COLUMN-Oklahoma gears up for next big shale play: 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.

Most Popular in Business