In East Texas, credited as the birthplace of the modern oil industry, prolific, shallow, conventional wells have long made oil the king of the region. But, as drilling has gone deeper, exploration has allowed producers to tap the so-called unconventional or tight-gas zones, long-trapped in deep, low-porosity sands.

High natural gas prices and advanced technology, particularly fracturing techniques, have spurred drilling activity and turned a once-marginal economic venture into a lucrative pursuit.

The production numbers are impressive. “The East Texas Basin is one of the most dynamic in the U.S.,” says Porter Bennett, president and chief executive of Bentek Energy, a Denver-based natural gas information and consulting firm.

Bennett estimates that last year, the basin produced about 1.3 trillion cubic feet (Tcf), or 3.6 billion cubic feet (Bcf) a day, representing a 10.7% increase over 2004 production levels. That rate of increase means East Texas had the third-highest growth rate among major U.S. production sites, trailing only the Uinta-Piceance Basin straddling Colorado and Utah (also an unconventional gas play, with a growth rate of 18.2%) and the Fort Worth Basin (driven by Barnett Shale production, with a growth rate of 13.7%).

Last year, about 67% of total production in East Texas was derived from conventional formations. However, since 2000, production from the unconventional zones has grown the fastest, by 12.5%, while conventional production increased at an annual rate of about 5.5%, Bennett says.

One factor causing gas production to grow in this basin is operators’ enthusiastic pursuit of tight-gas or unconventional plays. Through December 20, these plays showed cumulative production of 8.7 TCF of gas, and 61.2 million barrels of oil, says David Reimers, senior data specialist for Houston-based IHS Energy, an E&P data and consulting firm. Monthly gas production was 47.7 Bcf and daily output was 1.6 Bcf.

At year-end, some 66 operators were active in East Texas and there were 7,684 producing wells.

In East Texas (and nearby North Louisiana, which is geologically related), tight-gas sands include four individual pays: Travis Peak, Cotton Valley, Bossier (found between 12,000 and 14,000 feet), and Deep Bossier (at 15,000 feet and deeper), says Vello Kuuskraa, president, Advanced Resources International (ARI), an E&P technology development and consulting firm based in Arlington, Va., which specializes in unconventional resources.

So far, Travis Peak and Deep Bossier development has been limited to East Texas. Excluding these two plays, ARI’s estimate for the Cotton Valley/Bossier plays in East Texas and North Louisiana is an ultimate resource potential of about 39 Tcf, with 20 Tcf of undeveloped resource, assuming wide-scale infill development with density of 80 acres per well. Closer well spacing would substantially increase the resource estimate.

“The really exciting new play in East Texas is the Deep Bossier tight-gas play, which is just starting,” Kuuskraa says.

The Cotton Valley formation is found throughout East Texas. This gas-bearing sandstone is found in the Overton Field in Gregg, Rusk and Smith counties, and in the Carthage Field of Panola County. The Bossier Sand of East Texas also is a continuous play of multiple fields and pay zones. Current drilling activity centers on Freestone, Henderson and Anderson counties. New development also is occurring in the Travis Peak formation in the Joaquin Field of Shelby County, and in some areas of the Freestone Trend in Freestone, Limestone and Robertson counties. A single well can find multiple pay zones of Cotton Valley, Bossier and other sand formations.

By the end of last year, a cumulative total of 9,506 wells had been drilled in Cotton Valley and 1,730 drilled in Bossier for a total of 11,276, Reimers says, with most of those occurring within the past five years.

Production from East Texas tight-gas sands (excluding the recent Deep Bossier wells) varies. Although the average well produces 1.5- to 2 Bcf over its productive life, the top 10% of the wells will produce an average of 5- to 6 Bcf, Kuuskraa says. The best wells will produce up to 8 Bcf and the lowestquality wells will produce less than 1 Bcf. Recent higher gas prices now enable the lower-quality portions of this gas play to be economically developed, he adds.

The various Travis Peak formations are the most prolific unconventional sands in the East Texas Basin. In 2004 (the last year in which composite statistics are available), wells in the Travis Peak formation accounted for 37% of total unconventional production. The Cotton Valley Limestone and Sandstone formations accounted for 24% and 21% respectively, meaning the three groups of formations accounted for more than 80% of the total unconventional production in the basin, Bennett says.

Leading producers

East Texas production is relatively concentrated. In 2004, the top 10 producers accounted for about 77% of the basin’s total production. XTO Energy was the largest operator, producing 210 Bcf, or 17% of the total. Anadarko Petroleum and Devon Energy were the second and third largest producers, respectively, in the region.

XTO also took honors as the largest unconventional gas producer, accounting for 22% of that production. Hunt Petroleum, Devon, Southwestern Energy and Marathon were the second through fifth largest unconventional gas producers, respectively, each accounting for between 6% and 9% of total unconventional production. Anadarko, XTO and Devon were the three largest operators of conventional wells; respectively they produced 18%, 16% and 10% of total conventional production, Bennett says.

Through the third quarter last year, the largest East Texas producers, combining conventional and unconventional production, were XTO, Anadarko, Devon, Samson Lone Star, Hunt Petroleum, ExxonMobil, BP Energy, Valence, Chevron and Marathon, respectively.

Southwestern Energy’s East Texas production through third quarter last year was 100% from unconventional gas wells, and Marathon’s production was 93% unconventional, according to the Bentek database.

XTO Energy is the largest East Texas gas producer, producing about 500 million cubic feet per day from the Freestone Trend alone. About 65% of XTO’s total corporate production comes from tight-gas sands, with about 45% of it from East Texas. XTO estimates its East Texas reserve potential could be up to 2.6 Bcf a day.

The company’s Freestone Trend production will increase to an estimated 730 million a day during the next three to five years, says Gary Simpson, senior vice president of investor relations and finance.

“There is not that much risk,” says Keith Hutton, president. Tight-gas plays in East Texas posted 30% returns back when gas was at $2, he says. “There are already 700 wells drilled there, so we know it’s going to work.”

XTO currently has 20 rigs operating in East Texas. It drilled about 200 Freestone wells last year and expects to drill 250 this year. At an estimated cost of about $2 million per well, that represents an expenditure of $500 million. Through last year, the company drilled about 670 Freestone wells with plans to drill about 1,100 more within the next few years.

“The Freestone wells are prolific and fit the company’s mission of low-risk, high-margin projects. XTO’s Freestone wells would remain profitable even if natural gas prices dipped to about $4 per thousand cubic feet,” Simpson says. With 85% of total company production coming from non-conventional plays, XTO claims to have its best low-risk drilling inventory in its history. (XTO is also the second-largest producer from the Barnett Shale.)

M&A deals capture tight gas

The announced $35.6-billion sale of Burlington Resources to ConocoPhillips signifies the return of a major integrated producer to East Texas. Burlington had made East Texas one of its core plays and had commented that discoveries there were among the largest onshore wells in the lower 48 states.

Burlington produces about 200 million cubic feet a day from its Deep Bossier play there. Before the sale was announced, the Houston company had been in an acquisition mode, most notably in the Bossier and Cotton Valley plays. In November, it paid $460 million to acquire the assets of an undisclosed private company that had been a co-owner with Burlington in the prolific Savell Field in the Bossier. Production from that 26,870 net-acre acquisition is about 50 million cubic feet a day.

ConocoPhillips’ acquisition of Burlington grabbed most of the patch’s end-of-year headlines as Burlington’s conventional and unconventional assets would propel ConocoPhillips to number one in total North American gas production. But, that was not the only M&A deal to impact East Texas.

Oklahoma City-based Chesapeake Energy entered the play in November through a deal with Houston-based Gastar Exploration Ltd., an active producer and newly listed American Stock Exchange company with significant acreage in East Texas.

Chesapeake acquired 19.9% of Gastar’s outstanding stock and 33% interests in its Hilltop Prospect area. The two companies formed a 13-county area of mutual interest agreement through an integrated three-part transaction. The Hilltop Prospect area in Leon and Robertson counties is about midway between Dallas and Houston. The primary play is the Deep Bossier sands, where Gastar and its partners have about 54,000 gross acres under lease.

“We believe that entering into this transaction with Chesapeake creates significant value for Gastar through Chesapeake’s contribution of expertise, capital and access to drilling rigs and services,” says J. Russell Porter, Gastar’s president and chief executive. “With Chesapeake’s involvement, we will be able to accelerate exploration and development drilling of the Hilltop area resulting in the creation of that value sooner, and hopefully in greater amounts, than had Gastar continued exploration and development of the Hilltop area independently.”

Prior to its deal with Chesapeake, Gastar had drilled seven Deep Bossier wells in the Hilltop play. At the end of last year, Gastar was producing from four East Texas wells at a rate of about 7.5 million a day exclusively from the Deep Bossier. Just after year-end, Gastar announced the successful confirmation of a Knowles limestone discovery in the same area as its Deep Bossier activities.

The deal represents Chesapeake’s initial foray into the Deep Bossier, although it is active in other nearby formations, says Tom Price Jr., Chesapeake’s senior vice president, corporate development.

“This is a play that we have been looking at for a long time and have been involved in through a number of our acquisitions, though most of it in shallower formations, ” he says.

Chesapeake believes the deeper, higher-pressured formations between 16,000 and 20,000 feet included in the joint venture are “likely to have greater reserves than the other plays that we’ve seen over the last few years,” Price says.

Throughout its acreage in the Bossier, “We’re expecting an average rate of 8- to 10 million cubic feet per day,” Porter says. That makes the play “certainly economic at today’s prices” and likely to remain economic should prices fall as low as $4 to $5 per thousand cubic feet of gas. The cost to drill and complete a well to 17,500 feet is about $9 million. Drilling and completions for prospects as deep as 21,000 feet can cost as much as $12 million.

Anadarko Petroleum has been operating in the greater Bossier Trend, which stretches across East Texas and North Louisiana, since the mid-1990s, and has discovered nearly 3 Tcf of gas there. The company holds interests in about 478,000 acres in the Bossier play.

The Bossier is a core foundation asset, says David Larson, vice president of investor relations. Anadarko plans to operate a steady five-rig program to maintain existing levels, which in third-quarter last year averaged 271 million cubic feet of gas a day. The primary area of activity is in Robertson and Leon counties.

In East Texas, Anadarko also operates a gas-gathering system that runs through the heart of the Bossier properties, as well as the Bethel gas-treating plant, which is capable of handling as much as 500 million cubic feet a day.

Canadian-based EnCana has been an active East Texas producer, targeting the Bossier and Cotton Valley zones, since 2004 through its acquisition of assets from formerly Denver-based Tom Brown Inc. EnCana has also upped its position in the play through a joint venture with privately held Houston-based Leor Energy LP.

EnCana’s East Texas production last year was a little more than 90 million cubic feet per day, compared with 2004 production of 50 million a day. This year’s projection calls for East Texas production of 105- to 115 million a day, says Roger Biemans, EnCana’s executive vice president and president of EnCana Oil & Gas USA. EnCana spent about $220 million in East Texas last year and this year expects to spend more than $260 million.

Other producers of note

Lafayette, La.-based PetroQuest Energy, which in 2003 expanded out of the Gulf Coast region to East Texas via a 50% interest in 42,000 acres in the Carthage gas field, is currently producing about 11 million cubic feet a day from its South Carthage Field, says Todd Zehnder, vice president, corporate communications. At the time of the acquisition, the company booked reserve additions at 28 Bcf. The company identified 100 locations in Carthage and drilled about 15 wells last year, with plans to drill another 20 this year.

“The average well will have an initial production rate between 1 million and 2 million cubic feet equivalent per day and it has a hyperbolic decline curve, meaning most of the decline will be in the first six to 24 months. We book about 1- to 1.5 [billion cubic feet equivalent] per well.

“We use all types of fracs depending on what zone we are completing (in Travis Peak, we primarily use nitrogen foam fracs and in the Cotton Valley, we typically use a hybrid of slick water and gel fracs,” Zehnder says.

“We have been getting long-term contracts on rigs in this area, and we line up service ahead of time to minimize downtime,” he adds.

GMX Resources told investors in December that largely based on the positive results of its East Texas wells, it would more than double its capital-spending budget this year to $70 million compared with $32 million last year.

The Oklahoma-City based E&P company said it had finished drilling its 53rd Cotton Valley well in the North Carthage extension. The company’s total daily production at the end of last year was about 10 million cubic feet of gas. GMX also announced it had acquired a drilling rig it had under contract in East Texas and plans to use it to continue Cotton Valley wells.

“The company expects this purchase to increase development in our North Carthage Field and to help us control the costs of our drilling,” says Ken L. Kenworthy Sr., executive vice president. GMX and Penn Virginia Oil & Gas, a subsidiary of Penn Virginia Corp., formed a joint venture in December 2003 to exploit East Texas tight-gas sands.

Houston-based Southwestern Energy, whose East Texas operations are primarily in the Overton Field in Smith County, seeks to expand its position through additional development. Its Overton Field development has been a standout success. Tight-gas production, which was only 2 million cubic feet a day in March 2001, rose 10-fold to 22.2 Bcf in 2004. And, by mid-December, the production rate was about 107 million a day. This year, the company plans to invest about $196 million in East Texas.

Detailed background on these tight-gas plays is available in previous issues of Oil and Gas Investor. See “The East Texas Basin,” February 2004; “North Louisiana,” March 2004; “East Texas Gas Manufacturing (Overton Field),” August 2003; and “The Bossier,” December 2000.