<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=383903128744636&amp;ev=PageView&amp;noscript=1">

The Curse of the Austin Chalk

October 31, 2018 | Annalisa Kraft

For decades, the Austin Chalk was believed to harbor a curse, being difficult to explore, quick to deplete and uneconomical. But in this Get The Point we try to discover if the curse has lifted yet on this relatively unheralded play.

Austin Chalk’s scary history

In a fascinating article about the early years of the play, 37 years ago Texas Monthly wrote, “The Austin chalk is the most perverse, contrary, incorrigible oil field known to man.” The play was characterized as "tetchy" and what we would call today "high-maintenance," with beautiful honey-colored oil almost ready to pour straight in a car’s gas tank, prolific and giving at first but temperamental, likely to sulk and totally dry up. Not to mention elusive, with difficulty finding sweet spots that were productive.

But when oil fields were productive, they were "really productive," and for natural gas as well. 

According to the Austin Chalk Revival website, the area cumulative production through the end of 2016 is at least 948 million barrels of oil and 5.6 trillion cubic feet (Tcf). 

Austin Chalk Production History and Timeline 

Source: Austin Chalk Revival website

According to the EIA’s Annual Energy Outlook for 2018, the Austin Chalk still has left technically recoverable resources of 18 Tcf of gas and 4 billion barrels of oil.

And it's drawing new attention, according to Louisiana Oil and Gas Association (LOGA) President Gifford Briggs. “LOGA remains very optimistic that the Austin Chalk will be the next big play in Louisiana. In the '90s, the Chalk was booming, but low oil prices made it uneconomical to produce. Improved technologies such as horizontal drilling and hydraulic fracturing have opened this resource play for exploration once again," he said in an email with OPIS PointLogic.

"The play is still in the exploration stage, and we expect quite a few wells to be drilled and completed over the course of the next year. The outcomes of those exploration wells will determine if we move from exploration to development of the resource.”

Source: U.S. Geological Survey

Not scared off

There are a number of big players in the Austin Chalk who are unfazed by the play’s reputation for challenging production.

Norway-based Equinor acquired 60,000 net acres in the Austin Chalk in Louisiana in September from Texegy LLC for $75 million. The deal is even more notable in that it’s Equinor's first U.S. asset purchase since 2011, when it entered the Bakken. 

Marathon Oil owns 240,000 net acres in the Austin Chalk, and it will spud its first exploration well by year end. Marathon only paid $900 an acre, considerably less than the going rate for Permian assets. In fact, Marathon was willing to offload non-core Gulf of Mexico assets to get into the Austin Chalk.

The biggest announcement recently came on Oct. 30, when Chesapeake Energy said that it will pay almost $4 billion for WildHorse Resource Devleopment Corporation, best known for its Eagle Ford and Austin Chalk assets, lends more credence to the resuscitation of the Austin Chalk's allure and also signals a Chesapeake return to the area (see related article). 

On Sept. 20, WildHorse closed on 20,305 net acres in the Eagle Ford and Austin Chalk across Burleson, Brazos, Lee and Washington counties. WildHorse already owned more than 418,000 net acres in the Eagle Ford.

“The announced acquisitions are an excellent fit with our existing position," WildHorse CEO Jay Graham said at the time. "With the bolt-on of another 31,005 net acres, we continue to fill in our acreage position and increase our working interest and operational control across the field. Our status as the largest player in the region allows us to acquire acreage at extremely attractive valuations.”

WildHorse has brought online four Austin Chalk wells in the first half of 2018, and it said that it has more than 100,000 acres of prospective activity.

“In the Austin Chalk, we continue to be pleased with our well results," said WildHorse President Anthony Bahr in an earnings call. "At the end of the first quarter on March 31 we brought online the JRGC 1H and Austin Chalk well in Southern Burleson County located 4 miles south of the Bennett B 70H, our previous Austin Chalk test in Southern Burleson County announced last year."

Bahr noted a high NGL contribution, something generally not mentioned in connection with the Austin Chalk. “We are continuing to monitor the JRG but thus far the well is outperforming the Bennett. While the oil mix was lower than the Bennett given from the JRG's downdip location, the overall liquids mix is slightly greater at 67% with a strong NGL component."

The company said four wells in Washington County are expected to come online in the third quarter or very early fourth quarter. "In addition, we are very interested in testing the Austin Chalk on the northern portion of our Burleson County acreage. Offset operators have brought online several strong and very oily Austin Chalk wells in the area. We believe that our acreage could have the same potential and plan on testing wells in the area in early 2019," Bahr said.

Importantly, Bahr said that moving production out of the region is less of an issue than in the Permian, for example. “The only gathering systems that are effectively in place today are on the gas side and those are all for the majority owned by Energy Transfer Partners. So gas gathering is for the most part taking care of in Burleson County," he told analysts on an earnings call. 

For oil and water-gathering, "the Austin Chalk acreage relies much of the Eagle Ford acreage as well. So it would be all work together," he said.

 

 

Source: WildHorse earnings presentation

Magnolia Oil & Gas is another sizable player in the Chalk and holds 460,000 net acres in the Giddings Field in the Austin Chalk. Magnolia Oil and Gas CEO Steve Chazen said in March when the company acquired acreage from Harvest Oil & Gas, “We believe Magnolia’s acreage in Karnes County has some of the best economics in the United States and, when coupled with the upside in the Giddings Field, is a great fit with our criteria. Assuming moderate commodity prices, we plan to invest less than 60% of cash flow to fund a drilling program that consistently delivers more than 10% annual production growth.”

Magnolia plans a two-rig program in the Giddings Field position in 2019 (see details in graphic below).

Source: Magnolia earnings presentation

Conoco Phillips is also exploring the play, with 240,000 acres in the Louisiana Austin Chalk; it's drilling exploratory wells there this year.

EOG Resources is another big name located in the Austin Chalk and one of the most active. On the EOG second quarter call in August, Ezra Yacob, executive vice president-exploration & production, said, “Average initial 30-day production exceeded 3,000 barrels of oil equivalent per day. Austin Chalk wells on average pay out in just over three months.”

It's a different dynamic than other plays, he said, but with its own strengths. ”We continue to examine the Austin Chalk's prospectivity in our South Texas Eagle Ford acreage. The target is less consistent than the Eagle Ford shale. However, where it is prospective, it consistently delivers prolific results," Yacob said.

“Furthermore, the play is in an advantageous location with well-developed infrastructure close to the Gulf Coast and benefits from our extensive seismic and log control collected through our Eagle Ford development program."

More good news could be coming, he added, because EOG has "collected an awful lot of data while we've been developing and producing the Eagle Ford underneath the Austin Chalk."

Yet, he said the same issues that have always plagued the play are still in force. “As we've talked about in the past, it's geologically a bit of a complex play. Historically, the industry's success has been pretty inconsistent from well to well as it was more of a fracture play. We've really been focused on the matrix contribution in the Austin Chalk, making it a bit more repeatable," he added.

EOG Resources has been a pioneer in the play with what it says are promising results from its southern Avoyelles Parish well, the Eagle Ranch 14H-1. A June IHS Markit report singled out EOG’s performance in the Austin Chalk in the chart below.

Source:IHS Markit

Intertwined with Eagle Ford

Imperial Capital Managing Director Irene Haas, who covers WildHorse, EOG and Magnolia Oil & Gas, told OPIS PointLogic via telephone that the Austin Chalk is very much “intertwined” with the Eagle Ford, both geologically and geographically (see graph).

Source: U.S. Geological Survey

That knowledge -- and that infrastructure is beneficial, she said, though noting that the Austin Chalk “takes a lot more finessing. The idea is to go back to the Chalk trend to known naturally occurring fractures and apply what was learned in the Eagle Ford and apply that to the tight chalk. You have to know precisely what you’re targeting. People are not really going out of their way to look for gassy plays. Generically speaking it’s probably more gassy than the Eagle Ford.”

EOG, Magnolia and WildHorse, along with privately-held companies already in the play, already have sewn up most of the cherry-picked acreage in the Eagle Ford. “Assuming that you’re already in the Eagle Ford, you already own the land," she said.

For those companies with Eagle Ford holdings, it’s “just an extra horizon…a bonus horizon.”

But as to development Haas said, “It’s technically more difficult in the Austin Chalk [that’s why] you’re not going to see a land rush.”

She concluded companies in the Austin Chalk are taking their time with each stage of bringing production along through the exploration, delineation and finally, development stages.

Third time’s the magic charm?

So, has the Austin Chalk been exorcized of its bad juju?

Repeatability is part of the problem, according to Patrick Courreges, director of communications at the Louisiana Department of Natural Resources, in a phone call with OPIS PointLogic. Much of the bad luck associated with the play won’t change said Courreges as it’s part and parcel of its geology. He called the play brittle and unsurprisingly, chalky.

“Dense shale doesn’t respond to the same fracking technology” as in other basins or plays, Courregas said.

Also, producers are still seeing that quick depletion mentioned years ago. On the EOG Eagle Ranch well, Courreges said it went from an initial 900 b/d output in September 2017 to only 100 b/d by July 2018.

But Courreges said none of those factors make it a bad play, just misunderstood, like Frankenstein’s monster. “It’s like the Haynesville pre-2008, loads of potential but nobody can get it regularly and repeatably," he said. 

What’s interesting about the Austin Chalk is that light “fracturing” works better in the play, rather than shale high-pressure fracking. Also, of note, is that it would seem to be cheaper to drill than the Tuscaloosa Marine Shale, as it’s nearer the surface.

While the play is likely economical at $70/bnb of crude, Corregas underlined that right now, "It’s the leading edge of the play. It is still hit or miss.”

IHS Markit (parent company of OPIS PointLogic) sees promise. In a report in June, IHS Markit said, "Breakevens in the Austin Chalk overall are equal to premium unconventionals in the United States, at under $40/bbl. However, the Giddings area breakevens have varied widely, so 2018 will be critical to determining the viability of the Austin Chalk outside of the Karnes County, Texas, area. Karnes County has significant Austin Chalk running room, though operators have remained active in relatively small areas.”

The report notes that the Austin Chalk “leads the pack” of "incubating plays" with “increasing activity and solid economics.”

IHS Markit added that Karnes County breakevents are "universally" under $40/bbl, and that EOG and Encana are the most active spenders. 

As for the Giddings Field, a Railroad Commission of Texas most recent permitting report shows that much of the permitting dates from the 1980s and 1990s, but the IHS Markit says operators are now returning to Giddings.

“Numerous operators have returned to Giddings area, led by EnerVest and BHP–a rare area of activity for BHP, which is marketing its North American unconventional assets. Wildhorse is beginning to drill Austin Chalk wells on its acreage where it had focused on the Woodbine. No wells are in process near the EOG well in Avoyelles Parish, Louisiana. Several operators have horizontals in process around the Newton County, Texas, border area–though all are small operators,” stated the IHS Markit report.

Analyst comment

The bottom line is that the view is mixed, said IHS Markit Research and Analysis Associate Director Imre Kugler via email.

“We think of the Austin Chalk as an oil play for the most part. Total gas is about 250MMcf/d. Generally the Austin Chalk re-birth is because it’s stacked with other plays. There are some difficulties with natural fractures and very variable performance," Kugler said.

“The best oil wells have been in Karnes County – where the best Eagle Ford wells are. That’s driven much of the recent Austin Chalk growth – it’s a second zone for Eagle Ford operators. There have been some pretty good gas wells into east Texas, mostly in Polk County. Zarvona has been the operator there. The Eaglebine area results have not been great, save for a couple Wildhorse and BHP (now BP) wells in Washington County.

“The east-Texas/Louisiana wells are pretty close to Haynesville or Woodbine development, so infrastructure should not be a major issue for a while – beyond perhaps gathering. There isn’t much absolute volume so far or very good and widespread results,” added Kugler.

As far as gas is concerned, Kugler said, “To date, it’s mostly associated. There is a little dry gas potential in east Texas.”

Nonetheless, that hasn’t kept one of the biggest private-equity midstream firms, EnCap Flatrock Midstream, from supporting Aspen Midstream LLC’s  announced plan to build the Austin Chalk System in the Giddings Field. It announced on Oct. 11 it would build 90 miles of lean and rich gas gathering pipeline, a residue gas pipeline and a 200-MMcf/d cryogenic gas processing plant in the Austin Chalk. 

Various producers have dedicated 150,000 acres to the system, EnCap said.

More midstream investments could be coming, said Ryan Smith, director of research at East Daley Capital. ”ETP [Energy Transfer Partners] built the Alamo Plant specifically for that area, and is leveraging an extensive existing system from the OG Austin Chalk in the ~80’s. ETP also constructed the Volunteer high-pressure pipeline to transport gas production to the Alamo Plant. DCP is in the area as well, but I believe we have allocated most of Hawkwood’s and WildHorse’s rigs to ETP,” he told OPIS PointLogic.

OPIS PointLogic’s own Production Analyst Rishi Iyengar said, “I expect that once midstream comes online, such as the Aspen Midstream project that was announced (150,000 acres of gathering from committed producers, 200 MMcf/d cryo plant, pipeline to Katy Hub), we will be able to see that new production hit the interstates.”

Igengar noted a sudden addition of nine oil-directed rigs for the week ending Oct. 13 within East Texas counties that are likely targeting the Austin Chalk. "This is a large uptick in rig counts for this area,” Iyengar added.

Cursed no longer

Summing up, the Austin Chalk, while still difficult, is adequately supplied with midstream infrastructure and if approached with care and a light hand can unlock its oil and gas. The play still has barriers to entry but for those with strong data and some patience the Austin Chalk will someday be a blessing not a curse.