing water in for fracking and other trucks are taking oil away. Our police jury asked an oil company to help pay for blacktopping but it didn't get a firm commitment from them yet."

Drillers fracture the Tuscaloosa formation by forcing in water, mixed with sand or ceramic material and chemicals to crack the shale. The cracks release oil when they open.

Last week, Baton Rouge-based minerals consultant Dan Collins said too many trucks on rural roads are the top environmental concern at the moment. "The Florida Parishes have little industry and aren't suitable for crops or grazing livestock," he said. "It's mostly pine trees and roads without traffic lights." Groundwater isn't a major concern for now, Collins said. "Oil deposits in the TMS are deep and well below the water table, making groundwater less susceptible to contamination than in shallower plays," he said.

But retired Lt. General Russel Honore in Baton Rouge said wastewater from fracking is often injected underground in nearby wells and can contaminate drinking water and the food chain. "It might seem safely stored away but could affect water supplies of future generations," he warned. Leaching and seismic activity are among the potential threats to stored wastewater. Honore is the leader of the Green Army, a group of nonprofits and others formed in Louisiana in September to raise environmental awareness.

In the early stages of the Tuscaloosa play, roads will be particularly at risk until infrastructure is built to distribute oil, possibly through pipelines, David Dismukes, professor and associate executive director of the Center for Energy Studies at Louisiana State University, said last week. Planning between government and companies is needed. "You want to keep the golden goose but you don't want it tearing up the barnyard," he said.

Bell said St. Helena Parish officials have visited the Haynesville shale deposit in northwestern Louisiana to learn about drilling-related issues there.

Activity in the TMS is gathering steam. "In Louisiana, 22 wells have been drilled to date, 20 have been brought onto production, with one currently being drilled and another recently permitted," Patrick Courreges, spokesman for the Louisiana Dept. of Natural Resources, said last week. "These last two are Goodrich projects." Houston-based Goodrich Petroleum controls the largest share of acreage in the TMS.

Out-of-state firms stated their intentions this summer and fall. "If we're to believe what we've heard and read from the various companies, $500 million to $800 million in drilling expenditures are planned for the TMS in 2014," Collins said. "That's big money."

Denver-based Encana Oil & Gas USA, Inc. operates 15 wells in the TMS now, including four in St. Helena Parish, one is in East Feliciana Parish and ten in nearby counties in Mississippi. "Our 2014 plans call for $200 million to $300 million in expenditures in the TMS, and we'll run one to three drilling rigs there," Encana spokesman Doug Hock said last week. Drilling by parish and county will depend on rig availability and other factors, he said.

Goodrich Petroleum plans to spend $300 million in the TMS next year, versus $50 million this year, and could run five rigs by late 2014. This year, Goodrich bought Devon Energy Corp.'s two-thirds share of 277,000 leased acreage and seven wells in the TMS.

EOG Resources in Tyler, Texas operates Tuscaloosa wells. "And the entry of two new players, Halcon and Comstock, is an interesting development," Collins said. Houston-based Halcon Resources Corp. has leased 75,000 acres in Louisiana, and Comstock Resources Inc. in Frisco, Texas controls 53,000 acres in Mississippi and Louisiana. Last summer, Sanchez Energy Corp. in Houston acquired rights to 40,000 acres in Mississippi and plans to start drilling in 2014.

The depth of TMS oil, which is 10,000 to 15,000 feet down, makes it expensive to extract. Encana wants to reduce the price tag for its wells there. "The cost to drill and complete our last three TMS wells and bring them onto production was roughly $16 million each," Hock said. "But once we start drilling multiple wells per pad, we expect significant cost savings." A pad is a site of several acres, containing a number of wells. "Long term, the goal is for our TMS well costs to come in at $12.8 million," Hock said. "In comparison, our Haynesville wells run in the $14 million range." In Haynesville, Encana operates about 275 wells.

Interest in Tuscaloosa shale is driven by crude oil prices, which have hovered on both sides of $100 a barrel for over two years. Meanwhile, values for natural gas, the product of Haynesville wells, have languished because of extensive shale drilling for that product. The natural gas market may have some upward potential this winter because of heating needs, Dismukes said.

To what extent are residents benefiting from the TMS? Bell said a number of people in northern St. Helena Parish have been disappointed by the money they've been offered. "Mostly, they're dealing with middlemen rather than the oil companies, and they feel the offers are low," she said. But those who need the money are taking it. Meanwhile, attorneys have been contacting residents about their rights. "We don't have a lot of information at our disposal and aren't that internet proficient here," Bell said. "We need to have more community meetings about the impacts of drilling."

It's difficult to know what mineral rights should be. "Current offers range from $175 to $250 per acre, along with one fifth of the royalty when the lease becomes productive and as long as the well produces and the lease stays in effect," Collins said. In the last three years, an estimated 1.7 million acres have been leased in the TMS at an average $200 per acre, he said. Some landowners receive sizable, monthly checks from Tuscaloosa oil operators now.

Collins noted that Comstock paid over $1,000 an acre for rights in its November agreement to lease 53,000 net acres for $54.5 million in St. Helena and East Feliciana Parishes and Wilkinson and Amite Counties in Mississippi. The most ever paid in Haynesville was $30,000 an acre, along with royalties, in 2008.

As for jobs, Bell said a few residents of northern St. Helena have been hired as security guards for wells, and Northshore Technical Community College in Greensburg is offering courses for shale-industry training.

Louisiana oil-and-gas workers, who are mostly clustered in the southern part of the state, will benefit from the TMS deposit to their north, Dismukes said. "It's better for them than traveling to Pennsylvania for two weeks a month to work on shale sites," he said. "I've been flying to the East Coast lately and I meet these workers on planes. I hear about their stressful schedules."

Wilkinson and Amite Counties in Mississippi have been the play's core to date. Mississippi's climate for frackers is better than Louisiana's. Mississippi reduced its severance tax on hydrocarbons from horizontal wells to 1.3 percent in July from 6 percent. That's for the first 30 months of production or until the well pays out. A severance tax is a levy on the removal of nonrenewable resources, including oil and natural gas. Louisiana has no severance tax on sales of oil produced in the first two years of drilling but the state's tax jumps to 12 percent after two years.

Mississippi has "forced pooling" if a landowner doesn't want to sign a lease. A Tuscaloosa operator leasing a third of the mineral rights in a Mississippi area can "force-integrate" holdouts, and then must give them the same terms as the best lease that was signed with the first third of landholders.

Also in Mississippi, the State Oil and Gas Board allows very large drilling units, exceeding Louisiana's units of 640 to 1,520 acres. With bigger units, companies can hold onto their leases but drill fewer wells.

Landowners aren't particularly fond of Mississippi's regulations. "Landowners don't like forced pooling or the larger units of 1,900 plus acres seen there," Collins said. "In the larger units, the pie is divided between more mineral owners." Units in Louisiana average 900 to1,000 acres. "But since Mississippi has moved to bigger units, Louisiana may follow eventually," he said.

Louisiana's severance tax may be higher than Mississippi's but it isn't fully collected, Honore said. "Companies assess their production, and some of them are paying fewer taxes than they owe," he said. "Key departments within state government are kept understaffed so that the oil-and-gas companies are able to do this. Louisiana's got the best government that oil and gas can buy."

The state may be losing out on millions of dollars of in revenue from oil and gas severance taxes under its existing collection program, according to Louisiana Legislative Auditor Daryl Purpera's office in early December.

Honore said policies in Louisiana and Mississippi are more favorable for frackers than in Texas, North Dakota, Pennsylvania and other states. And he said diligent planning by Louisiana parishes, in matters such as disposal of wastewater from fracking, can be overridden by the state.

One area where parishes do have some control is roads. Courreges said the Dept. of Natural Resources' regulatory authority doesn't extend to infrastructure maintenance beyond well sites. "But parishes can work with companies to mitigate increased wear and tear through agreements or through parish ordinances," he said.

Oil from the eastern swathe of the TMS is expected to move to the St. James crude terminal, located on the Mississippi River between Baton Rouge and New Orleans, and to refineries along that stretch. end

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