The Texas oil industry was born in 1894 in Corsicana, on the western flank of the East Texas Basin. It was in this little town south of Dallas in Navarro County that commercial oil production was first developed west of the Mississippi, when a well targeting water found oil instead.

That was the beginning of a long and vibrant reign for East Texas, one of the foremost producing basins in the U.S. The giant East Texas Field in Gregg and Rusk counties has produced more than 5 billion barrels of oil from an immense stratigraphic trap in the Upper Cretaceous Woodbine formation. Salt-related fields such as Van Zandt County's Van and Wood County's Hawkins are also prolific producers, as well as fault-controlled fields like Mexia in Limestone County. Huge volumes of gas have been recovered from the Upper Jurassic Cotton Valley Lime and Cotton Valley sands in fields ranging from Personville in Limestone County to Carthage in Panola County.

And, the story is far from over. Today, 110 years after its seminal discovery, East Texas remains a lively corner of the Patch. Waves of activity have washed through the basin, and each time more hydrocarbons are discovered and developed.

"East Texas is a mature basin, but new trends impact it frequently," says Dan Breaux, Houston-based geologist, consultant and investor with AC Exploration.

The best thing to happen in the basin lately is the higher price of gas, as East Texas is loaded with numerous gas-prone stratigraphic plays, he says. The basin contains Mesozoic rocks that are generally hard and tight, but respond nicely to hydraulic stimulation. "When gas prices go up, the rig count blossoms, and when prices sink, the rigs leave."

Right now, times are good.

Currently, the strongest East Texas plays are the Upper Jurassic Cotton Valley sands and the Bossier Sand Trend. Exploration drilling is also on the upswing for stratigraphic accumulations in the slightly older Cotton Valley Lime.

"There are still shallow prospects in the Lower Cretaceous Travis Peak and Rodessa, but these are more picked over," says Breaux. "And there are some James Lime prospects that will be drilled."

Furthermore, if the gas price holds, the promise of tens of billions of cubic feet from a single well will simply be too enticing for some to pass by. The dormant Cotton Valley Pinnacle reef play will likely see some revival, and operators will be emboldened to push down the basin's slope to chase very deep Bossier sands.

Whatever the targets, the bulk of the wells drilled in East Texas are now punched down by independents. Although such firms as Mobil and Texaco were born in the East Texas oil fields, the vintage basin now is the playing field for independent operators hunting for natural gas.

The Freestone Trend

For Fort Worth-based XTO Energy, East Texas fits flawlessly into its strategy of growing production through low-risk development and strategic acquisitions.

The independent entered East Texas in 1998, when it purchased some $250 million in properties in Louisiana and East Texas. A small chunk of the purchase was in the Freestone Trend, an area on the western side of the East Texas Basin characterized by natural gas production from the Cotton Valley Lime and Travis Peak formations.

"In general, East Texas operators did not commingle zones, and our properties had been developed with separate wells for each formation," says Keith Hutton, executive vice president. The company saw an intriguing opportunity-the Cotton Valley Lime, Bossier, Cotton Valley sands and Travis Peak formations were crowded with tight, dry-gas reservoirs that exhibited similar permeabilities and still enjoyed reservoir pressures close to original values. The prevailing practice in the area was to stimulate the tight-gas reservoirs with large, expensive hydraulic treatments using huge volumes of sand.

"We believed that the various formations could be commingled, and we thought we could lower completion costs by using water fracs." XTO had been treating wells with water fracs in the Anadarko Basin for years, so it was quite familiar with the technique.

XTO started small in East Texas, joining a consortium that was testing water fracs in the area around Carthage Field in Panola County. It drilled several wells in Willow Springs Field in Gregg County, and stimulated the reservoirs with water fracs. The Cotton Valley and Travis Peak zones were commingled, and results were encouraging.

"With that success, we looked throughout East Texas and we found other areas that offered the same possibilities." XTO has since acquired nearly $600 million in properties in the basin, and at press time it announced another large purchase. Today, it is running 16 rigs and spending 65% of its capital in East Texas, and it has 1.6 trillion cubic feet (Tcf) in net proven reserves in the basin.

In just three and a half years, XTO's East Texas production has rocketed from 20 million cubic feet a day to 372 million per day, as of September 2003.

And that's just the first few chapters of the story. "We think that we have potential for another 2 Tcf net in East Texas," says Hutton. "We have 800 to 1,000 additional locations to drill on properties we currently own."

Mark Pospisil, vice president, geology and geophysics, led XTO's regional survey of the basin. The company elected to focus on the Freestone Trend in Leon, Robertson, Limestone and Freestone counties.

"This area offered abundant sands, thick hydrocarbon columns, and it was dominated by small independents," he says. Also, drilling depths to the Cotton Valley Lime were reasonable, in the range of 12,000 to 13,000 feet, and wells were not as expensive as in the Bossier play that was in full swing to the north and east.

"We were interested in acquiring properties and redeveloping them, while many of the Bossier players were putting together large lease plays."

XTO's Freestone Trend is on the upper shelf of the East Texas Basin, a region characterized by gentle structures that were created by movements of the Jurassic Louann salt. The Cotton Valley Lime sediments, mainly oolite shoals, were deposited over the crests of salt rollers and pillows. The Bossier Shale was deposited next, and above that some 2,000 to 3,000 feet of stacked sandstones in the Cotton Valley sands and Travis Peak intervals. Finally, more productive carbonates were developed in the Rodessa and Pettit formations.

"Our area was initially drilled in the late 1970s for Cotton Valley Lime and Travis Peak reserves, and the Bossier and Cotton Valley sands were generally behind-pipe," says Pospisil. "That played into our commingling strategy. Once we realized that all these zones were productive across structures, we knew we had a big play."

XTO launched its campaign with a four-well pilot in Freestone Field. It expected to sum the recoveries from the Cotton Valley Lime, Bossier and Cotton Valley sands in a single well using a commingled completion. It hoped for reserves in the range of 3 billion cubic feet (Bcf) per well. When the actual rates and recoveries exceeded those expectations, the company rapidly expanded its program.

As of press time, XTO had drilled some 400 wells in East Texas, and had raised production levels across a broad swath of the Freestone Trend. "Production in Bald Prairie Field has grown from 8 million to 77 million cubic feet per day," says Hutton.

Farrar and Bear Grass fields have grown from 9 million to 110 million per day. Freestone Field has jumped from 8 million to 115 million a day; Oaks went from 5- to 6 million to 35 million; and Teague has grown from 8 million to 50 million, he adds.

While attaining higher rates from commingling is one aspect, other crucial factors in XTO's success story are its ability to improve drilling efficiencies and its internal control of the gathering and processing segments in its play.

"When we started drilling in East Texas, it took us 35 to 40 days to drill a 13,000-foot well," says F. Terry Perkins Jr., vice president, reservoir engineering. In 1999, an average well cost $1.5 million, and the gas price was between $2 and $2.50 per thousand cubic feet. XTO's rate of return was close to 40%.

The gas-price spike in 2001 sent drilling costs through the roof, and the cost of an average well shot up to $2.2 million. A lot of hard work and attention to efficiency has since brought XTO's average well cost down to between $1.6- and $1.7 million. "Today, we are drilling our wells in 25 to 30 days, and our rate of return is 80% at a $4 gas price."

Typically, two to three zones are commingled in an XTO completion. An average well is fractured five times, once in the Cotton Valley Lime, once in the Bossier, and one to three times in the Cotton Valley sands.

Each water frac-the method used in the Cotton Valley Lime and Cotton Valley sands-costs $70,000 to $100,000. The Bossier intervals, which tend to be more permeable, are treated with hybrid fracs. These are initiated as a water frac then followed with a polymer frac and more proppant.

The company has also benefited from building its own gathering systems and gas plants, says Nick Dungey, senior vice president, gas operations. "When we started working out here there was only a little bit of infrastructure."

XTO consolidated gathering facilities and laid 450 miles of pipelines. Today, it has eight major compression facilities and it operates in three different pressure regimes. This year, the firm is building another plant at its Holmes site in the central part of the Freestone Trend. This station will have a capacity of 300 million cubic feet per day. "After the Holmes facility is completed, we will be able to handle between 600- and 650 million cubic feet per day," says Dungey.

Going forward, XTO plans to drill between 150 and 170 wells per year in the Freestone Trend. "We'll keep our rig count between 15 and 16 rigs," says Hutton. Step-out wells comprise about one-quarter of its drilling program; infill drilling accounts for the rest.

"We like to maintain a steady program, and we work at both increasing our production base and at extending the limits of the fields. This is a 10-year play for us."

The Bossier Trend

One of the great success stories of the last five years has been the Bossier play. Nearly 2 Tcf in estimated ultimate recoverable gas reserves have been developed in the Dew-Mimms Creek and Dowdy Ranch/Nan Su Gail areas in Freestone County alone. (For more on this, see "The Bossier," Oil and Gas Investor, December 2000.)

Anadarko Petroleum has driven the Bossier play, and it remains the largest and most influential operator. The Houston independent currently has more than 600 operated wells producing about 300 million cubic feet per day (gross) from the Bossier. The company's rate of return in the play is 35%, and it enjoys a finding cost of $5 per barrel of oil equivalent.

"We're projecting an increase in production in 2004 over 2003 levels," says Steve Pearson, Anadarko general manager, U.S. onshore operations. "Right now, we're running 13 rigs."

Drilling costs are the key to Bossier economics, and Anadarko has been steadily cutting those costs. "The way you cut costs in drilling wells is mainly to cut days," says Pearson. "That's what we've done in the Bossier, and the main tool has been PDC bits."

A polycrystalline diamond-cutter bit can stay in the hole longer than a conventional bit, and it drills faster. The company's costs per foot of hole drilled have dropped from $120 in first-quarter 2001 to $89 in third-quarter 2003. The typical 13,500-foot Bossier well can now be drilled and completed for $1.2 million, down from $1.6 million in early 2001.

The Bossier's production profile is characterized by flush rates in the first year, followed by a rapid drop and then a flattening. Typically, three-quarters of the reserves will be produced in 20 years, but gas will flow from a Bossier well for 40 years. "Our base production is pretty steady, as many of our wells are in the flatter phase of their decline."

Surprisingly, reservoirs in the area that Anadarko is playing are actually quite different from those in the Freestone Trend to the west. "We produce very little water, and our wells are deeper and overpressured," says Pearson. "Although the plays are close to one another, they don't have much in common."

This year, Anadarko expects to drill around 130 Bossier wells, a mix of both infill locations and step-outs on the outer perimeters of its fields. In the Bossier Trend alone, Anadarko holds 320,000 net acres of leasehold, and it has hundreds of remaining locations.

"We expect 2004 to be good year."

Cotton Valley Sands

The Cotton Valley sands are a popular target throughout East Texas these days. In Smith County, Southwestern Energy continues to set a fast pace in its redevelopment of Overton Field. (For more details, see "East Texas Gas Manufacturing," Oil and Gas Investor, August 2003.)

The Houston-based company purchased acreage with 16 producing wells in the field for $6.1 million in midyear 2000. Production was below 2 million cubic feet per day. The 11,000-acre leasehold had been drilled on 640-acre spacing, although at the time most operators in the basin were busy infill drilling Cotton Valley sands reservoirs on 80-acre spacing.

Southwestern drilled and completed 15 wells in 2001, 18 in 2002, and 57 in 2003. The company closed out 2003 producing approximately 60 million cubic feet of gas per day, gross, from the field, up from 27 million per day at the close of 2002.

"The performance of the wells-in terms of the estimated ultimate recoveries and initial potentials-are fantastic," says Richard Lane, Southwestern executive vice president, E&P. "We're extremely pleased."

For 2003, Southwestern's Cotton Valley sands wells cost approximately $1.5 million to drill and complete, produced at initial rates of about 3.3 million cubic feet per day, and will recover an estimated 2.2 billion cubic feet equivalent (Bcfe) apiece. In 2003, it posted finding costs of less than $1 per thousand cubic feet at Overton.

As with other operators in East Texas, Southwestern has enhanced its economics-independent of the prevailing gas price-by the two-pronged approach of improved drilling efficiency and enhanced well productivity. Currently, it is drilling its wells in an average of 23 days each, compared with the 55-day average posted by the previous operator. At the same time, its gross reserves and initial production rates have increased 60% and 200%, respectively. At yearend 2003, Overton's reserves will approach 200 Bcfe, net to Southwestern.

The independent has doubled its leasehold to more than 22,000 acres, and it has in the neighborhood of 150 additional locations. It is investigating further infill drilling: in 2003, Southwestern drilled four wells on approximate 40-acre spacing. Three of those exhibited pressures close to virgin and one was partially depleted. "We think that significant portions of the field will require 40-acre development."

Southwestern will keep at least five rigs busy at Overton this year. "At times, we'll use a sixth rig on other projects in East Texas, including a new Cotton Valley sands area in Shelby County."

The best attribute of its East Texas development program is that it is profitable, says Lane. "The margins are very attractive."

Another area with robust Cotton Valley sands activity is the vast Carthage Field in Panola County. Carthage is one of the giant gas fields in the U.S., estimated to contain ultimate reserves of some 18 Tcf in a multitude of productive reservoirs. Indeed, the field is so large that it encompasses much of Panola County.

Although it was discovered in 1936, Carthage still produces nearly 200 Bcf of gas each year. Today, most of that gas flows from the Cotton Valley sands formation. Development of this particular reservoir did not begin in earnest until the late 1970s. By 1980, the reservoir was producing about 200 million cubic feet of gas per day from 1,000 wells. Texas changed the field rules in 1988 to allow 160-acre spacing, which led to another surge in drilling. In 1992, the rules were modified again to permit wells on 80-acre spacing, and by 1995 there were 2,500 wells in the field making 500 million cubic feet per day.

Anadarko Petroleum operates about 1,000 wells in Carthage, and produces some 170 million cubic feet of gross gas per day, says Pearson. "We are currently running four rigs in Carthage, drilling for Cotton Valley sands." The wells are in the range of 8,000 to 10,000 feet deep, and cost about $1 million to drill and complete. "It's a very economic area for us."

Travis Peak

The Travis Peak formation, a shallower East Texas reservoir, is the target of independent KCS Energy in East Texas. In 2002, the Houston firm acquired a position in Joaquin Field in Shelby County, and has since been mounting a development program there. The tight-gas accumulation was originally developed in the late 1970s and early 1980s. KCS has 3,900 acres in Joaquin, and has drilled seven wells to date. "We are in the process of completing our seventh well, and are currently drilling our eighth well," says Weldon Holcombe, Tulsa-based vice president.

"Joaquin is a new field for us," Jim Christmas, chairman and CEO, said at the Freidman Billings Ramsey investor conference in December in New York. "We've raised production from nothing at the beginning of 2003 to more than 7 million cubic feet a day, and we expect to be producing 12 million cubic feet a day by the second quarter."

The Travis Peak at Joaquin is thousands of feet thick, but the gas-bearing sands are interlayered with water-bearing sands. In the past, operators were shy of fracturing into water, so completions consisted of opening up a very small section at the bottom of the productive interval and producing it without stimulation. After that zone depleted, intervals farther up the hole were produced.

A few years ago, BP brought a completion method to Joaquin that had been successful in South Texas. The major perforated and fracture-stimulated large intervals, and produced the water and gas, then separated the water at the surface.

The use of the less expensive water fracs has also made a tremendous difference to the economics of the Travis Peak, says Holcombe. KCS divides the Travis Peak sands into three or four intervals, perforates the bottom of an interval, then stimulates it with treatments carrying up to a million pounds of sand. It produces the zone for a couple of weeks, then sets a temporary plug and moves up the hole to the next zone.

After the fracture treatments are completed, KCS drills out the plugs and commingles the production from all the zones. Today, the company expects initial production rates of 1- to 3 million per day from a well.

A Travis Peak producer, which is typically between 6,600 and 8,800 feet deep in Joaquin Field, costs the company $1.5 million and recovers between 2- and 4 Bcfe. "We have a rig drilling in the field now, and have plans for an additional four to six wells," says Holcombe.

James Lime

Although activity in the James Lime has cooled considerably since the wild times in 2000, an operator new to the play has been enjoying success in the carbonate formation. (For more details, see "The James Lime," Oil and Gas Investor, June 2001.)

Denver-based St. Mary Land & Exploration has been drilling horizontal wells in Huxley Field in Shelby County. Last year, the firm acquired an 80% working interest in 2,900 acres in the field, which was the nexus of the James Lime play.

"We've had great success in Shelby County," says Doug York, St. Mary executive vice president. "We've drilled seven wells that average initial production rates between 2.5- and 5 million cubic feet per day."

Each well costs approximately $900,000, and features two, and sometimes three, laterals of 7,000 to 8,000 feet apiece. Recoverable reserves at Huxley are in the range of 3 Bcfe.

Like other East Texas operators, St. Mary is enjoying the double punch of lower drilling costs and higher gas prices. "We have cut the drilling time from 24 days on the original wells to 17 days currently."

This year, the firm plans to finish off development of its Huxley block with two additional wells. "Our acreage is just about developed. Certainly, it's not a blanket play and structure is important." St. Mary also has a James Lime acreage block across the state line in DeSoto Parish, Louisiana, which it is continuing to develop.

"In this gas-price environment, the economics are fantastic. It's been a great play for us," says York.

Indeed, that's the story across the entire East Texas Basin. The venerable area is undergoing yet another rejuvenation, and companies are looking forward to a hearty 2004.