UPPER TEXAS COAST

Each spring and fall, birders from all over North America come to the Texas coast, drawn by The Great Texas Coastal Birding Trail that links 310 premier bird-watching sites. In Matagorda County alone, about midway between Houston and Corpus Christi, 230 species have been sighted, ranking the area first in the nation during the annual Christmas Day Bird Count. This coast is likewise a prime spot for a flock of producers who are searching for natural gas. Active players include large E&P companies such as Anadarko Petroleum, El Paso, EOG Resources and Kerr-McGee, as well as many smaller ones such as Cimarex, KCS Energy, Brigham Exploration Co., Carrizo Oil & Gas and a host of private firms. From the Matagorda Bay area, onshore and offshore, to the city limits of Houston, across Galveston Bay and on to the Louisiana border, this area contains Texas Railroad Commission districts 2 and 3. Throughout the region, operators are reworking wells in the old fields and drilling to deeper zones, in some cases, below 18,000 feet. Targets include the Frio, Wilcox, Vicksburg, Yegua, Cook Mountain and deeper Woodbine. The onshore Texas coast represents about 15% of daily U.S. gas supply, or about 7 billion cubic feet per day, according to a recent report from Simmons & Co. International. "We believe the majority of the potential left in the region lies at depths greater than 12,000 feet," the firm reports. Although the majors still own about a third of the production, they are drilling far less on their acreage than ever before, while independents of all sizes have stepped up their activity since 2001, Simmons says. Excellent gas prices have encouraged drilling in the riskier deeper zones prone to high pressures, high temperatures and complex geology that test the equipment-stuck pipe can be a problem, for example. Operators rely on 3-D seismic amplitudes or "bright spots" to identify their prospects. Many of the fields can be adequately drained by only one or two wells, so pinpointing locations with precision is a must. Success rates in the region are high, but the depletion rate is fast. Then too, rig dayrates since last summer have risen by about 50% and there is a time lag as companies wait on rig availability. Luckily, a 20-acre seismic amplitude that was not economic when gas was $3 per thousand cubic feet makes sense now if gas remains at more than $4 or $5. "The real key here is newer, better-quality seismic and better processing of the old data, which means we're able to push deeper and further basin-ward. Combine that with higher commodity prices for the product and it makes for some good plays," says Greg Jewell, exploration manager for the southern division, Kerr-McGee Oil & Gas Onshore LLC, based in Houston. Some of the latest buzz surrounds the deeper Woodbine in Polk County north of Houston, in or near the Double A Wells Field, where the gas zone drops off from a standard 12,000 feet, drilled by several independents, to more challenging depths below 18,000 feet. Anadarko Petroleum drilled one deep well in the county and sidetracked it with a second one late last year to zones up to 21,200 feet. A spokesman says geologists are still evaluating test results and that it is too early to say more. Word on the street is that although the potential could be big, Anadarko spent upwards of $20 million and encountered mechanical problems downhole. That's due to the ultra-high temperatures and pressures found at 20,000 feet. Temperatures can be up to 340 degrees Fahrenheit and the drilling mud has to be very heavy, up to 17 pounds per gallon. "Many companies are trying to figure out how to produce the deeper Woodbine below 18,000 feet," says one observer. "The industry hasn't figured it out yet. People sidetrack, they frac, they use various chemicals, all with poor or mixed results. Almost nobody has had a commercial discovery with these wells. It's just fighting Mother Nature." Liberty County In Liberty County, also northeast of Houston, operators are successfully chasing the Yegua between 9,000 and 12,000 feet and the Cook Mountain zone from 12,000 to 14,000 feet. Recently the Westport/KMG #4 Catherine Henderson flowed 10.5 million cubic feet equivalent (MMcfe) a day from Yegua at around 12,000 feet. The June 2004 merger between Kerr-McGee and Westport Resources brought balance to Kerr-McGee's drilling program in the form of more onshore gas plays, especially in this part of Texas. It turns out the two companies were pursuing many of the same plays along the Upper Texas Coast, according to Grant Henderson, vice president of the southern division. He managed the same general area for Westport, and before that, for Belco Oil & Gas. "We each had about 100 million barrels of oil equivalent proved in what we now call the southern division. Our combined database has really helped our regional evaluation. We have more than 2,000 square miles of 3-D coverage in Liberty, Hardin and Chambers counties alone." Now, Kerr-McGee has three core operating areas in the new southern division; one is the Upper Gulf Coast. This year the company plans to drill 15 to 20 exploration wells there: 10 to 15 to Yegua/Cook Mountain and two to four to the Wilcox. Last year the company's biggest success was the Liberty Farms #1 in Liberty County, a prospect generated by Westport that was sold at NAPE 2004 to private companies, which drilled with a 60% working interest. The well tested 14 million cubic feet of gas equivalent a day and the sand turned out to be more than 50 feet thick, thicker than normal for this area. Cook Mountain is found below Yegua, with both being deposited in similar interdomal environments. Wells cost anywhere from $3.5- to $5 million. Generally the porosity is good enough that Cook Mountain doesn't have to be fracture-stimulated, although a few companies have begun experimenting with fracs in some wells. Yegua/Cook Mountain wells produce very well at first, but their decline is rapid, with depletion after four or five years. "It's very profitable, with a rate of return in excess of 50%," says Henderson. "I think the gas price would have to go below $4 before you'd see any drop in activity." The company also has a large Frio program in Chambers County. In addition, it is developing a middle Wilcox play, trying to bring production from the latter south of Houston across the Houston Embayment that lies deep beneath the city, to new areas to the north and east in Jasper and Hardin counties. Last year it had a 77% success rate in this region using 3-D, with two Frio finds and one Wilcox discovery in Hardin County, in addition to the aforementioned Yegua/Cook Mountain success in Liberty County. It had four wells drilling at press time. Also in the county lies the South Felicia Field that Westport purchased in 2002. It has three wells and an estimated ultimate recovery of about 60 billion cubic feet equivalent (Bcfe). The field has already produced 35 Bcfe from Yegua between 11,000 and 12,000 feet. The company tried to duplicate the field in a couple of prospects but it didn't work, even though amplitudes were used to site the wells. Explains Jewell: "3-D isn't a black box. Several things, including a little bit of 'fizz gas' in water, will cause an amplitude to show up on seismic, just as if [the sand] was 80% gas. We found nice sand packages but no commercial quantities of hydrocarbons." Even so, Kerr-McGee always does a peer review and a "look-back" or audit to learn from its failures and successes. "It isn't exactly like shooting fish in a barrel," says Henderson, "even though last year we were 77%, and we're five for five so far this year." Farther south, Lavaca County remains one of the best places to drill. Two wells indicate the potential. Last year El Paso Production Co. drilled the #1 W.B. Fitzhenry Heirs Gas Unit "1" in Hope Field in Lavaca County. It tested 52 million cubic feet of gas a day from fractured perforations in the Lower Wilcox between 13,398 and 14,288 feet. Also last year in Hope Field, EOG Resources tested 30 million a day at its #1 Henley Gas Unit. Both companies declined to be interviewed. Kerr-McGee is active here as well. It operates a portion of the Speaks Field in the county courtesy of an acquisition made by Westport in 2003. It is producing about 20 million cubic feet a day there, and the company is reprocessing its seismic as well. Speaks was producing from the shallow Wilcox but operators began drilling deeper fault structures in the mid-1990s. Matagorda County This county is the site of a lot of activity onshore and offshore in the bay waters. El Paso is rumored to have recently tested 30 million cubic feet per day at a deep Frio well it directionally drilled from an onshore pad to beneath Matagorda Bay. The Mad Island Unit wildcat and its first appraisal well, now under way, were scheduled to 20,000 feet. Word on the street is that El Paso's discovery could be as large as 200 Bcfe. Carrizo Oil & Gas Inc. is an exploration-focused company looking for that kind of pay here. In 2005, the Houston company will spend about equally on its new Barnett Shale acreage in North Texas and along the Gulf Coast, including in Matagorda County. Each area has its benefits and disadvantages. Here, the wells are higher-risk and have higher upside and a shorter life than wells in the long-lived Barnett. "It takes a long time to get production up to 15 million cubic feet a day in the Barnett Shale, whereas along the coast you can get that in just one well," says president and chief executive S.P. (Chip) Johnson IV. "The reason people like to drill here is that when they find something, the reserve value is higher than anywhere else in the U.S. except for the Gulf of Mexico shelf." He says the company's finding and development costs along the coast range from $2 to $2.50 per thousand cubic feet equivalent (Mcfe) but the reserves are worth $4 per Mcfe. Carrizo plans several wells in the county, with its biggest prospect this year the so-called Mega Mata, located on a 10,000-acre closure in the Upper Wilcox. Johnson says it could be as much as 400 Bcfe, but he calculates a mean success volume of 72 Bcfe, unrisked. It's in a largely untested part of the Wilcox trend and is deeper than anyone else has drilled in this part of the county. "The closest penetration to the section is about 17 miles away on a separate structure," says Darryl Smith, senior explorationist. Carrizo plans to sell down its interest in this well. Another key prospect is the Destaroyah well in Goliad County, which could be an 80-Bcfe target. Carrizo generated this Wilcox prospect and owns it 50-50 with Chesapeake Energy, which will operate the 16,000-foot well. Wellhead gas prices in this part of the world are about 25 cents below the Nymex price. 3-D driven Brigham Exploration is also known for its focus on 3-D-driven plays in Texas. Last year it spud some 60 wells, with 55 completed. The Frio in Matagorda, Jackson and Calhoun counties got plenty of its attention. The Austin company has 15,000 square miles of 3-D data in the region and just acquired 150 more squares across some of the bays. It is constantly reprocessing proprietary data it has shot over this productive region, which was initially developed in the 1950s without benefit of 3-D seismic or advanced interpretation. Jeff Larson, executive vice president of exploration, says, "We are looking for shallow Frio above the geopressured section, based on amplitude anomalies. If we go deeper in the pressured environment it gets tougher. We are looking generally for 1- to 5-Bcf targets, but in the deeper pressured sections the targets can be as large as 25- to 50 Bcf." Throughout Texas Railroad Commission districts 2 and 3, companies are applying new seismic and drilling techniques to rework old fields and drill deeper. In January, Brigham did just that. On its Bayou Bengal project, it announced discovery of the Appling Deep Field in Calhoun County with completion of the Sartwelle #3. The well had 82 feet of pay in Lower and Upper Frio and tested 530 barrels of oil and 1.9 million cubic feet of gas a day. At press time, Brigham was drilling an offset, the Appling #1, to 14,500 feet in Middle to Lower Frio. The old Appling Field, dating from the 1950s, has produced about 500 Bcfe from 10 pay zones in shallow Frio. The majority of the old field lies beneath Carancahua Bay. Brigham imaged it with higher-resolution 3-D. "It is clear to us there are a number of redevelopment opportunities to exploit in this field," says Larson. He notes that a lot of the deeper Frio potential has yet to be tested, and the risk of drilling deeper is mitigated by the shallower Frio found uphole. The middle section is prospective also. "We believe the Sartwelle #3 has the potential to be the biggest discovery in the company's history," says Brigham chief executive Ben (Bud) Brigham. "We estimate reserves in the fault block to be approximately 10 Bcfe, and it could have an estimated 80 Bcf, unrisked, for the entire closure if it is filled to the structural spill point. It could be a six-well field." Brigham increased its Frio budget 32% to $25 million over what was spent in 2004, and it now represents 43% of the 2005 budget, he says. "We have completed 33 out of 36 wells in the Frio in the past and it has consistently provided the best economics of our five focus plays." The company typically keeps a 75% working interest in most of its Frio wells. At depths of 14,000 to 15,000 feet, dry-hole costs are about $3 million and completion takes another $800,000. But with advances in directional drilling tools, a company can save up to $1 million by drilling from a land location to under the bay, as opposed to drilling in the bay, which requires a drilling barge. Brigham has 2,300 acres of leases in state waters. Near Brigham's Providence Field in Matagorda County, which it found in 2002, the Wise well was being drilled at press time. This Frio Anomalina wildcat, originated by partner PennVirginia Oil & Gas, was testing some 35 Bcf of potential. Providence has produced about 20 Bcfe so far from five wells. Frac treatments in the Vicksburg and Wilcox have been done for many years, but frac technology is now moving into the Frio, Larson says, which could mean even more upside is in the Frio in the future. Private players Ballard Exploration Co. Inc., formed in 1976, has found 30 fields in the past decade, 24 of them in this part of Texas. Most produce from Yegua/Cook Mountain. "We have explored, acquired leases and shot seismic continually. We have never quit despite $1.90 gas and $10 oil. We always have something in our inventory to drill," says founder and president A.L. (Les) Ballard. The Houston company plans to drill 15 prospects in 2005 and has an inventory of 30 wells behind that. It has kept one rig, the Grey Wolf # 506, drilling every day since 1990 when it started in Brazoria County. Today two rigs are running for the company, one drilling a 12,000-foot test in Wharton County and one drilling to 14,000 feet in Liberty County. Both wells are aiming for Cook Mountain. Ballard is a traditional independent. It generates all its prospects internally and keeps 100% interest in nearly all its wells. It never sells assets. Says Ballard: "Since we are private, we produce based on what is best for the reservoir's characteristics and not for meeting quarterly earnings. We don't sell our wells, we produce them to depletion. Around here we say, 'Buy it by the acre and sell it by the barrel.'" Ballard is the largest gas producer in Harris County. Its wells are east of the Houston city limits, overlooking the Houston Ship Channel and in the shadow of the San Jacinto Monument. In the Channelview neighborhood near downtown, it distributes monthly oil and gas royalty checks to hundreds of lot owners who own the mineral rights, and it has paid more than $2 million to the Channelview Independent School District as well. Since its discovery in 1998, the Channelview Field has produced about 65 Bcfe of gas for Ballard. "These Yegua/Cook Mountain wells last from seven to 10 years, with decline rates of 30% in the first year, then falling to 20% annually," says operations head Tyson Dunn. "Of the 30 new-field discoveries we've had, most are Yegua/Cook Mountain. The typical well is 12,000 feet. We've drilled 80 exploratory and development wells in the past 10 years." In Liberty County to the north, Ballard and its partner, Carrizo, started the first commercial Lower Cook Mountain play by shooting the first 3-D there in 1999. In 2002, Liberty was the most-leased county among the 164 active counties in Texas-and Ballard was the most active lessee. "The neighbors got in pretty quick after our first few wells," says Ballard explorationist Tom Binig. "We have discovered 12 fields in the county and we still have a number of wells to drill." As is so common in this part of Texas, Ballard took a good idea and pushed it further. The Raywood Field in the county, found in 1955, had produced 200 Bcfe from Upper Cook Mountain. Ballard drilled its Raywood Investments #1 to the east, in a more geopressured zone than found in the original field. It drilled the discovery to 13,600 feet and found bottomhole pressure of 12,000 psi. For 2005, Ballard plans to drill 10 or 12 wells in District 3, all geopressured Yegua/Cook Mountain wildcats. "We drill about a third of our wells directionally to stack the pays in the same wellbore and reduce risk," says Binig. In Polk County north of Houston, Ballard plans a 12,000-foot Woodbine well north of Comstock Resource's Double A Wells Field. Privately held Manti Resources of Corpus Christi will focus on Cook Mountain and Yegua this year as it has done for the past two or three years. "Our model is to attack an area, get a project to the point where we've taken most of the larger reserves out, then sell it," explains exploration manager Chris Douglas. The firm hopes to drill from four to six wells in districts 2 and 3 by year end, starting in the second quarter. "The Cook Mountain is an old trend but people are applying new 3-D to it. It seems like everywhere you go, people are on your heels, so there are gradual increases in land price." Douglas figures the dry-hole cost for its Yegua wells, drilled to about 8,000 feet, will be $800,000. Wells to the Cook Mountain interval between 10,500 and 11,500 feet cost $1.6 million. No fracs are required and generally one well will adequately drain a field. An estimated ultimate recovery of 5 Bcf is anticipated in the Yegua wells and 7 Bcf is hoped for in the Cook Mountain wells. That translates to initial production of 2- to 4 million cubic feet a day. After the cost of capital, the risked rate of return is about 25% annually or a two-to-one return in three years. "What drives our activity is being able to get our hands on good prospects. Gas pricing is a factor but our level of aggressiveness is what really drives our activity," he says. "Some of these amplitudes look good but then you drill and it's just a wet sand, so 3-D is a risk-reducer but no panacea. This is not a basin-centered play with blanket sands. There is a lot of variability in the way the sands were deposited," he says. Last year Manti drilled shallow Wilcox wells in McAllen and Atascosa counties as well, in addition to its activity in Louisiana and West Texas. All told it spent about $55 million, but will hike that to about $75 million this year.