New Wells Encouraging, But Brown Dense Viability Still Debated

As Southwestern Energy Co. drills more test wells in the Lower Smackover Brown Dense formation, preliminary results are coming back looking more and more promising.

Robert Reynolds, president of Shuler Drilling Co. of El Dorado, said the BML well in Louisiana has been "very encouraging," but Southwestern likely won't report any initial production numbers until the end of the year. Reynolds has been involved in the oil and gas industry in south Arkansas for almost 40 years.

"They have improved substantially," Reynolds said. "The first well drilled in Columbia County, by the short name Roberson, had a peak day of something like 103 barrels of oil. It never made as much as 103 before, and it hasn't made that much since."

The Garrett well in Claiborne Parish, La., peaked at 306 barrels, and the BML well in Union Parish had similar numbers.

The industry has several ways of presenting its production numbers. Even though Southwestern has reported some numbers, they do not represent the official answer to the play in question.

"In the oil and gas industry, state regulation agencies - and Arkansas and Louisiana are very similar in this respect - require us to report what is called initial production or, in industry jargon, what we abbreviate as IP," Reynolds said.

That means once the well has been drilled, the stone hydraulically fractured and the oil tapped, the number is the first full day of production for the well. However, none of the wells in the brown dense is "in production" per se.

"An IP is when you put your well into formal production on an ongoing basis," said Larry Bengal, director of the Arkansas Oil & Gas Commission. "That's your IP. They never got into that."

"Even though they've physically completed the well, they are still testing," Reynolds said. "They've not filed completion reports with the regulatory agency. It's that completion report file ... that tells the IP."

The oil from the test well is sold, but the wells are then plugged and abandoned until the drilling company decides whether continuing to produce oil would be viable. Instead of IP, Southwestern has reported "peak day" numbers to investors.

"Peak is not a standard industry-type concept," Reynolds said. "It was invented to describe what they're doing."

The huge amount of hydraulic "frack" fluid involved in the well jobs, Reynolds said, meant that the peak oil production times occurred as the used frack fluid flowed back out of the well.

So IP numbers are for ongoing, producing wells and peak day numbers are used to show Southwestern's best results from its test wells. Southwestern also reports the average daily production during the test well's life.

Southwestern Results

The company reported its latest test production to investors in early August. CEO Steve Mueller stated Southwestern had 560,000 net acres leased in the Brown Dense Play across southern Arkansas and northern Louisiana. The next-largest player in the lower Smackover, Cabot Oil & Gas Corp. of Houston, holds fewer than 15,000 acres and a single test well in the play.

In July, Cabot stated it was leaving the ball in Southwestern's court.

"Since our investment plans for the foreseeable future are in existing areas of operations ... the limited production coming from our first Brown Dense exploration well does not support its cost and therefore the well was written off," Cabot CEO Dan O. Dinges said in an earnings release. "We will monitor peer activity before making any additional capital expenditures in the play."

Meanwhile, since completing its first test well in Columbia County, Southwestern has drilled several more, all in Louisiana, and is working on testing further wells in that area.

"Our third well, the BML, located in Union Parish, Louisiana, was drilled to a vertical depth of approximately 10,400 feet with a 4,300-foot horizontal lateral and was completed with 19 successful fracture stimulation stages in June," Mueller told investors in August. Mueller said the BML well's highest 24-hour producing rate to date was 421 barrels of oil per day, and it averaged 353 per day during the test period.

"We are encouraged by the BML's results; however, we also know that we have more to learn in order to make the play economic," Mueller said.

The fourth well, the Johnson, is also in Union Parish, La., and was drilled in July. A fifth well, the Dean, also in the same area, was in the process of being drilled at the time of the earnings release. Mueller noted that the latest wells drilled had unusually high pressure, which meant they cost between $10 million and $12 million to drill, higher than the $8 million Mueller had estimated in the past.

"When you start looking at how that works out on the economics, I think still that the 500-barrel-a-day range on the oil-only side still makes that work," Mueller said.

If the play works, it could be the "best thing since the 1921 oil boom" for the southern region of the state, said Reynolds.

Reynolds said at the moment the viability of the play is "impossible to tell," mainly because Southwestern has a long way to go before the technology is perfected.

"President Kennedy predicted a person on the moon by the end of the decade, and a half-dozen people were killed in doing it," Reynolds said. "You can't push the throttle for technology. They've got to figure it out. It will take the drilling of several wells, in the dozens, because they have so many options as to drilling techniques and completion techniques. Just the math alone gives them dozens of combinations available. Since nobody's ever done it before, they don't have a guide to go by, just general knowledge and general experience."

Reynolds said he hopes Southwestern and the other exploration companies in the formation find a feasible way to harvest the area's resources.

"It is premature," he said. "We wish them well. We hope they make it."