It’s not a household name yet—and it’s a bit of a mouthful—but the 2.7 million-acre Tuscaloosa Marine Shale (TMS) in Southeast Louisiana and Southwest Mississippi is shaping up to be another prime play to add to the US unconventional roster, even though it’s still early days.
We still don’t know what the potential is here, so uncertainty is high, but E&P companies are betting on some big finds, estimating that we’re looking at a “Texas-size” pay-out.
They might be right. After all, the TMS is close to the Gulf of Mexico and has geological similarities to Eagle Ford in south Texas. Geologists think there could be a continuous oil and gas shale that runs all the way from Eagle Ford to the TMS, and that’s what all the drilling is banking on.
The TMS is a sedimentary rock formation that consist of organic-rich fine-grained sediments deposited in a marine environment that existed across the Gulf Coast region approximately 90 million years ago. The TMS includes the Eagle Ford Shale, being similar in geological age.
For now all we’ve got to go on is some dated, pre-fracking surveys that estimate the TMS could contain 7 billion bbl of recoverable oil from shale that is from 500-800 feet thick and at a depth range of 11,000-15,000 feet, extending for 3.8 million acres across both states. It was only about 3 years ago that the first horizontal wells were drilled, so we still don’t know what’s out there--really.
Industry estimates vary, but let’s wait for more drilling before we speculate on how big this could actually be (we’ll be following Tuscaloosa closely this summer and fall to that end).
Drilling has been slower than we would like, but this is largely because of the uncertainty and the long lease lives that allow explorers to take it slowly and absorb the risk a bit. And the risk is high because drilling is comparatively expensive: On average, companies are paying between $11 and $20 million to drill a single well, while the cost is about $10 million in Bakken.
Let’s break it down by state, because there are some legislative differences that will shape competition here.
The Mississippi TMS
The sweet spots here are in three counties: Amite, Wilkinson and Pike, and the state is hoping to out-compete neighboring Louisiana in exploration by offering more incentives.
Mississippi state officials have extended for five more years a lucrative tax break to lure E&P companies to drill expensive, 10,000-feet-deep horizontal wells.
Signed into law in April, the new scheme reduces the severance tax on hydrocarbons produced from horizontal wells drilled to 1.3% from 6 %, beginning on 1 July and ending on 30 June 2018. The tax reduction on output applies for 30 months or until the payout of the well. The new law also reduces the sales tax paid on electricity for oil and gas produced via carbon dioxide-enhanced oil recovery to 1.5%.
We’ve got our eye on Denbury Resources as a key beneficiary of Mississippi’s new incentive program. Denbury has an extensive integrated CO2 enhanced oil recovery (EOR) program in Mississippi, using CO2 from Jackson Dome, which is then injected into oil-producing fields in Mississippi (and other states). Bottom line: Denbury will definitely benefit nicely from Mississippi’s reduced sales tax on electricity for oil and gas produced via CO2 EOR.
The Louisiana TMS
Mississippi has some stiff competition, and the tax breaks are necessary because its neighbor, Louisiana, is the bigger play here. (Plus Louisiana’s also got the Haynesville Shale and the Brown Dense, but more on those in the coming weeks).
Two wells are known to have produced from the marine shale in southeastern Louisiana, with one having produced over 20,000 barrels of oil in the last 19 years, so we’re not starting exploration here from scratch so to speak.
Louisiana’s severance tax on horizontally drilled wells takes effect once a company recoups its cost of drilling or for a period of 24 months after production begins, whichever comes first. After this, the state charges a 12.5% standard levy on oil and gas extractions.
Companies have bought up more than 1 million acres so far in Louisiana’s TMS.
The Infrastructure Advantage
While Mississippi and Louisiana are playing a close game for tax-break competitiveness, they also both share an advantage over some other up-and-coming shale plays: infrastructure. The states both have a hearty supply-chain infrastructure already in place that will position them nicely if they do strike oil and gas and need to get more product to market.
Midstream, upstream and downstream, both states have extensive infrastructure systems that include pipelines, refineries and skilled labor. Southwest Mississippi, for example, enjoys the strategic positioning of being at the confluence of one of the US’ largest pipeline networks, so it has access to everything from petrochemical facilities and refineries, to export terminals and railroads—not to mention the Port of Natchez on the Mississippi River.
But here’s what we REALLY like: The St. James terminal on the Gulf Coast of Louisiana. There was a premium to WTI of $10-$20 in 2012 on crude oil sold to the St. James terminal because transportation costs to getting it to this terminal are higher, so it’s very competitive against higher priced Brent crude that St. James has to import. There could be a nice window of opportunity here as long as this premium continues, but once we start seeing more crude from Eagle Ford and the TMS go through St. James, that premium could get lower.
Who’s Risking on the TMS?
• Encana is the largest acreage holder in the Mississippi TMS, with 290,000 acres
• It’s paying about $17 million per horizontal well, but those costs are declining steadily and it’s targeting $15 million for its new wells
• Encana says it will save up to $800,000 on each well that goes into operation as of 1 July due to the Mississippi tax break
• It’s got 6 horizontal wells already in the TMS and 2 more planned for this quarter (but we expect it will delay those until July to qualify them for the tax break)
Encana’s results in Mississippi’s Amite County have been quite promising, with one of its wells (Anderson 18H-1) producing Bakken volumes during its first days of production, for instance.
Goodrich’s balance sheet is just “ok”. The company’s financial and operational performance so far this year has been negatively impacted by offset well completion that has led to a reduction in production volumes in its Eagle Ford Shale and Haynesville Shale leases, where they are now working to completed gas wells drilled earlier.
In late December 2012, Goodrich acquired 135,000 net acres in the TMIS in Louisiana and Mississippi. It’s paying about $13 million per well, with 4 wells in the completion phase a second operated well in drilling.
Looking Ahead …
Right now, TMS is an “unproven unconventional seven billion barrel oil resource”—but there’s a lot of promise here. We wouldn’t read too much into Oklahoma-based Devon’s decision to put its TMS acreage up for sale earlier this year. Devon is already sinking a lot into the more certain Cline, and seems intent on focusing its efforts (and money) on the Permian Basin. In January, Devon announced it was putting the bulk of its Louisiana TMS acreage up for sale—to wit: 297,000 acres. This after it already spent $50 million on leases and drilled eight wells, including 6 horizontal wells producing around 600 barrels of oil per day. But these wells only cover a small portion of this vast acreage. But keep this in mind about Devon: Its net debt to capital ratio is an impressive 22%, so this is a solid investment regardless of the TMS.
So what’s the bottom line? A high-risk, relatively unproven, very expensive play, but we like the tax breaks and the infrastructure—particularly the St. James potential—and we think the pay-out will be worth it.