The Austin Chalk formation is re-emerging after peaking in the 1990s as drillers increasingly deploy new technologies in the play, writes Ros Davidson
What: The Austin Chalk play in Texas and Louisiana is undergoing a revival. Why: Strong results are being seen in the play as drillers try out new technologies and focus more on oil. What next: The formation could see more interest as producers look for opportunities beyond the Permian Basin.
The Austin Chalk formation is re-emerging, particularly in South Texas. Previously, the play – which stretches eastwards into Louisiana – peaked in the 1990s, but at that time its main output was natural gas. Within the last two years, though, there has been renewed interest in its oil production, and in 2016-17 there were solid well results in the Austin Chalk for liquids.
Significantly, the most attractive part of the limestone and clay formation, in South Texas, is not facing infrastructure constraints such as pipeline capacity. This is in stark contrast with the far larger Permian Basin in West Texas and New Mexico, which is currently having its growth potential constrained by a lack of pipelines and a tight labour market.
The Austin Chalk is better off in this regard because of existing takeaway capacity serving the underlying and better-known Eagle Ford shale – where output is growing, but not as rapidly as in the Permian. Local sand mines and production facilities are also being brought online in South Texas.
On the up
The rig count in the Austin Chalk has doubled in the past six months to 14, according to DrillingInfo data. And 350 permits were approved in the Austin Chalk in the most recent 16 months, which was nearly four times the approval rate in the previous 16 months, said the data firm. “These fringe areas, like the Austin Chalk, could be the next big thing,” DrillingInfo’s vice president of market intelligence, Bernadette Johnson, told Reuters.
Earlier this month, private equity firm Blackstone Energy Partners sold royalty rights in South Texas – targeting both the Austin Chalk and the Eagle Ford – for over US$40 million to a new special purpose acquisition company (SPAC) named Osprey Energy Acquisition.
Another SPAC, TPG Pace Energy Holdings – led by former Occidental Petroleum CEO Stephen Chazen – announced a US$2.7 billion deal in March for some EnerVest drilling rights on 360,000 acres (1,457 square km) where the Austin Chalk overlies the Eagle Ford.
There has also been interest in the eastern part of the Austin Chalk. During the first quarter, ConocoPhillips bought 211,000 acres (854 square km) in the Austin Chalk in Louisiana for less than US$5,000 per acre (US$1.3 million per square km). This is far lower than the US$75,000 per acre (US$18.8 million per square km) that is common in part of the Permian. Now, attention is turning to ConocoPhillips’ production in the Austin Chalk, which could include a breakthrough in at least one new well. Its results are expected next year.
In May, Marathon Oil announced that it had acquired a “material position” also in the eastern Austin Chalk for less than US$900 per acre (US$225,000 per square km).
Austin Chalk results are being trumpeted. The play contains “some of the most prolific and highest-return wells in the company”, EOG Resources’ executive vice president, Ezra Yacob, said during a call with analysts in early May. The firm will complete 25 more Austin Chalk wells by the end of the year.
New technology, older plays
In the 1990s, the 650-mile (1,046-km) Austin Chalk formation was being developed in parts of East Texas and near Houston, sometimes with vertical drilling or single-stage hydraulic fracturing. As the shale industry started booming, attention turned to other formations. The Eagle Ford, for example, saw development start in 2009-10.
Some operators such as Marathon, EnerVest and Pioneer Natural Resources had access to the Austin Chalk in their acreage, and in 2011 were starting to see “fairly impressive” results with modern well design, high-volume fracking and a lot of proppant. The Austin Chalk was not yet competitive with the Eagle Ford, but results were considerably improved, Rystad Energy’s vice president of shale analysis, Artem Abramov, told NewsBase Intelligence (NBI).
More recently, the Austin Chalk results have been even better. “The application of new technology to older plays is a winning bet,” Wildhorse Resource Development’s chief financial officer, Drew Cozby, told Reuters.
Indeed, some Wildhorse Austin Chalk wells recently produced more than three times the initial output of wells in the Eagle Ford, reported Reuters. Similarly, EOG has reported that one well drilled in the Austin Chalk this year produced almost 3,000 bpd in its first month – more than twice the first-month rate of a shale well the company completed in the Permian Basin also this year.
ConocoPhillips is also bullish on its progress in the formation. “What we were seeing with some of the newer technologies work really well in the Austin Chalk,” ConocoPhillips’ CEO, Ryan Lance, told Reuters recently.
Karnes County in South Texas, near San Antonio, is so far at the centre of the most promising Austin Chalk activity. In 2017, 95-100 horizontal wells targeting the play were completed in that county alone, according to Rystad. Major players including Marathon, Encana, EnerVest and BHP were active in the area.
In fact, the average Austin Chalk well performance in Karnes County outperformed Eagle Ford wells there by 20-25% last year, according to Rystad. However, Austin Chalk wells are pricier, because the completions are more intensive owing to the immaturity of the play and inefficiency of drilling. The Austin Chalk is more complex geologically, and optimal lateral spacing there is harder to gauge that it is in the Eagle Ford.
Still, breakeven prices in Karnes County can be as low as the high US$40s per barrel. This is being achieved, as WTI prices are at about US$65 per barrel. Oil content is high in the play’s wells – up to 70%, although this is lower than the Eagle Ford’s 75-77%. Oil content also declines more quickly in the Austin Chalk. In 2016-17 on average, Karnes County Austin Chalk wells produced 75% oil in their first month, which dropped to 64% over the first six months. Meanwhile, Eagle Ford wells initially produced 80% oil, declining to around 71% over the same half-year period.
The lack of infrastructure bottlenecks in the western Austin Chalk is also providing a boost. Production in the underlying Eagle Ford is rising, but is still about 500,000 bpd below its peak in March 2015, meaning that excess takeaway capacity from the region exists for now.
In May, the US Energy Information Administration (EIA) estimated that the Austin Chalk contained technically recoverable reserves of around 4.1 billion barrels of oil, 18 tcf (510 bcm) of gas, and 1 billion barrels of natural gas liquids (NGLs). This is similar to the volumes thought to exist in the Niobrara shale play in Colorado, and equivalent to about one-third of what is estimated for the Eagle Ford.
Oslo-based Rystad projects that the Austin Chalk could produce 300,000 bpd by 2022, up from 90,000 bpd in 2017. This figure already marks a significant improvement on the 20,000 bpd produced in 2013. The Eagle Ford currently yields around 1.1-1.2 million bpd.
In fact, Rystad’s Abramov believes that the Austin Chalk has more potential than any other emerging unconventional play in the US to be a significant source of oil production in the medium term. NBI agrees that the play’s proximity to extensive infrastructure, combined with the promising early results being achieved as new technologies are deployed, puts the Austin Chalk in a comparatively strong position. The play may not be as large as some of the leading shale formations, but it is a strong contender for drillers’ attention as they increasingly look beyond the Permian Basin.