Once spotlighted for its coalbed methane, the Powder River Basin is gaining renewed interest for its deep, stacked-pay oil potential.

Peak Exploration & Production LLC’s Iberlin 1-10 TH well, targeting the Cretaceous Turner formation in Campbell County, Wyoming, came on as a bit of a surprise in July with a reported 24-hour initial production (IP) rate of 2,600 barrels of oil, 4.3 million cubic feet of gas and 250 barrels of gas liquids per day. And that flow rate is conservative, as the well was produced through a 40/64-inch choke.

“We could have IP’d it higher had we wanted,” acknowledges Peak E&P chief executive Jack Vaughn. “We could have opened the well and gotten 3,000 barrels a day.”

The world might not have known the specifics of the Powder River Basin gusher if not for its unusually public entrance. Peak, a private E&P with private-equity backing from Yorktown Capital Partners and the Hillman Co., likes to stay under the radar, but “the problem we had with this well,” says Vaughn, “is it was right on the highway—you could see the flare for 15 miles.”

Having observed mixed results from other operators testing the play nearby, Vaughn knew the Turner formation held potential, “we just didn’t know how much. I’d have to be clairvoyant for that not to be surprising.”

And it’s not just Peak; other data points in the Powder River Basin from various tight-oil zones are lighting up the radar. The Powder, still the nation’s leading region for coal production and known for its coalbed-methane gas fields, is re-emerging as an oil contender.

Encouraging results

The Powder, located in northeastern Wyoming and southern Montana, encompasses some 24,000 square miles and features a series of stacked-pay zones. The Muddy sandstone is the source of historic, conventional oil production. Bringing horizontal, unconventional technology to bear, operators first targeted the Niobrara and Mowry formations here, with varied results. Now, drillbits are also aimed at zones such as the Shannon, Sussex, Turner and Frontier.

“The Powder River Basin got serious love during first-quarter earnings,” Global Hunter Securities analysts said in a June research note.

One of those reporting companies, SM Energy Co., pegged a type curve of 1 million barrels of oil equivalent (BOE) on the Frontier formation during the quarter, its Dandy State well yielding 927 BOE per day (65% oil) on a 30-day rate. Further, two partner wells produced 1,418 and 1,734 BOE per day at a peak 30-day IP.

“We’re really excited about the Frontier,” SM Energy president and chief operating officer Jay Ottoson said on the first-quarter conference call, “and we think the Shannon interval can be interesting as well,” referring to a recent Shannon test with a peak 30-day IP of approximately 500 BOE per day.

SM Energy holds some 110,000 net acres in the Powder River Basin, of which 65,000 is considered “best rock” in the Frontier play. The company projects about 250 drilling locations and 90 million BOE total net resource potential in that formation alone. While earlier Niobrara tests proved inconsistent for SM, “in the Frontier, pretty much every well we’ve participated in within this core area has been good,” said Ottoson.

Well costs are still high, with a long-lateral well currently near $15 million. But with a 1-million-barrel estimated ultimate recovery (EUR), he anticipates this program to have “substantial economics.”

SM also has 45,000 acres prospective for the Shannon formation, and 15,000 for the Sussex. For the remainder of 2013 it is running one rig focused on the Frontier, with plans to add another in 2014.

Contributing another first-quarter data point, Devon Energy brought online five oil wells targeting the Turner, Frontier and Parkman formations. These wells averaged 540 BOE per day over 30 days. Two subsequent wells targeting the Parkman and Turner averaged 1,100 BOE per day, with 960 barrels of oil. Well design features laterals of 4,500 to 5,000 feet.

Devon chief operating officer Dave Hager said in a conference call that “the results were impressive and have given us renewed confidence that we can have a lower-risk development opportunity with a lot of locations out there. We’ve done a lot of detailed technical work to figure out (where each of these plays work) over the course of the past year or two, and now we’re starting to see the results of it.”

Devon has identified 600 risked locations across the three formations.

Chesapeake’s partner

Chesapeake Energy Corp., a first mover among public companies in the Powder River Basin tight-oil play, is also the leading operator, with 10 rigs drilling for the Niobrara formation in southern Converse County, Wyoming. Together with international partner CNOOC International Ltd., the tandem holds a 50% interest in nearly 1 million gross acres. The other half is owned by privately held RKI Exploration & Production LLC. Like Chesapeake, it is based in Oklahoma City.

It was RKI that brought Chesapeake into the play, via a partnership forged over pancakes at a local IHOP restaurant.

Powder River Basin veteran Ronnie Irani, RKI founder and chief executive, recognized the potential of unconventional drilling in the Powder’s oil zones early on. In 2006, using data from historic Niobrara perforations, he identified markers where the Niobrara exhibited a higher concentration of carbonate. But he knew his start-up couldn’t compete with the larger companies in building a position. He called his neighbor, former Chesapeake chief executive Aubrey McClendon.

“I was convinced of the potential of the Powder, and knew he was the only guy who could move that fast. The acreage was open.”

McClendon made a date at the IHOP, and Irani convinced him, using the maps he’d developed, over a two-hour meeting. “I put the outline of the sweet spot in front of him, which hasn’t changed. It was on a handshake; we signed it up 50-50 and got going," says Irani.

Today, RKI holds an undivided 50% working interest in the total 920,000 accumulated acres, concentrated in Converse County. Chesapeake operates the southern half, employing a drilling carry from CNOOC, and RKI the northern half.

Chesapeake began drilling for the Deep Basin Niobrara in 2009, and most of the acreage is currently held by 26 federal units in place or Niobrara production, with more than 90 wells drilled. However, the company is now focusing on a 140,000-acre development program using pad drilling in southern Converse County. “The southern position is the sweet spot for Niobrara and Frontier,” says Irani. “That’s where Chesapeake’s rigs are now focused.” Wells here consistently IP between 1,200 to 1,800 BOE per day, 70% oil and liquids, he says.

Here, the Deep Niobrara sits 11,000 feet deep, and laterals average 5,000 to 6,000 feet, completed with a plug-and-perf technique. Wells cost about $9.5 million, with a 40% to 45% rate of return to RKI’s interest. Pads are designed with six to eight wells.

With 60 million cubic feet per day of processing capacity currently, the partnership has enough for now. It will add another 100 million per day by the middle of next year, and 100 million more the following year. “Now that Chesapeake has gone to pad drilling, we anticipate substantial production growth and improved cost efficiencies by this time next year,” says Irani.

On its northern operated acreage, RKI this year began drilling into the Parkman, Teapot and Sussex zones, conventional sandstones rather than shale. With five wells completed and four wells drilling or waiting on completion, the Parkman has IP’d between 500- and 750 BOE per day; three Teapots have been drilled with IPs between 350- and 500 BOE per day; and one Sussex IP’d at 425 BOE per day.

“We’ve essentially had a 100% success rate,” Irani says. “We are excited by the results we are seeing in the very early stages of these plays.”

Shallower than the Niobrara, wells in these zones cost about $4.5- to $5.5 million, with 4,500-foot laterals typically, and drill times to total depth of as little as 11 days. Rate of return: 75% to 100%.

“Those are easy drills,” Irani says. “For the handful of wells we’ve drilled, we’re making good progress.”

The company is now running two rigs, with a third planned by year-end. Irani says he plans to end 2014 with as many as eight rigs in the Powder River Basin. “The Powder is a solid oil basin. As we add rigs, we plan to have two or three in each zone.” This includes drilling for the Niobrara and Frontier—equivalent to the Turner further north—on its operated position.

“The Frontier is definitely there,” he says, noting Chesapeake drilled a successful short-lateral Frontier well early on before concentrating on the Niobrara. That well has an EUR of 600,000 BOE. “My estimation is that’s the low end. It wouldn’t surprise me to see 700,000 to 900,000 BOE per well” in the Frontier.

Irani estimates the company has 15,000 drilling locations on the combined acreage. RKI, with a consortium of investors including Ziff Brothers Investments and First Reserve Corp., splits its $600-million budget between the New Mexico Delaware Basin and the Powder River.

“When I formed RKI and looked around, no one was playing the Powder River at that time. We were fortunate to build a position. It’s a tremendous oil basin. Our growth potential is huge.”

Powder targets

Today, both public and private operators are quietly testing various Powder plays, including industry heavyweights Anadarko Petroleum Corp. and EOG Resources Inc.

Anadarko, with some 350,000 acres amassed, reported “exciting exploration results” from about 20 wells in its second-quarter conference call. “The zones we’re playing are the Shannon and Frontier, and we’re also looking at the Niobrara and Mowry,” Anadarko’s executive vice president of U.S. onshore E&P, Charles Meloy, said during the late-July call. The rates “look really good,” about 500 to 600 barrels a day, although it’s too early to know EURs.

The company is putting plans together for development programs in two areas for 2014.

“We are actively moving forward,” president and chief executive Al Walker said of the play in an earlier conference call. “It’s an exciting area for us, and we’re hoping to put some size and mass around them so we can put our machine to work.”

EOG Resources has been mostly radio silent on the play, although it holds some 150,000 acres in the Powder, according to research by Wells Fargo Securities, with 128 permits issued during 2013. That, says Wells Fargo analyst David Tameron, represents 30% of all permits issued year-to-date, and compares with Chesapeake’s 79 permits with 10 rigs active. “EOG is drilling up a storm in the Turner,” he says.

Bill Barrett Corp., with eyes on the Sussex, Shannon and Frontier, drilled five wells in 2012 with IPs between 500 and 600 BOE per day, and another five this year, with an average 24-hour IP of 816 barrels a day and 30-day average of 516 barrels. Bill Barrett is marketing its 68,000 acres in the play.

Samson Resources holds 275,000 net acres in the basin, with exposure to the Parkman, Sussex, Shannon, Niobrara, Frontier, Mowry and Muddy formations, according to an SEC filing. “To date, Samson has focused on exploiting the Sussex and Shannon oil sands with 5,000-foot, multistage-frac horizontal laterals.” It operates 51 horizontal wells targeting the Sussex, and four in the Shannon. The company has 900 locations in those two formations, and is running three rigs with plans to drill 27 wells in 2013.

Peak’s production

In its first week online, Durango, Colorado-based Peak E&P’s Iberlin well produced 14,000 barrels of oil, and “it’s not declining,” notes Jack Vaughn. Due to gas-gathering constraints for the 1,385-Btu flow, “we’ve got it pinched way back, and it’s still making 1,000 barrels a day on an 18/64 choke.”

The well was drilled to a total measured depth of 15,667 feet, with a 4,000-foot lateral. It was fracture stimulated in 14 stages.

As good as it is now, though, the well was not easy. The company fought to keep it under control once in zone. “We had consistent flows every day on the lateral,” Vaughn noted. “These wells require high mud weights. It was just perseverance and caution getting the well drilled. Our drilling team did a great job.”

The well was budgeted for $7.1 million, but at 65 days to drill with a managed-pressured drilling unit and a higher pressure blowout-preventer stack, “we probably went over a little bit,” he says.

The Iberlin was Peak’s first Turner well; four Shannon-formation wells preceded it. These were drilled along the southern apron of Hartzog Draw Field.

“We like the Shannon,” Vaughn says. “It gives us good reserves and a good rate of return.”

Offset results and the lower $6-million-perwell cost from the shallower zone persuaded Vaughn to lead with the Shannon. Shannon 24-hour IPs range from 400 to 675 barrels of oil and 200,000 to 400,000 cubic feet of gas per day. He estimates EURs of 450,000 to 650,000 barrels of oil per well.

Peak president and exploration manager Glen Christiansen says the initial play concept was to develop the Shannon, but due to the stacked- pay potential, “we felt it prudent to drill pilot holes and evaluate deeper horizons, like the Turner. The pilot-hole data were key in identifying the Iberlin target. That data, along with offset activity, have allowed us to map the Turner over a significant portion of our acreage.”

The current development plan is to drill on 320-acre spacing, but, he adds, “it’s likely that spacing will decrease once we gather additional reservoir and production data.”

Peak E&P is Vaughn’s fourth iteration of Peak Energy Resources, with about $200 million currently invested. The company holds 25,000 acres in the play and growing, with 40 likely drilling locations. Devon Energy, EOG Resources, Denbury Resources, Yates Petroleum and Ballard Petroleum are offset operators to Peak’s acreage. Upside potential here includes the Niobrara and Mowry shales, and the Muddy, Parkman, Frontier and Dakota sandstones.

“The multiple pay zones in the Powder River Basin are what make our acreage position so exciting,” Christiansen says.

The company is drilling with one rig now and may add a second in the fall. Peak plans to complete 12 wells this year with the one-rig program, alternating between the Turner and Shannon. Four additional wells are likely if the second rig is added.

“We’ve got some infrastructure problems to solve for high-pressure gathering before we can really get as active as we want in the Turner,” Vaughn says. “We can go with the lower-pressure gathering system with Shannon wells.”

What attracted Vaughn to the Powder River in the first place? “Why not?” he responds. “It’s like the Permian—it’s a known hydrocarbon basin with multiple stacked pays. With horizontal technology, that changes the landscape.

“We are obviously very pleased with the results of this (Iberlin) well,” he says. “The strong initial production from this well, as well as the positive results from earlier wells, are clear indicators of the overall resource potential of our Powder River Basin acreage.”

Anticipating the Mowry

Denver-based Cirque Resources LP concentrated its position further north in the Powder than most active operators, accumulating 130,000 net acres primarily in Sheridan County, Wyoming. Its objective: the Mowry shale.

“Cirque focuses on oil resource plays in basins with known petroleum systems and, given the Powder River Basin has produced over 1.3 billion barrels of oil from just the Cretaceous-age reservoirs, it fit the bill,” says Cirque chief executive Peter Dea. “The Mowry shale has many of the right criteria for an exploratory target.”

That includes high total organic content (TOC), thermal maturity, brittleness, being naturally fractured, favorable resistivity, and “signs of historic producible oil via old, unstimulated vertical wells that produced tens of thousands of barrels of oil.”

“When you look at the components that make successful shale plays, the Mowry appears to have all the basic framework that is required,” says Rob Sterling, senior geologist for Cirque. “It just hasn’t had the drilling.”

Sterling points to the thousands of vertical wells drilled through the Mowry in the 1960s through 1990s on the way to the Muddy sandstone. While generally bypassed, a handful of operators perforated the formation, with mixed results. EURs were small, maybe 1,000 or 2,000 barrels of oil, but one topped 200,000 barrels, he notes.

“There is still a lot to learn in the Mowry,” Sterling says. “It is a true shale, and is one of the primary source rocks for a lot of the Cretaceous rocks in the basin.”

Sterling believes the Mowry is present basin-wide, ranging from 8,500 to 14,000 feet deep, averaging 225 feet thick. On Cirque’s acreage, depths range from 10,000 to 11,500 feet. And while the formation doesn’t change much across the play, what varies is thermal maturity, he says. “An understanding of regional geology is essential.”

Other operators have drilled Mowry wells in the past year in the south-central part of the basin; one in particular, by EOG, remains unreported. “What we’ve seen in that well encourages us about the success of the Mowry,” Sterling says. “We feel we have similar reservoir qualities in our area.”

Cirque has participated as a nonoperating partner with Mariner Resources on two vertical wells to date, and is currently drilling a horizontal well with Onshore Holdings LLC. Forward plans hang on this well’s results. “The data will dictate the next move,” Sterling says.

“We’re early in the play,” he adds. “We’re hoping the play is commercial. We have expectations, and certainly you can calculate some large oil-in-place numbers given the high TOC and thickness of the formation. But there isn’t any data to say what the EURs can or should be at this point.”

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