The Mississippian Lime Play
The Mississippian Lime play targets a limestone (carbonate) formation that extends from central Oklahoma to the west and northwest up into the northwestern corner of Kansas. This formation, ranging from shallow to mid-depths was extensively developed historically with vertical wells and conventional completions. The advent of horizontal drilling combined with multistage hydraulic fracturing has opened this play to redevelopment, and the prolific oily production at a fairly shallow depth and low well cost has made this play attractive compared to alternatives.
The Mississippian Lime becomes somewhat shallower and oilier to the east side of the play. A major geologic feature, the Nemaha Ridge, separates the play between the oily east side and the more extensively developed and gassier west side. Prominent operators on the west side include Sandridge and Chesapeake, and Range Resources and Devon are the prominent operators on the east side. Historically, both sides of the Ridge have experienced considerable vertical well development, and the attached map of the play illustrates the estimated average vertical well recovery of oil – note that gas recovery is not included due to inadequate records.
The Evolution/Orion Joint Venture
In 2012, Evolution entered into a joint venture with private equity backed Orion Exploration, a private company based in Tulsa focused on originating and operating development projects in central Oklahoma. The joint venture has acquired 11,887 net acres across 38 sections in central Kay County, just north of Ponca City. This leasehold is close to and east of the Range Resources leasehold and on the eastern flank of the Nemaha Ridge.
In our general area, we believe the Mississippian Limestone is a highly layered, fractured carbonate, typically with the fractures containing salt water and the matrix porosity containing hydrocarbons. In addition, the upper portion of the formation includes a “Chert” section of varying thickness that typically has high porosity and permeability. In order to produce the hydrocarbons, we believe that the water within the fractures first must be produced and reservoir pressure reduced. As this occurs, hydrocarbons (being a compressible fluid) can expand out of the matrix into the high permeability fractures and then to the producing well. In our area, industry has largely drilled horizontal wells into the upper section of the Mississippi Lime just below the Chert and completed with multiple stage hydraulic fracture treatments.
Horizontal development of the Mississippian Lime began on the west side of the play and moved east, thus the number of wells and well results on the east side is limited. The attached map illustrates some of the relevant well results around our leasehold. Range Resources has disclosed that its shorter lateral wells to date are estimated to be recovering an average 485 MBOE of reserves, and that its 18 horizontal wells completed in 2012 with longer laterals are estimated to develop 600 MBOE of reserves per well. Range’s well spacing is based on 160 acres with potential downspacing to 80 acres.
We utilized Pinnacle Energy Services as our independent reservoir engineer based on their experience, extensive data and focus on the Mississippian Lime. Pinnacle evaluated our leasehold based on vertical well and horizontal well results in the area compared with data describing the formation in our leasehold. Pinnacle assigned 114 gross drilling locations to the 38 sections in which our joint venture owns leases with estimated probable reserves of 314 MBOE per well (57% oil) and 212 acre spacing.
Our joint venture initially drilled a salt water disposal well, followed by the first two Mississippian Lime wells - the Sneath and Hendrickson. Both wells were horizontally drilled in the upper half of the formation approximately 100 feet below the Chert zone. The Sneath was completed in late October 2012 with a ~3,100’ lateral section, and the Hendrickson was completed in late November 2012 with a ~4,000’ lateral section. Both wells were completed with 10-12 stages of hydraulic fracturing each. Evolution owns a 45% working interest in the Sneath well and a 36% working interest in the Hendrickson well.
To date, our Sneath and Hendrickson wells have produced the expected high initial volumes of salt water with minimal amounts of hydrocarbons and declining bottom-hole pressures. Declining pressure suggests that the well’s completion is contained within the target formation, as desired, and not connected to a water filled formation outside of the reservoir, which is unfavorable. When declining pressure is present, larger amounts of salt water production suggest a potentially large, interconnected fracture system that provides access to the oil and gas reservoir, which is favorable.
Both wells began producing water, as expected, at rates of less than 3000 barrels per day. The operator, Orion, has gradually increased dewatering rates and reservoir pressure has gradually declined. We subsequently learned from another nearby operator of successful producers that dewatering rates up to 10,000 barrels per day for an extended period are not unusual in our prospect area. Accordingly, Orion further increased dewatering rates to match best practices in the play and both wells are currently producing high rates of water plus 20-25 BOE per day of oil and gas. At this time we are conducting further work to ascertain the potential in these wells and explanation for the extensive dewatering in comparison to other successful wells nearby. To date, we have determined that our wells are 40’-50’ lower in section than the nearby successful wells. One explanation that fits the data is that our laterals are too low in the formation and that the fracs connected multiple horizontal bedding planes so that oil and water are separating in formation with the water migrating to our lateral. Consequently, we are considering a third well test higher in the formation similar to Range’s wells.
Our joint venture agreement with Orion Exploration initially called for the drilling of at least six gross wells by mid-April 2013. Due to the extended testing and results of the first two wells, the balance of the drilling was deferred. Subsequently, we reduced our interest in the joint venture from 45% to 34% and proposed drilling of a third evaluation well that we expect will be drilled during the summer of 2013. The probable reserves shown in the table above are from our June 30, 2012 report that reflects a 45% joint venture interest.