Fayetteville Shale drillers look beyond Arkansas

Editor’s note: Roby Brock, with our content partner Talk Business, wrote this report. He can be reached at [email protected]

Current and former Fayetteville Shale leaders Southwestern Energy and BHP Billiton (Chesapeake Energy) sent signals through the energy industry late this week that both are ready to expand their drilling programs well beyond the Arkansas shale reservoir.

In announcing impressive second quarter results, Chesapeake and Southwestern touted new exploration programs that could boost profits for both U.S.-based drillers for years to come.

Chesapeake highlighted energy stock performance in stock market trading Friday (July 29) after the Oklahoma City based driller announced a new “major discovery” in Ohio. Company officials boasted that the discovery was superior to the Eagle Ford Shale – the huge gas-liquids shale play in South and West Texas with an estimated 4 billion barrels in recoverable reserves.

“Chesapeake believes that its industry-leading 1.25 million net leasehold acres in the Utica Shale play could be worth $15 – $20 billion in increased value to the company,” Chesapeake said in its second-quarter earnings report. “As a result of its analysis, the company believes the Utica Shale will be characterized by a western oil phase, a central wet gas phase and an eastern dry gas phase and is likely most analogous, but economically superior to, the Eagle Ford Shale in South Texas.”

The news of the projected multi-billion oil and natural gas discovery sent the company’s stock up more than 3% in mid-day trading on Friday. The share price eventually settled at $34.35, up 92 cents over Thursday’s close. In April, Chesapeake exited the Fayetteville Shale with the sale of 2.4 trillion cubic feet of proven reserves to Australia-based BHP Billiton Petroleum for $4.75 billion in cash.

Meanwhile, Fayetteville Shale leader Southwestern said that the company’s “New Ventures” group is studying drilling prospects beyond its huge leasehold position in central and northern Arkansas. In the second quarter, Southwestern spent $682 million to operate 149 working wells, upkeep 18 drilling rigs and produce 1.8 billion cubic feet of natural gas per day in the Arkansas shale play.

However, Southwestern said it spent $80 million in new ventures in the second quarter, including the recent development of the Smackover Brown Dense formation, an unconventional oil reservoir found in southern Arkansas and northern Louisiana.

“This region of Arkansas and Louisiana has produced oil and gas from the Upper since the 1920s. The Brown Dense formation is the source rock for these Upper Smackover fields,” said Southwestern CEO Steve Mueller. “It has the critical properties necessary to be a successful play and compares favorably to other productive oil plays in the United States. However, it has never been exploited with horizontal drilling technology until now.”

Mueller said the company hopes to receive a permit from the Arkansas Oil and Gas Commission to spud the company’s first test well at 8,900 feet in Columbia County late in the third quarter. If successful, the brown limestone rock development also could spur land leasing in Southern Arkansas and northern Louisiana, where Southwestern owns 835,000 undeveloped net acres.

A second well is planned to spud later this year with a total vertical depth of nearly 10,700 feet and a 6,000-foot horizontal lateral in Claiborne Parish, La. Ten additional wells are planned for testing in 2012.

“If our testing yields positive results, we expect that our activity in the play could increase significantly over the next several years,” Mueller said.

Besides the Smackover Brown development, Southwestern’s New Ventures group also is in the second phase of testing for oil and natural gas at an undeveloped site in New Brunswick, Canada. Southwestern holds 2.5 million acres in that play.