Prospect Introduction
There is an interesting Haynesville Shale gas play involving the immediate acquisition of large, strategically located, acreage blocks for the purpose of developing highly profitable gas fields. The prospect involves approximately 3800 acres in a highly desirable locations in Northern Louisiana. Major energy companies have leases and drilling / production activities surrounding this block. Recently, several large natural gas wells have been discovered in nearby acreages. Demand for natural gas continues to grow at consistently strong rates in the United States and worldwide. The Haynesville Shale play introduced in this report projects to be highly profitable, with $306 Million gross revenue within 5 years, 42 BCF cumulative gas production, and enjoying 64% Net Revenue margins to Working Interests. Payout will occur in approximately two years. Projected gross revenues over 35 years (expected well life) exceed $ 900 Million. Additional production potential in this same acreage is very significant.
Bossier/Haynesville Shale
The Bossier / Haynesville Shale gas field (shown above) calculates to be one of the largest gas reservoirs discovered in the United States. It appears to cover over 7,000 square miles, 4.3 million acres or roughly 7 counties in North Louisiana and East Texas. Recoverable reserves are conservatively estimated at 8.5 billion cubic feet (BCF) per well on 80 acre spacing. At $8 per MCF each well is conservatively projected by Chesapeake Energy to generate $68,000,000 or slightly over $800,000 per acre over the lifetime of each well.
Subsequent to the first successful completion in 2007 by Chesapeake Energy, 8 additional wells have been successfully completed in the Bossier/ Haynesville Shale by Chesapeake Energy, Petrohawk Energy, Penn Virginia, Encana Corporation (in partnership with Shell Oil Company), and Penn Virginia – with all wells in a 20 mile radius of the first well. These wells have initially tested from 5 million to 20 million cubic feet of gas per day on restricted chokes with flowing tubing pressures of approximately 6,500 psi.
Haynesville Shale Play Key Advantages*:
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Overpressured reservoir
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High gas in place and high initial recoveries
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Geologically stable area – structurally uncomplicated
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Good frac barrier below and no apparent water problems
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Located near major pipeline and infrastructure systems
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Adequate water supply for drilling and completion purposes
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Located largely in rural areas
*Chesapeake Analyst and Investor Report dated October 16, 2008
Geological Overview
The Bossier Shale is the basal formation of the Cotton Valley Group, an upper Jurassic/ Lower Cretaceous sandstone/shale sequence. It is a dark, calcareous, fossiliferous marine shale and grades upward into the Cotton Valley sandstones with interbedded shales. These sandstones are a collection of fluvial-deltaic, barrier island, offshore sandbar and strandplain sands, deposited in the shallow waters of the early Gulf of Mexico as it opened in the beginning stages of continental rifting and drift (also referred to as the East Texas, Louisiana and Mississippi Salt Basins, respectively).
Sections of the Bossier shale are interbedded with these various sands. The thickest section of the Bossier Shale lies below the lowermost Cotton Valley sand and above the Gilmer Lime and subsequent Haynesville strata. As would be expected by their depositional methods, the Cotton Valley group thickens general to the south and comes to a thin sectional pinchout in east Texas and southern Arkansas as the shoreline of the ancient interior salt basins is approached. The Cotton Valley sands have been long known to be highly gas productive within the region covered by this analysis. In conjunction with this, the appearance and character of the Bossier Shale indicates that it is the primary source rock for the gas accumulations in the Cotton Valley sands.
The Haynesville Shale is characterized by ultra-low permeability, but exhibits a high porosity compared to other shales. The Haynesville Shale is below 10,000 feet deep in the area. The formation gets deeper as the field dips towards the Gulf of Mexico. The formation is of a type once considered too costly to explore, but rising energy costs and newer technology and processes have changed that, leading to a rush of activity as energy exploration companies have begun to lease property in north Louisiana in preparation for possible drilling and production.
The major geological feature of the region is the Sabine Uplift. The aerial extent of the Sabine Uplift encompasses most of northwestern Louisiana and extends into northeastern Texas and southern Arkansas. While the Sabine Uplift zone was a mild positive elevation feature at the time of deposition of the Cotton Valley group, the primary period of uplift was post depositional. The resulting structure led to the development of a gas productive area within the primary confines of the uplift zone, separated from the surrounding region by a number of complex fault systems separating the uplifted area from the shallower shoreline areas of the depositional basin. In contrast, the downthrown portions of these fault systems, especially to the north, have proven to be relatively prolific oil productive regions. The Cotton Valley gas productive trend extends eastward beyond the Sabine Uplift across the majority of the northern parishes of Louisiana.
Prospect Development Historical Review
The region of the Sabine Uplift has historically been a highly productive oil & gas area, beginning with the first well penetration of the Cotton Valley sands in 1927 and continuing until the present day. The Jurassic formations below the Cotton Valley sands have gone largely unexploited due to limited local productivity of the Smackover and significant mechanical problems associated with drilling through the Cotton Valley. As a result, very few wells penetrated through the entire section of the Bossier Shale and underlying Haynesville strata and the potentially productive character of the Bossier/Haynesville Shales was not well known. Further, the completion techniques that allow the production of shale source beds have been relatively recent developments in the industry. For all these reasons, the Bossier and Haynesville Shales are only now receiving attention as a possibly major gas producing formation similar to the Barnett Shale of central Texas, the Fayetteville Shale of central and northern Arkansas and others.
Chesapeake Energy (Oklahoma City, Oklahoma) conducted the first extensive investigation into the productive potential of the Bossier and associated Haynesville Shales, beginning in early 2006. Chesapeake went to great lengths to keep their work in this play a secret until a significant lease block could be developed and has only recently disclosed the play publically. Chesapeake Energy is a leading independent producer of natural gas in the United States and has chosen to invest the majority of their efforts in unconventional gas plays, particularly shale reservoirs. To advance these efforts, Chesapeake has developed extensive geological, geophysical and engineering expertise in the exploitation of shale formations as well as an in-house analytical lab where core samples may be tested more extensively than in outside contract laboratories.
To date, Chesapeake has drilled four vertical wells through the Bossier/Haynesville Shale for the purpose of obtaining drillstem cores for their analytical laboratory followed by several horizontal wells. These wells were drilled over an area covering nine township/ranges, centered in T15N R15W. This proved to be the structural high of the Sabine Uplift at the Bossier Shale horizon based on picks of formation tops from logs. Moving away from T15N R15W, the top of the Bossier Shale lowers by approximately 10-15 feet per mile moving toward the south and southeast. This indicates that the formation has minimal updip tilt which should make the “sweetspot” of the play relatively large as centered around the structural high. Further, the Bossier/ Haynesville Shale was observed to be of relatively uniform thickness throughout Chesapeake’s nine township/range initial target area, with each well having multiple pay zones totaling 350-450 feet of net pay per well. It is believed that there will be some thinning of the shale towards the north and east as well as a thickening towards the south due to the depositional method of the formation, but this cannot be confirmed by the logs of wells in what is believed to be the Chesapeake target area.
Chesapeake now has 16 horizontal wells and one vertical well in the Haynesville Shale area while others have 11 horizontal wells and 81 vertical wells Chesapeake reports current Haynesville production at 65 MMCFE/ day with a projection of over 600 MMCFE / day by January, 2011.
Chesapeake has since expanded their area of interest to include almost all of northwestern Louisiana. Chesapeake has released preliminary recoverable reserves estimates for this play of 20.5 TCF over the approximately 500,000 acres of their target zone. Assuming $8/MCF gas pricing, this amounts to $324,800 in recoverable reserves for each acre leased within the Chesapeake play to the 8/8th interest. Chesapeake’s risked reserve estimates for the region are significantly higher. Initial contacts indicate that Chesapeake has only about half of this area actually under contract, leaving an opportunity for entry.
Company Strategy
Identifying Prospective Offset Fields
The Company has identified prospective offset fields where the Bossier and Haynesville shales may be exploited by drilling of horizontal wells. As previously stated, the Bossier and Haynesville Shales are the source rock for hydrocarbons discovered in the Cotton Valley sandstone group. Both were deposited as blanket formations in the late Jurassic Hico Lagoon, which covered the majority of northern Louisiana at the time.
Given that the formations were deposited as blankets in relatively quiet, shallow waters, both the Cotton Valley sands and the Bossier and Haynesville shales will be found throughout the highlighted are in the diagram above. Numerous Cotton Valley sandstone fields have been discovered and exploited throughout this region, corresponding to localized structural highs and fault created traps. Hydrocarbons accumulated in these areas due to their relatively high mobility within the sand once migrated from the shales, as shown below;
Unfortunately, the areas where Cotton Valley fields exist, these are largely held under lease by producing wells. The shale layers underneath, as blanket formations, are expected to be uniformly charged with hydrocarbons throughout their extents. Due to the relative lack of porosity and permeability in the shale, the hydrocarbons are largely held in place. Because of these factors, the likely primary targets for new field discoveries of large extents - similar to that found by Chesapeake, lay in the areas adjacent to and between existing Cotton Valley fields. Areas containing such acreage extend over the majority of northern Louisiana and into Eastern Texas and Southern counties of Arkansas.
Leasing Activities
Columbia Petroleum has focused on acquiring large, contiguous acreage blocks such that 640 acre drilling units may be formed under company control. Our latest project is primarily centered in sections within the geological definitions of the Bossier / Haynesville Shale prospect area.
Within this area of interest, the Company has obtained letters of intent to lease from mineral owners. In total, the target acreage under option includes is up to 3800 acres and extends into 7 different sectional 640 acre drilling units. Of these, the Company has drilling control in 5 units. Two more units may be controlled by the further acquisition of small interests. Negotiations are currently underway.
Field Development Strategy
Columbia Petroleum intends to begin drilling horizontal wells in order to control the acreage by production with the operation of several wells. To drill and complete 12,000 ft vertical depth wells - each with 4000 ft + horizontal legs, will cost approximately $7.5 million per well. While the initial cost of the acreage and drilling is expensive, return on investment is expected to be significantly higher compared to other conventional gas plays. Recoverable reserves have been estimated by Chesapeake throughout the region at $406,000 per acre. Wells completed by major operators nearby our area of interest have shown initial production potentials on the order of 22,000 MCF per day.
Superpads
The Company intends to further develop acreages utilizing techniques that increase operational efficiencies. Once such idea is the use of Superpads for drilling and completing wells. Advantages include: a) shared surface imprint b) fewer rig moves c) up to 8 wells per superpad and d) only one (1) superpad is needed per section. Wells will be drilled on 80-acre spacing (8 wells per section), each with a single horizontal leg up to 4,500 in length and these wells will be oriented North-South. This configuration will make a good match with existing gathering systems which tend to run East-West along sections lines between proposed superpads.
Summary
Columbia Petroleum’s Haynesville Prospect represents an attractive investment. Below are some key points to review when considering this opportunity.
Targeted Acreage is Strategically Located
- Up to 3800 acres in highly valued, PROVEN Haynesville Shale producing areas where Petrohawk Energy, Chesapeake Energy, Encana, Penn Virginia, XTO, Shell, and others are aggressively leasing and drilling.
- Drilling activities are expanding North and East of early round, successful exploration activity areas. The targeted acreage is in the direct path of the expansion moves by major energy companies active in the Haynesville play.
- Large block acreage provides control over key sections within the township
- Easy access to nearby gathering systems and transport pipelines.
Attractive Acquisition Costs for Valuable Leasehold Positions
- Acquisition costs for targeted acreage is well below market prices. Similar acreage in surrounding areas has been acquired for in excess of $15,000 per acre
Top Performing Acreage with Untapped Potential
- Nearby wells have initially tested from 5 million to 10 million cubic feet of gas per day. Recoverable reserves are conservatively estimated at 8.5 billion cubic feet (BCF) per well on 80 acre spacing
Minimal Funding Requirements, Quick Payout
- Funding to occur in stages.
- Payout expected in less than two years.
Scaleable Operations / Growth Opportunity
- Production and Cash Flow can be increased significantly with infill drilling and field production development.
- At $8 per MCF each well is conservatively forecasted by Chesapeake Energy to generate $68,000,000 or slightly over $800,000 per acre over the lifetime of each well.
- (Note: This business plan calls for 8 wells to be drilled over 6 Sections. On 80 acre spacing, there exist the opportunity to drill an additional 40 wells on this same acreage.)
Experienced Management
- Key execs have extensive experience in geology, geophysics, lease acquisitions, oilfield drilling operations, and gas production.
Strong Financial Performance
- The Haynesville Shale play projects to be highly profitable, with $306 Million gross revenue within 5 years, and enjoying 64% net revenues margins to working interests.
- Projected gross revenues over 35 years (expected well life) exceed $900 Million.
The Bossier/Haynesville Shale prospect is not only large in area but also extremely dense in reserves. Columbia Petroleum believes there is an exceptional opportunity to participate in building value by way of this proposed venture.
For additional information please contact: info@columbiapetroleum.com