Natural gas exploration surges on Arkansas scene

QUITMAN, Ark. -- Thousands of feet below Arkansas hay fields and cow pastures, a newly tapped reservoir of natural gas is quietly giving up its bounty.

After 300 million years trapped in hard, black shale, gas now flows into pipelines headed for market to ultimately warm homes and businesses.

In the flicker of five years, the Fayetteville Shale has gone from "just sort of a geologic oddity" to a significant industrial development, says Ed Ratchford of the Arkansas Geologic Commission. Investors, so far, are satisfied with early production and a university study says the newly tapped energy source could have a $5.5 billion impact on Arkansas by the end of 2008.

Cleburne County Judge Claude Dill says business at the county courthouse, where mineral rights transactions are recorded, had been so brisk that clerks had to bring in extra tables. Dill himself negotiated a five-year lease on his 60 acres.

Leases cover 4,000 square miles across north-central Arkansas, an area just smaller than the 5,000-square-mile Barnett Shale field in northern Texas, which produced 1.2 billion cubic feet of gas per day last year.

A gas transmission company plans a pipeline across Arkansas that would carry 1.1 billion cubic feet daily, but developers won't make predictions about the Fayetteville Shale.

Houston-based Southwestern Energy Co. did not discover the Fayetteville Shale nor invent the technology to shatter its hold on a buried treasure, but it and its Arkansas subsidiary, SEECO Inc., discovered that it held commercial potential like the Barnett.

Also important, Southwestern Energy was willing to place a bet -- up to $700 million by the end of last year and another $900 million in 2007 -- that new "frac treatment" technology used in the Barnett could also be used here.

"We 'discovered' an idea," said Harold M. Korell, Southwestern Energy's chairman, president and chief executive officer. "But until we started drilling wells, we didn't know it would produce gas. I was very excited in 2002 as the pieces were coming together."

That year, SEECO was a relatively small company, with its principle area of operation in the Arkoma Basin of Arkansas and Oklahoma. For 60 years, the company had been exploring and producing gas from conventional sources -- porous rock thousands of feet underground. Gathering gas from unconventional sources like shale was new to the industry.

For Southwestern Energy, the Arkoma Basin represented about half the company's gas reserves -- "our bread and butter," said John D. Thaeler, a petroleum geologist and SEECO senior vice president.

As SEECO drilled in the tighter Wedington sandstones of the Arkoma Basin, the company came across some unexpected findings. After analyzing data from 21 wells, Thaeler and his team couldn't explain the numbers.

"We estimated it should contain about 2.2 billion cubic feet [of natural gas]. But when we looked at the well performance, we realized those 21 completions were going to produce upward of 17.3 billion cubic feet," Thaeler said. "What it meant to us is that we didn't understand as well as we thought we did where the gas was coming from."

Southwestern plans to drill 400 to 450 wells this year and may eventually have 8,000 operating in the Fayetteville Shale. In all, the company estimates its leases hold 11 trillion cubic feet of natural gas for production. Arkansas has not traditionally been a major gas producer.

Meanwhile, the much larger Chesapeake Energy Corp., based in Oklahoma City, plans to drill 50-75 wells in 2007 and open a field office in White County. Schlumberger, a world leader in servicing oil and gas companies, is building a 31,000-square-foot facility in Conway, where Southwestern also has opened up an office and formed DeSoto Drilling Inc.

According to the Arkansas Oil and Gas Commission, mineral rights owners could receive as much as $3,750 a month in royalties in the first year of production on 160 acres. Also, a University of Arkansas study, partially funded by Southwestern Energy, predicts the shale play from 2005-2008 will mean an additional 9,683 jobs in Arkansas and $358 million in taxes for state and local governments.

Still, for the Fayetteville Shale venture to work, gas prices and demand will have to remain high and drilling costs and skilled workers will have to be within reach. Production throughout the play will have to be good. And new costly transmission lines will have to be built in time to take advantage of all these variables.

"It's one thing going out and punching a hole in the ground, saying 'I've got gas,"' Ratchford says. "It's another thing, more difficult, to get a delivery system in place to where you have a gathering system from the well head to a gas transmission line and bringing that resource all the way into a person's home or business."

But Thaeler says those are the risks of the oil and gas business.