There are no easy roads in East Texas, or so country artist Michelle Shocked sang in “Memories of East Texas,” her 1988 hit. “You had to watch out for all the curves,” the song goes.

The oil and gas industry has indeed seen its share of curves in East Texas. This historic producing region, which flourished in the 1930s and 1940s, was all but abandoned as fields were depleted and a complex, stacked geology baffled operators. Now, with the application of hydraulic fracturing and horizontal drilling, the region is seeing new life.

East Texas’ longstanding reputation as an established hydrocarbon-bearing basin makes it appealing to producers, and unconventional technology is helping them enhance existing producing reservoirs and assets. But operators are also accessing reservoirs that have been previously unproductive or uneconomic.

“There’s a school of thought that it’s the next big thing,” said Jordan Marye, partner at Denham Capital, which has made investments in East Texas. “I don’t know if that is exactly true or not, but we’re very excited about it.”

Charlie Goodson, the CEO of PetroQuest Energy Inc., which entered the East Texas Cotton Valley in 2003, is also excited. His company plans on drilling six horizontal wells by the end of 2014. Next year, it plans to drill 18 to 20.

“From our standpoint, this will be the fastest-growing play,” Goodson told Oil and Gas Investor. The company has a drilling inventory of 10 years.

Once the backbone of gas production in the U.S., drilling in many of the Cotton Valley Formation’s fields had depleted 75% of what was recoverable from vertical or vertically fracked wells by the time PetroQuest Energy Inc. entered the play in 2003, according to Goodson. “We, fortunately, had tighter rock that had little drainage in it.”

With the application of hydraulic fracturing and horizontal drilling, East Texas is seeing new life in its older fields.

At $4 per thousand cubic feet, PetroQuest's horizontal fracked Cotton Valley wells are generating more than a 70% rate of return.

Cotton Valley quest

The Cotton Valley is a massive, ancestral coastline that stretches from East Texas to the Florida Panhandle. Its geology fluctuates from an oolitic limestone to a series of sandstones.

“The way I’d characterize [East Texas Cotton Valley], it’s some very, very bad, silty type sandstones, but still a lot better than a shale,” Goodson said. “The early vertically fracked wells were simply uneconomic at any gas price.”

So, when PetroQuest entered the play in 2003, its 50,000-acre position in the historic Carthage Field was largely undeveloped. The company’s entry came by way of a farm-in from Chevron, which acquired the field as part of its purchase of Texaco. The property dated back to the 1940s, and had been owned by Skelly, which later became Getty Oil Co., then Texaco.

“It probably has, right now, one well per 1,000 acres, and so there was virtually no drainage on the property from the vertically fracked wells,” Goodson said.

The company, based in Lafayette, Louisiana, drilled about 60 vertical wells from 2003 to 2007 and planned on going horizontal in 2008, “and the Haynesville hit, and it sucked the air out of it,” Goodson said. The company instead went to work elsewhere, including in the Eagle Ford, Niobrara, Woodford and Fayetteville shales.

Time was on PetroQuest’s side. By the time gas prices started going up again in 2011 and the company was ready to begin drilling horizontal wells in the Cotton Valley, it had drilled about 500 of them in other plays.

“Our team had already really honed its skills on staying within a shale,” Goodson said. “We had someone watching this thing on a 24-hour basis, as opposed to ‘turn right and we’ll see in a few days.’ With thinner shales and sand, you really have to monitor it ... we went in with that knowledge and it’s worked very well.”

According to Gregory Robbins, vice president of corporate development at Houston-based Memorial Production Partners LP, the ability to drill longer laterals into multiple units (cross-unit wells) and stay in zone are the key drivers in delivering high-rate-of-return wells in the Cotton Valley. “Targeting areas that are liquids-rich can make the difference between 20% rate of return wells and 100%-plus returns,” he said.

Memorial is active in the play in Rusk County, and its Crow Holland 2H 14-603 well in Henderson Field recently posted an initial production (IP) rate of 17.4 MMcfe/d, NGL included. It also operates the best-in-class Terryville Complex across the border in North Louisiana, where many of its wells have posted 30-day IPs north of 20 MMcfe/d.

PetroQuest expected to see a 3x uplift going from vertical to horizontal. Instead, it saw an 8x uplift. Furthermore, at $3.75 per thousand cubic feet, the company’s horizontal fracked Cotton Valley wells are generating a 70% rate of return.

Well costs are between $5- and $7 million, and Goodson estimates gas breakeven prices between $1 and $1.50, with payout in about one year. “I think [well costs] will come down, but running two rigs consistently for 12 months, your frack crews are getting better on every well, your drilling company is getting better on every well, and you’re just going to bring those costs down.”

The company’s three most recent wells in Carthage Field exceeded expectations. Its PQ #13 well achieved a maximum 24-hour gross rate of 8.794 MMcf of gas, 583 barrels of NGL and 32 barrels of oil, while the PQ #14 well achieved a maximum 24-hour gross rate of 9.810 MMcf of gas, 619 barrels of NGL and 55 barrels of oil. And the PQ #15 well, while impressive, was also illuminating. On a 3,107-foot lateral, it achieved a maximum 24-hour gross rate of 8.367 MMcf of gas and 504 barrels of NGL—comparable to the other wells, which had laterals of about 4,600 feet.

PetroQuest expected to see a 3x uplift going from vertical to horizontal. Instead, it saw an 8x uplift.

“You’re really fracking into an area that has never had any depletion at all, and because you’re doing it over a lateral length, you’re just creating enough capillaries out there to get it out, and it’s the perfect situation for a horizontal lateral,” Goodson said. “Later on down the road, more than likely, this 5,000-foot lateral will drain a larger area, and we should see a higher EUR, and more than likely what’s going to happen is the EUR for the shorter lateral will probably stay where we initially had it, and the longer lateral over time will probably show a lower decline rate, and you’ll see the EUR grow.”

Liquids-rich

Industry activity in the area is intensifying. Other players in the region include Indigo Minerals, BHP Billiton, XTO and Memorial, and Marye and Goodson both noted a number of private-equity-backed companies on the scene. And while it’s true that technological advances have contributed to the emergence of the East Texas Cotton Valley, there are other aspects of the play that make it attractive to investors. Goodson and Robbins pointed to existing midstream infrastructure to get the product to market.

“This area was the backbone of gas production in America for so long, so there are massive trunklines through here, massive infrastructure, and while there’s a lot more activity than there was, there’s nothing like Marcellus, Utica, or Eagle Ford,” Goodson said.

Unlike many areas in the Northeast, East Texas players are close to markets with massive legacy infrastructure from both historical Cotton Valley development and the Haynesville, Robbins said.

“The one thing making it better than a lot of other places is you don’t see the differential risks burdening other areas in the country,” he added.

Furthermore, Cotton Valley production is liquids-rich, ranging from five to 15 barrels of condensate and 45 to 60 barrels of NGL per MMcf in some areas. East Texas also has the processing capacity to handle the current activity, unlike other areas suffering from processing bottlenecks.

“If you take the rate and you try to convert it to the dry gas rate, and then you compare those wells to the Marcellus, it gets people’s attention,” he said. “The point is, yes, our IPs are slightly lower, but they don’t have the same liquids we have. When you convert the liquids over at 20:1, then our wells’ production equivalent rates exceed many of the resource plays.”

It’s enough to attract foreign investors, Goodson said.

“They might not have access to a shale play, but they have a lot of existing production, and they don’t have a lot of experience with horizontal drilling or fracking wells or things like that, so it’s a whole other business model for going into existing areas.”

Robbins said he has seen a number of Asian investors looking to acquire Cotton Valley assets. For example, investors from Japan are looking for new sources of natural gas as their country moves away from nuclear power.

“They like it because of the proximity to Henry Hub and to exporting terminals,” he said. “They also see the assets’ high rate of return potential."

Depending on natural gas prices, IRRs on PetroQuest's Cotton Valley wells in Carthage Field range from 70% to upward of 85% with a quick payout.

Land issues

While operators are beginning to figure out the complex geology of East Texas and are quickly learning how to make horizontal drilling and fracturing work for them, the region has one more curve to be watchful of: the issue of land.

“Land is much more of a hand-to-hand combat game,” Marye said. “You’re leasing far smaller, less homogenous-shaped land parcels in order to build a land position.”

That differs greatly from in North Dakota and West Texas, where leases are determined by section, township and range, or in South Texas, where leases can come in large, contiguous parcels, such as a ranch.

“You have to be cognizant of the fact that oil and gas has been produced here for a long time, so there are a lot of held-by-production acres, and there are a lot of long-time, small independents that own assets,” he said. “I think it will be the normal course of challenges of any old, established area, similar to Permian Basin, similar to Pennsylvania or Ohio.”

Goodson said that East Texas operators usually use a combination of leasing, farming-in, buying others out and buying certain rights to assemble a decent-size package.

The result of the legacy unit configurations in East Texas, Robbins said, makes drilling long laterals a challenge. Operators are utilizing production sharing agreements as the primary method of combining and drilling in multiple units. "It is not uncommon for us to piece together two or three existing units in which we lay our laterals," he said. "On the Louisiana side, putting together multiple units is substantially easier. A longer overall process, but the state has paved the way to make this possible for operators."

But for those who want to put in the work, it can yield great rewards. In addition to Cotton Valley, PetroQuest has interest in the Bossier Shale and Travis Peak formations.

“It’s really the second generation of these fields, and I really do feel that while the Cotton Valley is a target zone right now, there are a lot of Lower Cretaceous and Jurassic sands that over time will be found to be good landing zones for horizontals and be productive,” Goodson said.

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