by Igor Sill, Geneva Venture Partners
Insights into the Mississippian Lime Opportunity
The recent announcement from Paris-based International Energy Agency projects the US may become the world’s largest oil producer by around 2020, overtaking Saudi Arabia, thanks to new technologies capable of extracting previously inaccessible oil reserves and increased output achieved through innovative drilling advances. So, despite a worldwide oil shortage and high demands, the US can actually achieve energy dependence while potentially enjoying lower oil and gas prices. Improved vehicle efficiencies along with clean energy, would allow the US, which currently imports around 20 percent of its total energy needs, to become fully energy independent by 2035. So, what’s happened that’s creating this remarkably rapid rise in domestic oil supply in the US?
Recently, domestic oil exploration and extraction have been all about applying new technology advancements to oil resource plays. Significant advances in extraction and lift technology now allows us to remove heavier grades of crude out of existing oil fields more cost effectively. These plays are opening huge new reservoir targets with vast hydrocarbon deposits in regions all across our country. One of the highest-profile plays to surface is the 17 million acre Mississippian Lime area which covers Northern Oklahoma and Kansas. This is in contrast to the wildly successful 15 million acres in North Dakota and Montana’s Bakken region and 6 million in Texas’ Eagle Ford oil rich fields. The North Dakota Petroleum Council estimates that 30,000 direct oil field jobs have been created in western North Dakota over the last three years and that an additional 7,000-10,000 direct jobs will be created each year over the next 5 years. For every direct job created in the oil play, an additional two indirect jobs are created. Interestingly, Montana and North Dakota are the only two states to have had budget surpluses each year starting in 2009 going through the current year.
Most tend to agree that while the Bakken has an advantage in reservoir shape, the structurally thin Bakken requires operators to drill wells with horizontal legs up to two miles long, whereas Mississippian drillers can drill shallower vertically or horizontally with far better economics. The Mississippian Lime is reversing the decline of oil production in the US because of the many continual fine tuning and innovative technological advances that have been made in 3D Seismic Imaging and horizontal drilling. The added bonus for Mississippian Lime operators is that they are working in the heart of the country with ready access to transportation infrastructure, better weather conditions, skilled professionals, plenty of oil services and equipment.
Horizontal production is in full ramp-up mode in the Mississippian, and an interesting aspect of the play is that conventional verticals work as well. The Mississippi Lime has been active for over 50 years with conventional vertical wells, but what has transformed it into a leading oil play is the advent of advanced horizontal drilling techniques, seismic imaging, multistage production and new artificial lift technologies.
What makes the Mississippi Lime play attractive is that the wells are relatively simple and inexpensive to frac. Drillers are able to use low horsepower rigs and low horsepower frac equipment making it extremely cost-efficient to drill into the formation with horizontal wells at costs in the $2.5 to $3 million range. These wells are averaging rates of investor returns exceeding 75%, making the Mississippian Lime one of the most robust economic plays for high growth, reasonably sustainable oil investments for emerging upstarts and small players. SandRidge, one of the largest players has drilled 382 horizontal wells accounting for approximately 45% of the total horizontal wells drilled in the Mississippian. SandRidge expects to generate estimated ultimate recoveries (EUR) of 456,000 barrels of oil equivalent (MBOE) per well.
One small player I like is AusTex Oil (ASX:AOK). AusTex is active in the Mississippian play in Oklahoma and Kansas with 17,000 of AusTex’s 22,500 net acres squarely in the Mississippian. One well, piercing the Mississippian, tested at 100 barrels of oil per day, and the other, targeting the Arbuckle, tested at 16 barrels of oil per day, lifting AusTex’s market cap in recent trading sessions as the stock has risen on much higher than average volumes. I walked acres of the Kay County, Oklahoma Mississippian Lime fields with AusTex’s Chairman Rich Adrey, last week. Rich is an impressive and experienced investment banker, venture capitalist turned oilman seriously bent on uncorking the Mississippian Lime’s treasure. AusTex’s holdings are adjacent to leases operated by Range Resources Corporation (NYSE:RRC).
AusTex recently announced two impressive conventional vertical well results – one vertical well at 160 barrels of oil equivalent per day (boepd) and the other at 90 boepd via natural pressure without siphoning – it could produce more once a pump is activated. For a lower drilling cost of approximately $650,000, these production rates are extremely impressive and the wells could potentially earn triple digit returns.
Though a smaller producer, AusTex’s operating results within the Mississippian are more impressive than Chesapeake (CHK) Apache (APA), Range Resources’ (RRC) and SandRidge (SD), the companies with the most surrounding acreage in the Mississippian. These are meaningful production numbers, as they demonstrate good overall results from surrounding areas and provides support for AusTex’s belief that the Mississippian play extends further than had originally been thought. The other major player in the Mississippian is Devon Energy (DVN) who is aggressively moving forward with joint ventures to become the area’s leading integrated energy producer.
Devon recently announced a joint venture deal with Japan’s Sumitomo where Devon will sell a 30% interest in 650,000 acres in West Texas. Sumitomo agreed to pay $340 million and will commit $1.025 billion additionally for drilling, allowing Devon to invest more of its capital and resources into the Mississippian. Devon has also done a good job of increasing its operating cash flow and has been refinancing its debt so as to minimize impact of the heavily oversupplied natural gas market. Devon is not alone as there are plenty of other companies in similar dire situations including Chesapeake Energy (CHK) who has been paying down debt by selling off natural gas assets.
There are also plenty of smaller upstarts with significant acreage positions in the Mississippian Lime including Petro River Oil. This private company is significant not only because it has purchased over 100,000 net acres in the Lime, but because it’s backed by the New York investment firm ICO Fund, a private equity fund focused on direct ownership of oil and gas assets. ICO was formed through the convergence of veteran oil and gas professionals, innovative technologists, leading entrepreneurs and experienced investment professionals utilizing advanced sciences to extract oil reserves. They utilize leading technologies and quantitative analytics to achieve impressive internal rates of returns. PetroRiver, with ICO’s backing has garnered the leadership of two CEOs, Daniel Smith and Ruben Alba, who combined have several decades of experience in the oil and gas industry. Daniel has extensive prior experience with XTO Energy, acquired by ExxonMobil (XOM), and Ruben who brings an extensive oil service expertise to the company from Halliburton Energy Services and Superior Well Services. Ruben also holds several patents in completion technology. Serving as Senior Advisor is Luis Vierma, who spent several decades at Venezuelan state-owned oil and gas company PDVSA, where he served as the VP of Exploration and Production including a role as Venezuela’s Deputy Oil Minister to OPEC. Ironically, ICO is also an investor in AusTex.
So, it is truly impressive that we have been able to develop advancements in technology that allows us to drill much more efficiently and precisely for oil reservoirs in our own backyard, but better yet, that it provides us with the opportunity to become energy independent and diminish our reliance on Middle East oil and its messy politics. That is truly a pretty impressive feat indeed.
The author, Igor Sill, is a technology venture capitalist and founder of Geneva Venture Partners. He is a Limited Partner in Goldman Sachs Investment Partners, Benchmark Capital, Norwest Ventures, Brentwood Associates, SV Angels, The Endowment Fund and Granite Ventures. Sill was educated at the University of California, Berkeley, received his MBA from the Said Business School, University of Oxford and is a member of Merton College, Oxford University. He also attended Harvard Business School’s Venture Capital Program, Stanford Graduate School of Business Advanced Management College and Stanford Law School Directors College. He is member of Mississippi Lime Formation, Petroleum Technology Transfer Council and Global Petroleum Forum. In 1979 he started accumulating and holding ExxonMobil (XOM) and has no regrets.