The Arkoma Basin has become a "tale of two shales" -- it's not quite the best of times yet, but it's certainly not the worst. By 2010, natural gas volumes from the Fayetteville and Woodford shales may approach 970 MMcfe/d, a significant jump from this year's expectation of 469 MMcfe/d.
According to a report by energy consultant Wood Mackenzie, interest in the potential of the Arkoma Basin followed the stunning exploration success in the Barnett Shale of North Texas. The Fayetteville Shale, located in the Arkoma Basin of north-central Arkansas, was pioneered by Southwestern Energy Co. beginning in 2002. The Houston-based producer began stealthily buying up acreage in rural Arkansas, then securing land at an average cost of $95/acre with 15% royalty rates for seven years.
"This cost of entry looks favorable compared to today's terms of $550/acre and royalty rates of 18.75%," Wood Mackenzie's Scott Mitchell noted. Southwestern amassed a land position of nearly 500 million acres before publicly announcing its development plans, and it remains the largest lease owner in the core of Fayetteville (see NGI, July 3, 2006). Chesapeake Energy Corp., which began buying up acreage in 2005, now is the largest lease owner in the entire 4,000-square-foot play.
The Woodford Shale, located in the western Arkoma Basin of southeastern Oklahoma, is dominated by Houston's Newfield Exploration Co., which was the shale's "pioneer and clear leader," said Mitchell. Newfield drilled its first vertical well to test the Woodford in 2003, achieving an initial output of 1.8 MMcf/d.
The producer then spent the next two years acquiring acreage the same way Southwestern worked the Fayetteville -- in a stealth mode at an early-mover's advantage cost of $200/acre. Today, prices in the Woodford range from $500-1,000/acre, but most of the prime acreage is already leased, according to the analysis.
To date, Newfield has drilled more than 100 vertical and 80 horizontal wells. Barnett leader Devon Energy Corp. now is a large leaseholder in the Woodford -- it already has drilled 38 horizontal wells in the shale, according to the Wood Mackenzie analysis.
Mitchell said the two plays offer "huge potential," and "most operators are still very much in the exploration phase." However, some things already are clear:
"Wood Mackenzie's analysis shows that gas production from the Fayetteville and Woodford shales has grown rapidly since 2005," said Mitchell. "If the plays' participants execute their announced drilling plans, then production is expected to rise for a number of years..."
Because of declining gas prices and high drilling costs, Wood Mackenzie found that operators are testing several techniques to increase initial output and recoverable reserves.
"Originally, Southwestern used nitrogen-foam fracs for its early Fayetteville wells," said Mitchell. "Today, the company is drilling wells with an average lateral length of 2,000 feet and racing with slick water and cross-linked gels," which has resulted in more output and lower decline. Newfield also experimented with lateral lengths as long as 3,700 feet, but the higher well costs were not justified by the incremental increase in reserves. Newfield has since returned to using a 2,500-foot lateral with frac densities of five stages.
Wood Mackenzie also compared the Arkoma shales to the Barnett Shale core area, and the economics have improved, but operators have yet to reach the returns generated by the Barnett core wells.
When prices are in the $5/Mcf range, both Fayetteville and Woodford have rates of return under 10%, the analysis found. At $6/Mcf, the Woodford is still a marginal play. Since typical Fayetteville and Woodford wells produce most of their gas in the first two years, "they tend to be very sensitive to short-term price fluctuations."
However, Wood Mackenzie said more understanding of these reservoirs, coupled with improved production techniques, should help support the development of these plays "for years to come."
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