In an age when a lot of people are talking about going deep, Petro River Oil Corp. prefers to stay in the shallow end of the reservoir pool. The emerging E&P, which currently owns 85,000 net acres (115,000 gross) in the southeast Kansas region of the Mississippi Lime, has built its strategy around the play and its shallower targets. Shallow wells mean lower-cost, more affordable wells, according to Daniel Smith, engineer and executive vice president of operations for the company.

“You go anywhere else for a horizontal well, you’ll be drilling twice as deep at least,” Smith says. “And because of that, we can use smaller rigs and nonspecialty proppants, just regular beach sand for the most part, to stimulate these wells.” The low capital cost ($400,000 to $3.5 million) per well doesn’t just mean a more economic well it also helps the company manage risk.

“Any time you get into plays such as the Eagle Ford or even the Cana Woodford or the Tuscaloosa Marine shale, you’ve got wells that are 20,000- to 22,000 feet measured depth,” he says. “In that particular situation, you’ve got an extraordinary amount of money invested in a single well, and if anything goes wrong, whether it’s geological or, more than likely, the usual failure is mechanical, you have just taken a major hit.” By contrast, the Mississippi Lime play is between 3,000 and 6,000 feet in depth, mitigating those risks.

Building the company

Petro River attracted attention a year ago when it announced that it would enter into a reverse merger with the distressed OTC-traded company Gravis Oil Corp., Houston, formerly MegaWest Energy Corp. Gravis had spent more than $100 million leasing and developing a heavy-oil play in Missouri. The merger was completed in March of this year, allowing Petro River to access the capital markets.

“There was a lot of money that was spent out in the MegaWest assets so if you’re going to be public, or you want to go that route, you want to access capital,” says Scot Cohen, executive chairman of Petro River.

Cohen is also managing partner at Iroquois Capital Opportunity Fund, a New York-based private equity fund that oversees more than $300 million and has invested in Petro River. It was through Iroquois that Cohen recruited top talent to round out his team.

“Right away, it was clear that we needed more engineering and geological capability to properly assess these opportunities,” says Cohen. First, he brought on industry veteran Luis Vierma as executive vice president of geological and geophysical. Vierma previously served as vice president of exploration and production at PDVSA, the Venezuelan national oil and gas company. He also was Venezuela’s deputy oil minister to OPEC.

Later, Cohen added Smith and Ruben Alba, engineer and executive vice president of unconventional, both of whom had been consultants for Iroquois. Their technical expertise made the perfect team, in Cohen’s estimation.

Smith and Alba had previously reworked wells in the Mississippi Lime for AusTex Oil Ltd., another Iroquois-backed E&P. “The wells had very good results,” says Jason Selch, who joined Iroquois Capital earlier this year to run the Iroquois Energy Fund. “Then Iroquois said, ‘You did a good job as consultants, now we want to build a company around you. Where should we go?’”

Cohen says it was empowering to have the pair’s expertise, especially when he found that other companies he approached for technical expertise didn’t have the kind of skills he wanted his team to have.

Smith had spent seven years with XTO Energy Inc., now a subsidiary of ExxonMobil, as an operations engineer, specializing in hydraulic fracturing and artificial lift. He managed fields producing more than 100 million cubic feet of natural gas per day, and worked on numerous drilling projects from the Marcellus to the Permian Basin. Alba had spent a large part of his career with Halliburton and Superior Well Services, during which he introduced multiple novel technologies for new fluid chemistry and completion processes to the industry. He holds three U.S. patents.

“Daniel and Ruben’s background, the ability to design wells and implement them, and really lead the services, lead the completions, and even lead the due diligence, technically was something that gave us a lot of confidence going forward,” Cohen says.

Smith acknowledges the technical expertise of the team, but is quick to emphasize the equal importance of capital. “It doesn’t matter the skills you have on the technical side, whether it’s a service background, like Ruben has, or whether you have an incredible international company with 47,000 people working under you, like Luis, or the background I had, which was at XTO,” Smith says. “I learned a lot about how private oil and gas companies work, and they’re highly dependent upon their partners and the people they do business with. And that can be good and that can be bad, but the key is that you’ve always got to have access to capital to keep everything running.”

Kansas Mississippian

When Petro River, through Iroquois, began making acquisitions, the idea was to stay focused on optimization, shallow unconventional wells, and high rates of return. The fund’s work with AusTex had shown the team the potential of the Mississippian, and it identified an opportunity to take on a large acreage position by buying a company’s Kansas acreage out of bankruptcy court. The company had 20 existing wells, 10 of which were on the eastern flank of the Nemaha Ridge in Marion, Kelley, Butler and Harvey counties. Petro River raised a round of capital to rework the wells and do some geological study of the assets.

According to a company presentation, the company completed a 60-square-mile 3-D seismic survey and found potential for 2,400 vertical and 600 horizontal drilling locations on its East Kansas Mississippian position. More than 37,000 wells have been drilled in the counties surrounding Petro River’s acreage, and the independent finds itself in good company alongside larger entities such as Shell, Chesapeake Energy, SandRidge Energy, Encana and Range Resources.

The fund also had $12 million in debt tied to legacy heavy-oil assets in Missouri and Kentucky. With some restructuring, it was able to merge those assets with the Kansas position. “That was really what formed Petro River,” Cohen says. “The idea is that the same team will be managing the operations of all the assets from the corporate level of Petro River.”

Smith says the geology of the company’s Kansas position correlates with well-developed areas in Oklahoma.

“We are in the exact same depositional environment of the Mississippi Lime that AusTex is in Kay County, Oklahoma,” he says. “We’re looking at these different sections, and that’s ultimately what guided us to the large position and to extend the money to take this leasehold where we are.”

The company currently has five or six wells producing in the Mississippi Lime, and is planning to raise capital for development so it can drill a 20-well vertical program. It also plans to continue building its core management team, expand its 85,000 net acreage position up to 250,000 to 350,000 net acres, and increase joint venture development funds. It is currently pursuing such funding.

The Show-Me shale?

When Petro River merged with Gravis, it acquired some existing wellbores in a heavy-oil field across the border in Missouri. “Heavy oil is a tough game, it’s a place where you have to look at a lot of details, but we’re also very enthusiastic about some of the potential these assets have,” Alba says. He’s been working on reentering some of the fields in the Show-Me State, one of which had peaked at 300 barrels per day. “No one is seriously invested in these regions yet... there’s a tremendous amount of upside.”

Cohen also is confident the Missouri assets will pay off. It is a challenge, he says, but also a great opportunity.

“There’s no one talking about producing oil in Missouri, and there’s a tremendous amount of original oil in place,” he says. According to a company presentation, the region holds several billion barrels of original oil in place. The company also has infrastructure there, including two production facilities, each capable of handling 1,000 barrels of oil per day. Total production peaked at more than 400 barrels of oil per day.

As for the Kentucky heavy-oil assets, Alba has this to say: “Many people don’t know that the Big Clifty formation in Kentucky is Mississippian in age. This interval has the same heavy-oil reserve story as Missouri.

“In short, when I look at the Kentucky reserve region and I look at our data, Kentucky is as prolific as Missouri. The equations to succeed here have been established by a handful of producers. So it is a revisited battleground in the industry as to who will unlock the engineering. That’s our focus now.”

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