Mississippi Lime Shale Formation Offers Billion-Dollar Water Play

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The Mississippi Lime is sometimes overlooked in discussions on U.S. shale formations. The play, straddling the Oklahoma/Kansas border, has been drilled for decades with conventional vertical drilling practices. But horizontal drilling technology and hydraulic fracturing techniques are causing Oil & Gas Producers to take a second look at the formation. At a recent "Water Management for Shale Plays -- 2013" conference here, an analyst from Wood Mackenzie (WoodMac) (Edinburgh, Scotland) outlined a billion-dollar drilling opportunity in the Mississippi Lime. But the opportunity focused on drilling wells to dispose of wastewater, not wells to produce oil, gas or natural gas liquids (NGLs).

Though its reservoir is still being characterized, current production from the Mississippi Lime is about 50% oil, 33% natural gas and 17% NGLs, Jeanie Oudin, the WoodMac analyst, told about 85 attendees at a conference organized by Information Forecast Incorporated (Infocast) (Woodland Hills, California). High crude-oil prices and "extremely low" drilling costs--in the range of $2.5 million to $3.5 million per well--are drawing a lot of producers to the Mississippi Lime, she added. Costs are low because the shale formation is much closer to the surface than several other shale formations, like the Marcellus and Utica. It also takes significantly less water to hydraulically fracture a well in the Mississippi Lime--about 1.7 million to 2 million gallons, or about one-third the water needed to hydraulically fracture a well in the nearby Granite Wash formation.

Acreage in the Mississippi Lime is owned by more than 20 oil and gas producers, including SandRidge Energy Incorporated (NYSE:SD) (Oklahoma City, Oklahoma), Chesapeake Energy Corporation (NYSE:CHK) (Oklahoma City), Apache Corporation (NYSE:APA) (Houston, Texas), Devon Energy Corporation (NYSE:DVN) (Oklahoma City), Encana Corporation (NYSE:ECA) (Calgary, Alberta, Canada) and Royal Dutch Shell plc (NYSE:RDS.A) (The Hague, Netherlands).

This year, an estimated 450 wells will be drilled in the Mississippi Lime, up from about 100 in 2011 and only a handful in 2008. Production this year is expected to exceed 200,000 barrels of oil equivalent per day (BOE/d), four times the level of production in 2011.

By 2015, Oudin projects a peak of 900 wells will be drilled annually in Mississippi Lime. She forecasts a steady rise in production, reaching 400,000 BOE/d in 2018. Though no Bakken or Eagle Ford, the Wood Mac analyst said the Mississippi Lime is expected to produce a respectable level of hydrocarbons, mainly oil.

But drilling wells in this formation produces "huge volumes of salt water," about three to four times the amount of oil produced, Oudin told the Denver conference on June 10. Produced and flowback water is expected to more than double by 2020, to more than 2 million barrels per day. Right now, one producer, SandRidge Energy, is disposing of an estimated 850,000 barrels of wastewater per day from that play. By the end of the year, the company will be disposing of about 1 million barrels of wastewater each day.

Therein lies a business opportunity: drilling wells to dispose of produced water and flowback water. Oudin estimated there are about 150 such disposal wells operating today, but another 500 will be needed by 2015, given the Mississippi Lime's projected levels of hydrocarbon production. "High volumes of produced water require numerous disposal wells," she said. Unlike other shale formations, where the main water concern is availability of water to hydraulically fracture a well, the primary water concern in the Mississippi Lime is disposing of produced and flowback water, she added.

There is "escalating demand for salt water disposal facilities" in the Mississippi Lime, Oudin continued. Today, it costs between $1.5 million and $3 million to drill a disposal well, but as more wells are drilled, she sees that cost declining to an average of $2 million per disposal well. If 500 new wells are needed, that could be a billion-dollar drilling opportunity. There could be additional capital costs for pipeline infrastructure, electric submersible pumps and electric generation, she added. The need for capital, equipment and electricity could rise even higher if acreage on the less-developed Kansas side of the border is more widely developed. Kansas has less infrastructure in place there than Oklahoma, Oudin said.

Obtaining fresh water for drilling, and securing permits for the disposing of wastewater, are "not a serious concern" in Oklahoma as regulators there treat the industry favorably, the WoodMac analyst said. The Mississippi Lime "is still in the early stages of development--the areas of best recovery are still to be determined. But a proactive water management strategy is key to the oil and gas industry," she concluded, because water accounts for 5% to 15% of the overall shale well drilling and completion costs in the Mississippi Lime.

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