Oil play ditched years ago draws EOG, Conoco as Permian fallback

The Austin Chalk, a vast underground highway of rock that runs along the Gulf Coast, is garnering new attention this year, with drillers including ConocoPhillips and EOG Resources Inc. trumpeting efforts in an area the industry largely wrote off 20 years ago. The latest sign of life came last week, as private-equity giant Blackstone Group LP sold royalty rights in the region for more than $400 million.

The revival is the latest testament to the oil industry’s improved health, now that crude prices are near $70/bbl following a painful three-year slump. Explorers are betting the kind of drilling techniques that led to a boom in U.S. shale plays can also work on the more unpredictable rock in the Austin Chalk.

“It is a play that I think is going to have a lot of legs," said Bernadette Johnson, a vice-president for researcher DrillingInfo Inc.

Blackstone’s sale followed a $2.7-billion deal in March by TPG Pace Energy Holdings Corp. to buy drilling rights on 360,000 acres in the Austin Chalk and the neighboring Eagle Ford shale basin. Conoco later announced it had grabbed another 211,000 acres while Marathon Oil Corp. said in May that it had acquired a “ material position" in the Louisiana portion of the play.

The Austin Chalk’s now home to “some of the most prolific and highest return wells in the company," EOG Executive V.P. Ezra Yacob told analysts on a call May 4, though he warned it’s “still pretty early" in the area’s development.

Here’s a closer look at what’s generating all the furor:

What is the Austin chalk?

It’s a 650-mi long geological formation, stretching underground from the Mexico-Texas border, through central Louisiana and into Mississippi. As the name suggests, it’s a river of underground chalk -- soaked with oil and natural gas. That differentiates it from shale plays like the Eagle Ford or Permian that have been the focus of U.S. drilling in recent years.

Explorers have been tapping “The Chalk" since the 1930s, and some of the hydraulic fracturing and horizontal drilling techniques that powered the U.S. oil resurgence were pioneered here. The most recent boom came in the 1990s, but since then, the region’s been eclipsed by more profitable shale plays.

How much oil and gas does it hold?

In a word: Plenty.

The U.S. Energy Department estimated in April that the Austin Chalk holds about 4.1 Bbbl of crude, 18 Tcfg and 1 Bbbl of natural-gas liquids that are “technically recoverable" (a measure that doesn’t account for economic viability.) That’s about a third of the nearby Eagle Ford and on par with the much-touted Niobrara shale play in eastern Colorado.

But the Austin Chalk has a history of wells that start strong and decline quickly, industry consultant Wood Mackenzie Ltd. said in an April report. That’s particularly true in the less-explored Louisiana side, where much of the new activity is targeted. The area has a naturally fractured geology that’s more varied than shale, said Jud Walker, president at EnerVest Operating Co. The Houston driller announced a new venture with TPG Pace in March.

“It is much different than a shale play," Walker said in an interview. “The Chalk changes pretty rapidly over small distances, so you have to do a lot of geology to understand where it’s going to produce."

Why was it initially abandoned?

The Austin Chalk’s past surges came long before the heyday of "unconventional drilling," which uses fracking and other techniques to crack open underground rock and free up oil and gas.

Conventional drilling produced big gushers in the ’90s, but wells quickly petered out and the industry moved on. Experiments with unconventional drilling in the 2000s were underwhelming -- the chaotic mix of natural fractures in the chalk made the underground reserves too hard to pinpoint, said DrillingInfo’s Johnson.

So, why are they back now?

Because drillers can, once again, afford to gamble abit.

With West Texas Intermediate crude prices rising, explorers are more willing to bet that they can crack the Austin Chalk code. Innovations including more powerful fracturing of underground rock. longer horizontal wells and computer-guided drill bits have boosted results fivefold in some cases, Wood Mackenzie said in April.

The play overlaps the Eagle Ford in parts of Texas, and the proximity to pipelines and other infrastructure serving that shale play should also lower costs, explorers say. That’s a big attraction at a time when drillers in the Permian have been forced to sell their barrels at steep discounts to account for a lack of shipping capacity.

EOG caught the industry’s attention last year when its Eagles Ranch 14H well in Louisiana’s Avoyelles Parish produced a robust 80,000 bbl over its first 110 days, WoodMac said.

Do the economics work?

The average Austin Chalk well in Karnes County, Texas, breaks even at about $37/bbl, Bloomberg New Energy Finance analyst Tai Liu estimated in an April report.

In Louisiana, EOG’s initial experience suggests wells may cost about $10 million a piece, Wood Mackenzie said. That’s more than double the cost of some Eagle Ford projects, a hurdle drillers will have to overcome.

“The rock is more challenging," the consultant said. “So completions will need to be more aggressive and costs will be high."

What's the industry saying?

Conoco won’t have results from pilot projects until next year. EOG, meanwhile, plans to complete 25 more Austin Chalk wells this year and plans further growth, Yacob said on the May call. He declined to estimate the ultimate size of the opportunity.

Developing this play is “not quite as straightforward" as others, Yacob said. “It is different and it’s unique."

Marathon, meanwhile, is still in the appraisal stage of its Louisiana push, CEO Tillman told analysts in May. “Until we are able to get out in the field, do the necessary technical work and get some wells down, we don’t really know what we have here," he said. “But it’s exciting."