While offshore waters surrounding the Gulf of Mexico states of Mississippi, Louisiana, and Texas have been traditionally expensive to exploit – and hence, somewhat financially inaccessible to smaller explorers – onshore targets such as those within the historically-productive Wilcox Group formations are attracting interest for the amount of hydrocarbons still up for grabs and their subsequent ease of development.
Amadeus Energy paved the way years ago and has been followed by other Australian juniors who have had varying degrees of success.
Recent Australian-listed newcomers to the region have included Pryme Oil & Gas, Target Energy, Burleson Energy, Texon Petroleum, Advance Energy and Austin Energy.
Three Australian companies – Petsec Energy, First Australian Resources (FAR) and Strike Oil – that are more established in the onshore Gulf Coast agree that for small and mid-sized companies, the region’s greatest drawcard is its combination of hydrocarbon-rich acreage and extensive infrastructure.
Petroleum + pipelines = profits
Petsec is best known for its offshore Gulf of Mexico exploration and production, but the company is also building an onshore Gulf Coast position.
“It’s always much more expensive to put in pipelines and drill wells offshore than it is onshore,” Petsec chairman Terry Fern said.
“We think we can find reasonable amounts of gas onshore and when we find it, the net return should be higher than offshore because we do not have to wear the extra infrastructure costs.”
The company first took up onshore acreage in 2004, entering a joint venture at the 60,000-acre Moonshine prospect in Louisiana’s St James Parish.
“The move onshore was primarily to protect us against rising offshore costs,” Fern said.
“About 60 percent of it is swamp, which is why there has not been any 3D seismic in the past but there has been some production in the surrounding area so there is a network of pipelines that one can access.”
In addition, onshore rigs are much cheaper than offshore rigs and there are no platform costs.
But there would no point in Petsec stepping onto dry land if the onshore Gulf Coast was not petrolific.
“Most of the reservoir rock along the Gulf Coast is very good and because the place has been so productive in the past, the infrastructure is extensive and it has become a relatively cheap environment in which to operate,” Fern said.
Strike managing director Simon Ashton agreed.
“The Gulf Coast is clearly a prolific oil and gas province with many productive horizons from very shallow to very deep levels almost sitting on top of each other,” Ashton said.
“The more infrastructure there is, the more economic it is to explore. And as drilling and seismic technologies advance, new opportunities can be evaluated at reasonable cost and risk. Also, because of the maturity of the industry, getting access to equipment is very efficient.”
To date, Strike has made two discoveries in the onshore Gulf Coast region – Mesquite and Rayburn – from three exploration wells in the Wilcox.
A further three development wells at Mesquite have been successful and the company is now drilling its first development wells, Duncan-1 and 2, at Rayburn.
Both wells are expected to be in production by year-end.
If all goes well, Strike will be able to bring on production and start selling oil and gas almost immediately because of the level of infrastructure onshore.
“We may even be able to sell test gas before we commence normal production,” Ashton said.
“When there is a gas pipeline nearby, you would be crazy not to connect into it to sell what you test. This all provides for early cashflow which helps the project economics and future project funding.”
FAR chairman Michael Evans gave an example of how the Gulf Coast compares with some other parts of the world.
“Our most recent well in the Lake Long prospect in Louisiana started production within two months of the first drill,” Evans said.
“By comparison, we made a discovery offshore China in May 2006 and we won’t commence production until 2009.
“The difference is purely to do with infrastructure. In China, we have to build our own. In the US, however, you are never too far from a market or pipeline.
“The early cashflow that comes from a quick start-up can often make a difference to a small company.”
Getting ahead of the competition
Getting early production from discoveries is all very well, but finding good prospects in the first place isn’t straightforward, Evans warned.
“If you go to a well-exploited area, you would generally pay a high price,” he said.
“The landowner knows that to the north, south, east and west of him there is production, so he will ask a price for the mineral rights which represents the fact that it is within a producing trend.”
Because of this, FAR prefers to target overlooked parts of the Guld Coast region in both dryland onshore prospects and the inshore waterways of Louisiana. The company has focused on running new three-dimensional seismic surveys over previously unexplored trends in the Wilcox, providing maximum leverage and minimising acreage costs.
The Wilcox runs in trends that can be seen clearly on production maps, according to Evans.
At the Northeast Waller prospect in South Texas FAR believes it has identified a particular play in a trend which has production at two ends and little production in the middle.
“We have leased out the middle section and shot a 3D survey which will hopefully prove that the trend continues through,” Evans said.
The 130-square kilometre Northeast Waller survey is expected to have multiple drilling objectives identified by January.
Unlike many other Australian companies that go to the US and buy a group seismic shoot, FAR chose to shoot its own seismic.
“A group shoot can make a particular play a lot more competitive and a lot more open,” Evans said.
“When we shoot the seismic ourselves, we own it and no one else gets a look-in unless we say so.
“If we explore where companies have previously shot seismic – where everyone has ploughed over the area – and made the results available, all of a sudden the competition and the price of acreage becomes a lot greater.”
Evans said this circumspect approach can be the difference between paying as much as $340 per acre for a leasehold position or as little as $30 an acre, which is FAR’s current price.
It’s also who you know
But getting good ground at a good price requires a lot more than flying under the radar. You also need a good contacts book.
Acquiring onshore Gulf Coast acreage can mean talks with many private landowners, often numbering into the hundreds. For example, FAR’s US representatives have dealt with more than 2000 landowners in the past couple of years alone.
Royalties to these landowners can be aggressive and the amount of time a company has to conduct its business over a given acreage can be much shorter than offshore.
Negotiating the landowner maze is one of the reasons Australian companies choose to partner with US operators, either through a formal joint venture agreement or more casual networking arrangements whereby local ‘landmen’ are used to assist with business dealings and identify new exploration opportunities.
“Most of the prime Gulf Coast opportunities don’t see the light of day because there is very much an ‘old boy’ network at play and those people generally get the pick of the crop,” Evans said.
“We have two key contacts in Houston – one is in his 60s and the other in his 70s – and they effectively work as scouts for us.
“Those who have been around the oil patch for a long time know the ups-and-downs and ins-and-outs. They are the ones who will be shown new opportunities on a regular basis.”
FAR also has partnership arrangements with US upstream companies Kriti Exploration (over the Lake Long field), Ayco (North East Waller) and Goodrich Petroleum (multiple prospects).
Similarly in 2005, Strike partnered with Cypress Exploration & Production Corporation in its Texas prospects, having previously worked with the company in the early 1990s.
At the time, Strike said the strategic alliance would enable it to accelerate its drilling program and access high-quality projects.
Two years later, Ashton believes the partnership has paid off.
“Having an experienced local partner is essential to our competitive position,” he said.
“It’s a very crowded market but if you can network with the right type of people, you can still get very good opportunities.”
Petsec also has a host of consultant landmen as well as joint venture partners such as Houston Energy, Red Willow Production Company, Badger Oil and Gas, Helis Oil and Gas and Cross Timbers Oil Company.
“It pays to be very careful when choosing your US partners,” Fern said.
“You should deal with people who have honesty, integrity, technical capacity and the willingness to establish a long-term relationship.
“And it is important to clarify that their objectives are the same as yours.”
But even with good contacts, setting up shop in the US is not an overnight process, Evans warned.
“It takes a long time to get to know the [US] industry and the pitfalls – you cannot expect to turn up and experience instant success,” he said.
“It’s a slow build and you learn quite a few lessons along the way.
“But provided you play your cards right, the advantage of the Gulf Coast is that your budget can give you a meaningful position and you get quick turnaround between discovery and production.”
First published in the November 2007 issue of Petroleum magazine
