- As the world’s biggest producer and consumer, the United States has dominated the global energy sector
- While there are few producing regions considered to be ‘emerging’, the Tuscaloosa Marine Shale (TMS), which stretches across the Gulf Coast, is under-developed and has shown a lot of promise
- Of those operating there, Australis Oil & Gas (ATS) holds an enviable portfolio with 38 producing and cash-generating wells on 107,500 acres within the TMS core
- But unlike other nearby formations, the TMS is deep and requires the use of expensive and slow to move equipment
- Still, Australis’s experienced management team knows the value of waiting for good things to come
When it comes to oil and gas, few countries rival the United States.
Not only is it the world’s largest producer, pumping out an average of 18.6 million barrels per day during 2020 — roughly 20 per cent of global supply — but it’s also the world’s largest consumer, accounting for around 20.54 million barrels each day last year.
The number of producing wells in the United States hit a peak of almost 1.03 million in 2014, but slid in the years since to less than 970,000 in 2019, largely as a result of lower oil prices.
But, with this being the age of innovation, technology has managed to counter some of those negative market influences.
Between 2009 and 2019, the proportion of horizontal wells jumped from 3.6 per cent to 15.8 per cent with the evolution of unconventional development — a sure sign of the times.
The growth in US unconventional production during this period can clearly be seen in the graph below with 7.5 million barrels per day being added.
The last 18 months have been a strange time for everyone, including those in the oil sector.
The COVID induced plunge in demand led to oil prices dropping to an unfathomable low of minus US$37 per barrel at one point during Q2 2020 and this has had a devastating impact on the industry.
But things seem to be improving out now with demand recovery against an overarching theme of underinvestment in the industry (i.e. new oil field developments) for the last five years.
In the US politics always looms large and after a number of restrictions and cancellation President Joe Biden’s administration is preparing to do a 180-degree turn and resume America’s federal oil and gas leasing program, and plans to hold an offshore auction in the Gulf of Mexico as soon as this month.
The decision comes just months after the US Interior Department said it would comply with a federal judge’s ruling on July 15 that blocked a months-long pause in oil and gas leases on federal lands and waters.
That pause took effect in January this year, pending a still-ongoing analysis of the program’s impact on the environment and its value to taxpayers.
But the Western Energy Alliance (WEA), an advocacy group for around 200 oil and gas companies in the United States, argues that the sales put on hold had already been under analysis and are “ready to be put on the calendar.”
“The brief filed today with the court appears to show progress, but the slow walk indicates one step forward and three steps back,” WEA President Kathleen Sgamma said in a statement.
Clearly there exists sufficient — perhaps even significant —appetite for another revival of America’s oil and gas sector. But how is that going to look?
Recent growth in US oil production has come exclusively from the unconventional sector, however a closer look at the chart indicates that 85 per cent of that growth has originated from just three plays, the Permian, Eagle Ford and Bakken.
During the period 2010 – 2014 the growth was predominately from the Eagle Ford and Bakken, but the most recent growth spurt has come exclusively from the Permian with the quality locations in the other two now having largely been drilled out, albeit with large volumes still left to produce.
With the Permian highly competitive and expensive, the industry is having to look elsewhere for the next source of growth and the extensive exploration that has already occurred. This means there are few regions that can be classified as “emerging” areas when it comes to unconventional oil exploration and production — few, but not none and not many.
One of the last remaining and most talked about is the Tuscaloosa Marine Shale (TMS) — a 90-million-year-old sedimentary rock formation that stretches across the Gulf Coast region of the United States through southern Louisiana and Mississippi, covering at least 2.7 million acres.
It bears many similarities with, and sits on-trend from, the neighbouring Eagle Ford Shale in Texas, which burst onto the scene in 2008 when drilling work by Petrohawk, which was acquired by BHP Billiton in 2011, first began.
Operations there grew rapidly over the preceding years, with a 2018 report by the United States Geological Survey estimating reserves within the Eagle Ford Shale at 8.5 billion barrels of oil, 66 trillion cubic feet of natural gas and 1.9 billion barrels of natural gas liquids.
“This assessment is a bit different than previous ones, because it ranks in the top five of assessments we’ve done of continuous resources for both oil and gas,” said USGS scientist Kate Whidden, lead author for the assessment.
“Usually, formations produce primarily oil or gas, but the Eagle Ford is rich in both.”
Now, the TMS seems to be following suit, with an estimated seven billion barrels of oil in potential reserves. And, for a company like ASX-listed Australis Oil & Gas (ATS), that’s a big deal.
The Perth-based business was established in March 2014 by Jon Stewart, Ian Lusted and Graham Dowland, formerly founders and key executives at Aurora Oil & Gas, which listed on the ASX with a market capitalisation of just $30 million before being sold in June 2014 to Calgary-based Baytex Energy for $1.6 billion.
Aurora was one of the first entrants into the Eagle Ford shale, drilling the second horizontal well in the play in 2006 and spent three years building a position before Petrohawk raised its profile.
Through various leasing programs over the last few years, Australis has built itself an enviable position as the largest landholder within the core TMS area, which spans just 450,000 acres in the core (highly productive area) of the larger 2.7-million-acre formation, and hosts the most consistent, highest-performing wells.
At the end of last year, the Australis owned 38 producing and cash-generating wells on 107,500 of those core acres.
Based on that position, oil and gas consulting firm Ryder Scott estimates that Australis has access to approximately 170 million barrels of recoverable oil.
Early drilling work by other operators also suggested promising quality, with many investors salivating at returns of between 85 and 100 per cent light crude oil.
“We learned from our experience at Aurora Oil & Gas that reservoir quality was a key success differentiator and so this was the primary attribute Australis focused on when searching for our project,” said Mr Lusted, now Managing Director and CEO of Australis.
“When we reviewed TMS core oil production performance of wells drilled in 2014, they were equal to or better than our old Aurora acreage, which we sold for $1.6 billion. Naturally this piqued our interest.”
But there are some challenges that have slowed the pace of development. While the reserves within the TMS are significant and of largely good quality, they’re deeper compared to the Eagle Ford — between 11,000 and 12,000 feet — and require the use of bigger drills, which are typically slower to move and more expensive.
But technology has improved and historically all of the established plays had early technological challenges which were overcome, allowing costs to be driven down and productivity to be improved through engineering refinement.
Australis, however, is in no rush. Having been through the process before with Aurora, the team is well aware that good things take time.
“We have to be patient, we cannot have that low-cost, uncompetitive entry and then immediately expect asset perception to simply turn around,” Mr Lusted continued.
“A lot of our efforts lately have been educational; letting potential partners know about the well performance and cost base, which for an early-stage play are compelling.
“Then it is simply a question of when industry sentiment moves to a growth phase as it appears to be in the early stages and is supportive of potential partners becoming involved in an emerging play, which of course is a subjective view of each partner, hence difficult to specify.”
It would certainly seem that the TMS has reached a point of transition. With the world opening up again and the impact of COVID-19 having a gradually lesser effect, there will inevitably be a greater demand for oil and gas in the not-too-distant future.
It makes sense, then, that those players who have been working quietly behind the scenes are the ones that are poised for success. After all, the Australis team did it once before — can they do it again?