COLUMN-Oklahoma gears up for next big shale play: John Kemp

Wed Nov 28, 2012 4:44pm GMT

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By John Kemp

LONDON Nov 28 (Reuters) - Oklahoma could be on course to see the next big increase in oil and condensates production, following North Dakota and Texas, as innovative drilling companies move in to explore the liquids-rich sections of the Woodford shale under the western half of the state.

Oklahoma is a very old oil producer: the first oil was discovered in 1897, a decade before Oklahoma was admitted to the union.

In recent decades, however, the state's conventional fields have appeared exhausted. Production peaked as long ago as 1927 at 277 million barrels for the year. By 1980, output had fallen to 149 million barrels, sinking to just 58 million barrels in 2010, according to annual production records from the Oklahoma Commerce Commission (OCC).

In 2011, production jumped to 77 million barrels. But Oklahoma still accounted for just 3.8 percent of all oil produced in the United States. Production has been broadly flat at 175,000-200,000 barrels per day (bpd) since the start of the century. Meanwhile, fracking has lifted North Dakota's output from less than 100,000 bpd to more than 700,000 bpd over the same period.

Oklahoma has more than 32,000 oil wells. However, more than 30,000 of them are "stripper" wells producing less than 15 bpd that are marginally economic. Only 163 wells produced more than 100 barrels per day in 2009, according to the Energy Information Administration (EIA), the independent statistical arm of the U.S. Department of Energy.

The state is better known as a natural gas producer. Oklahoma accounted for 8 percent of all U.S. gas output last year, ranking behind Texas and Louisiana. In fact, the state's 52,000 gas wells accounted for almost 30 percent of all the crude and condensate produced in the state in 2009.

But all that may be about to change.

WORLD-CLASS WOODFORD

The western half of Oklahoma lies on top of the Anadarko Basin, a huge sedimentary formation that has already yielded most of Oklahoma's conventional oil and gas.

Now attention is turning to the possibility of unlocking the basin's unconventional resources using the same horizontal drilling and hydraulic fracturing techniques that have prized millions of barrels of oil and condensates from North Dakota's Bakken and Texas' Eagle Ford.

Specifically, drillers and frackers are now targeting the basin's Woodford shale layer. The Woodford shale is "one of the thickest, best quality resource shale reservoirs in the country," according to Continental Resources, the company which more than any other is associated with the development of the Bakken.

Woodford is up to 400 feet thick, according to Continental, with a rich organic content and which potentially contains enormous amounts of oil and gas in continuous-type unconventional formations.

In terms of area, Woodford (3,300 square miles) is smaller than either the Bakken (13,000 square miles) or Eagle Ford in Texas (5,000 square miles). But it is also much thicker (150-400 feet) than either Bakken (10-250 feet) or Eagle Ford (100-250 feet). The total organic content (6-12 percent) puts it somewhere between Bakken (5-20 percent) and Eagle Ford (3-7 percent).

Woodford contains 400 million barrels of oil that could be recovered, accorded to an estimate by the U.S. Geological Survey published in 2010, and another 250 million barrels of valuable condensates, as well as plenty of associated gas. Continental is even more bullish about potential ultimate recoveries.

FOCUSING ON THE SCOOP

Continental has featured the most prospective area of the Woodford shale, a section that it calls the South Central Oklahoma Oil Province, SCOOP, as one of its two favoured plays alongside the Bakken in recent presentations to investors, underlining its importance to the company.

Continental has been leasing oil and gas rights in the Woodford even faster than in the Bakken to exploit it. Between 2009 and October 2012, Continental increased its net acreage in the Anadarko-Woodford area by 113 percent from 149,000 to 316,000 acres, compared with a 51 percent rise in net Bakken acres from 645,000 to 915,000.

Because of the divergence between oil and gas prices, the company has focused on the oil-rich and condensate-rich parts of the shale ("fairways") in the east, which lie under Grady, McClain, Garvin, Stephens and Carter counties, rather than the gas-rich areas further to the west.

Continental claims wells in the oil fairway have yielded as much as 75-85 percent liquids (crude plus condensate) while liquids yields from the condensate fairway have been about 60 percent.

It has drilled or participated in 35 wells to date and plans to bring the same efficiencies that it pioneered in the Bakken, cutting drilling and fracking times and costs, to the new play.

THE SILENT REVOLUTION

The Woodford play remains in its infancy. The full scale of exploration and development work has been obscured because the state also produces significant amounts of conventional oil and gas. Both have been under pressure because of the plunge in gas prices to less than $4 per million British thermal units and the slide in prices for midcontinent U.S. oil.

Oklahoma oil prices are directly tied to the price of benchmark crudes delivered in-state at Cushing. Average Oklahoma oil prices fell from $102 in March to less than $75 in June, according to the Corporations Commission. The result has been a slowdown in conventional production from stripper wells, which has masked the increase in fracking.

Similarly, the number of drilling rigs active in the state, has remained at around 200, which is roughly similar to the number drilling back in 2008, at the height of the oil and gas boom. But that masks a huge shift from gas-directed to oil-directed drilling. In 2008, some 1,098 oil wells and 2,201 gas wells were completed. By 2011, the numbers were 1,573 and 876.

Other gas producing states, like Louisiana, have seen a sharp drop in the number of active rigs since 2008 as the gas industry responds to a sharp decline in prices. In Oklahoma, however, rigs have simply been shifted from gas to oil plays within the state, which has to some extent hidden the extent of the state's new oil revolution.

More rigs are now drilling in Oklahoma than in any other state apart from Texas. Only North Dakota is even close.

Continental Resources admits that it has kept the full potential of the play relatively quiet until recently while it has secured mineral leases. The company only began to discuss the full potential of the SCOOP/Woodford in its marketing materials in October.

The SCOOP/Woodford formation is even deeper underground than the Bakken and Eagle Ford shales, so wells will be expensive. But the high liquids content should ensure they have high rates of return.

Crucially the shale play is located in many of the same counties that have previously hosted conventional oil fields. The state already has plenty of oil and gas-gathering pipelines and infrastructure to support a fairly rapid increase in output. And the state government is enthusiastic about oil development.

Oklahoma's oil and gas business -- an increasingly complex mix of oil and gas, conventional and unconventional resources -- makes production and drilling statistics hard to interpret.

While the Woodford shale should boost oil drilling and output, the marginal nature of many stripper wells makes conventional output susceptible to any drop in oil prices, and oil output from gas wells will remain under pressure from low natural gas prices.

Nonetheless, the attractive characteristics of the Woodford shale should result in a significant expansion of oil output in the next five years as the play is developed.

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