Kelley Williams Chair, Bigger Pie Forum September 25, 2014
The Tuscaloosa Marine Shale formation lies 10,000 – 15,000 feet below the surface of the south west corner of Mississippi and extends west and south into to Louisiana. It contains billions of barrels of crude oil. Its existence has been known for decades. But the technology to produce its oil was not known. That’s changing. Five companies are applying and adapting their horizontal drilling and fracking technologies to produce its oil. Their efforts are concentrated in Wilkinson and Amite counties now and have boosted local economies in the area. If successful, they will have a big economic impact on the entire state.
If you drive from Centreville to Woodville on MS 24, you can see Halcon’s Blackstone 4H-2 well pad, day tanks, and constant flare. It’s one of 22 producing TMS wells drilled in the last 30 months. Halcon, headquartered in Houston, is one of five large out of state companies that have acquired over 500,000 mineral acres in Mississippi’s TMS at an estimated cost over $100 million. They are betting their technology can make the TMS commercial.
Their bet is a bonanza for Mississippi mineral owners. You can see its impact. My favorite place to eat in the area is Vine Brothers in Centreville. It has remodeled and expanded. It was already successful. Now it’s booming. Its hearty country food lunch buffet is crowded with oil field and service company workers. The logos on their uniforms identify dozens of companies. County courthouses are wall to wall with land men running titles and searching for leads on leases.
The companies have bet another estimated $645 million on 43 TMS wells drilled and drilling. Early wells cost $15-20 million each. This is trending down to the $12 million range as the companies learn more about the reservoir and tweak their technologies to drill and complete the horizontal laterals that extend thousands of feet from the bottom of the well. The learning curve experience is similar to that in other shale formations such as the Bakken in North Dakota and the Eagle Ford in Texas which are now commercial successes.
The TMS is deeper and hence more expensive to drill than other reservoirs. Its characteristics are different and challenging. But that’s typical. The companies are modifying their technologies by trial and error to find what works. That’s typical too. They are making progress and are encouraged to keep trying because of the potential pay off if successful.
More to come. Here’s an estimate of the initial payoff. The companies have permitted another 138 wells. If they drill half of them, the additional estimated cost will be $825 million. Expenditures by service companies and local vendors and suppliers could add $300 million bringing the total invested to almost $2 billion.
If 80% of the wells are commercial (success rates are higher in the Bakken and Eagle Ford) and produce an average of 750 barrels per day, these new wells and existing wells will generate revenues of about $2.5 billion annually. This will generate severance tax of $150 million per year when the five year tax abatement expires. That’s over twice existing severance tax revenues. Production royalties to mineral owners will be $500 million annually. If the money goes round and round (what economists call the multiplier effect), investments and purchases could increase several billion dollars annually and boost Mississippi’s gross domestic product significantly.
And this is just the first wave of investment and activity. Other companies will come If the companies achieve the above success proving the TMS commercial. Activity and investments will grow as has happened in the Bakken and the Eagle Ford. North Dakota now ranks sixth nationally in per capita income. It was 37th before the Bakken. Although the TMS is not as extensive, it could have a major impact on Mississippi’s economy.
Grass roots efforts. Wilkinson County’s leaders are taking the initiative to assist with infrastructure support for the companies’ efforts. An example is a grass roots project to provide water for fracking. It can take over 10 million gallons to frack a well. The total frack water required exceeds the capacity of local aquifers and streams. The project will provide frack water from a large Mississippi River oxbow lake via pipelines along county and state roads The companies will pay for the pipelines and county road improvements using funds from temporary severance tax abatements.
Level playing field important. The companies can operate profitably in Mississippi’s common sense regulatory environment. Some states discourage horizontal drilling and fracking despite its economic benefits. The Environmental Protection Agency favors alternative energy (wind, solar, biofuels, etc.) and discourages use of fossil fuels. The EPA and regulatory uncertainty are a constant threat to domestic drilling. Uncertainty discourages investments. Our Washington representatives are aware of this threat and its consequences. Congressman Gregg Harper’s district includes Wilkinson and Amite counties. He is on the House Energy and Commerce Committee and Subcommittee on Environment which has some influence on regulatory policy.
The companies have also benefitted from a five year severance tax abatement that encourages them to invest in local infrastructure improvements. The money they spend is money the counties and state won’t have to spend. Still significant state funded improvements will be needed (e.g., to four lane state highways) to support commercial activity in the area. Future severance taxes should pay for these with money left over for years to come if the TMS proves commercial. A win for all.
A better way. These companies are investing in Mississippi without loans and other incentives given to alternative energy companies such as Kior. Its pine trees to diesel boondoggle failed stiffing the state for a $70 million interest free loan. The oil companies did not come here because of the severance tax abatement. They were already here and would probably stay and invest without it.
This happened the old fashioned way. The oil companies invested their money to make money using their technologies without any government grants or guarantees. A level and stable playing field and Mother Nature were enough. Let’s hope they are successful. If they are, many Mississippians will benefit. Many already have. If they fail, it won’t cost us anything.
This is a better way to create a bigger economic pie.