KFG Resources in Search of the Wilcox Formation’s Riches

Jan. 11, 2008 - PRLog -- High oil prices have a habit of creating winners and losers. It’s a complex equation, to be sure, since price hikes are the result of multiple causes, including the fact that “easy” oil reserves are increasingly difficult to come by.

For oilmen with the correct experience and some faith in serendipity, high oil prices indicate the opening – or reopening – of giant swathes of land for drilling and production, and the potential for big profits.

I spoke with Bob Kadane, the president of KFG Resources (TSX.V:KFG) about how oil prices have had an effect on one formation in particular – the Wilcox Oil and Gas Formation – and learned a lot about the true story behind petroleum exploration in the US that every investor should know. It’s a fascinating story.

First off, the stakes are huge. While proponents of the peak oil theory may be correct in stating that oil reserves worldwide are increasingly depleted, there is still room for substantial oil production from the Wilcox Formation.

For example, using a geology-based assessment methodology, the U.S. Geological Survey in 2007 estimated 110 million barrels of undiscovered oil, approximately 3 trillion cubic feet of gas and over 500 million barrels of natural gas liquids throughout the Wilcox Formation. Much of that would be contained in Mississippi and Louisiana, where KFG Resources is will soon be drilling.

The Wilcox Formation is located some 6,500 feet below sea level in Mississippi and Louisiana, inland from the Gulf of Mexico. It is just one of many strata of the earth buried underground by millions of years of erosion and land movement caused by wind, water and tectonic motion.

The last time the sand, silt and clay that comprise the Wilcox Formation were exposed to air was about 50 million years ago, during the early Eocene period, when the earth’s poles were covered by forests and the shoreline of the Gulf of Mexico lay many kilometers inland from where it is found today.

Huge pockets of oil formed by decomposing plant matter from distant epochs populate the Wilcox Formation, which can be harder to find than other oil reserves due to the fact that the oils are not kept in place by thick shale beds or other rock that are relatively easy to spot using seismic. Instead, the formation is up to 2,500 feet thick, and mostly sand. As such, other, more traditional methods are used to find deposits in the oil rich formation.

Just how rich? Well, as mentioned earlier, USGS has reported more than 100 million barrels of oil plus gas and natural gas liquids geologically proven in the area. But what about the standard petroleum measure of “barrels per acre foot”?

According to Kadane, the standard oil reservoir in the Rocky Mountains might yield from 75 to 250 barrels of oil per acre foot – meaning that one foot of sand over one acre of land would yield between 75 and 250 barrels, depending on such factors as porosity and oil content.

I did my own homework, too: A search of other companies producing oil reveals a high of 400 barrels per acre foot in Nevada, 350 in Texas, 300 in Oklahoma and so on. The numbers vary, of course, and in oil rich areas such as Alberta and the Middle East, they are much higher.

But the Wilcox Formation yields an average of 600 barrels per acre foot, Kadane says.

“I have been associated with some reservoirs that have recovered in excess of 1,000 per acre foot – it’s a high porosity sand,” he noted.

Simply put, Kadane says, “It makes the Wilcox Formation – if you can find it – probably the most profitable return on your investment on shore in the United States. It’s elusive but it makes a very lucrative target once you’re able to pin it down and find it.”

Kadane was born and raised in communities that lay on the earth above the Wilcox Formation. Starting in the 1940s, Kadane’s father drilled the same formation to great success. Kadane recalls his father putting dynamite into a well to get the oil flowing in about 1942 – when he opened the valve, a huge geyser of oil shot some 150 feet into the sky. Kadane still has a 16-millimeter film of the event, he says.

The Wilcox Formation lost favor due to its low success ratio and the fact that modern technology, such as seismic, doesn’t help much in finding its reserves. To find Wilcox oil and gas, oilmen like Kadane use traditional methods and wisdom gained through experience to improve chances of success. To profit from them, you have to know everyone working the Wilcox Formation, where they are drilling, and where they have succeeded and failed.

“The last Wilcox well we found that amounted to anything was 1989. We haven’t done a lot there since then, and that field still produces and is part of our main reserve and is almost 20 years old. It’s just three wells and it’s produced about 1.3 million barrels, I think.”

Now that peak oil has emerged to be a law rather than a theory, and with prices up and American supply diminished, the math is right again to make a success of the Wilcox Formation.

“In the Wilcox Formation, the success rate on wildcat drilling – which means no production within a mile or so, or virgin, undrilled land – is between 10 and 15 percent,” explains Kadane. “The success rate of offset is in the 50 percent range in terms of success.” That indicates that in many cases it will be most prudent to drill next to where other teams have already drilled, but failed to find the goods.

“With the price of oil and gas above $70 per barrel, suddenly new exploration companies are down in the Louisiana Salt Basin area. The higher price of oil makes the lower success rate more profitable.

“You see, when more players are in the field drilling, it helps to eliminate where oil is not, and tells you where it may be. Lot of people do one or two holes where there should be oil. Sometimes, if they come up dry, they give up. You go in there and drill a third or fourth hole, because you know it’s there – and bingo, you hit paydirt. So the other guys have in essence done the work already.

“By going in and completing more holes you know your chances of hitting oil have improved without spending a dime.”

The other players at KFG add the other essential ingredients to the brew that Kadane predicts will see success in 2008. President of Operations Stephen Guido owns a drilling rig good to below 10,000 feet. Geologist Dave Easom has 25 years experience in the area and has worked closely with seismologist Pitman Calhoun, who is said to be one of the best lower Tuscaloosa and Wilcox seismologists in that whole part of the country. Kadane says that Calhoun and Easom have completed three 3D seismology shoots in the Lower Tuscaloosa Formation in the region, all of them successful.

“I’ve got a network of guys who know what they’re doing,” he emphasizes. “They’ve been there and done that here since they were kids. They know every player on the scene and every dip in every field in the state of Louisiana.”

Coming Up: In the next piece, I’ll talk about how KFG Resources plans to use 3D seismic data with subsurface well log data to create a drilling plan to hit both the Wilcox Formation and the Lower Tuscaloosa – simultaneously.

This article is intended for information purposes only, and is not a recommendation to buy or sell the equities of any company mentioned herein. It is based on sources believed to be reliable, but no warranty as to accuracy is expressed or implied. The opinions expressed in the article are those of the author except where statements are attributed to individuals other than the author, in which case the opinions are those of the individual to whom they are attributed.

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