One surefire way to gauge the interest in, and potential of, a region is to note how many players want to buy producing assets there, and how much they are willing to pay. By these measures, South Texas always stands out. In the last four quarters, buyers paid an average $1.15 per thousand cubic feet equivalent (Mcfe) for proved gas reserves in South Texas, according to data from investment-banking firm Waterous & Co. The region ranked third behind the Upper Texas-Louisiana Gulf Coast onshore at $1.31 and the Gulf of Mexico, which commands the highest price, at $1.56. (Reserves in eight other U.S. onshore regions garnered less money.) Data from the U.S. Energy Information Administration show that Texas Railroad Commission District 4-which encompasses the counties that rise from the Mexican border east of Eagle Pass to the coast-has almost as much proved gas reserves as Alaska, and more than Louisiana. In 2001, the latest year for which data are available, this district alone accounted for 300 billion cubic feet of new-field discoveries-the most of any area in Texas, and indeed, more than any single state. And that doesn't count upward reserve revisions or many new reservoirs found in old fields. Production and the producing-well count have increased at a 1.6% compounded annual rate since 1990. Rigs have increased at 6% because the number of days to drill have increased 4.5% per year as operators go deeper. Prospects in the region vary from 20 billion cubic feet (Bcf) to 100 Bcf and internal rates of return can be 20% or more-but depletion comes fast too as the new and improved frac techniques cause the wells to produce at high initial rates, which fall off. A Texas severance-tax abatement on tight sands has helped. "In many ways, South Texas is as good a play as the deep Shelf in the Gulf of Mexico in terms of the average prospect size. There is not much to differentiate it, except that of course, you don't have to build a platform or use boats and helicopters," says David Trice, president and chief executive of Newfield Exploration Co., Houston. No wonder acquisitions in the region have remained steady during the past few years. Newfield has been joined by Peoples Energy Production and Santos Exploration USA as recent buyers. Samson Resources is pursuing deep Vicksburg pay, keeping two or three rigs operating in South Texas, often partnered with Shell Exploration & Production. In addition to drilling, in 2002 it purchased Texas Independent Exploration Co. for about $45 million, with reserves in Starr County. It also bought 700 square miles of 3-D in South Texas. It plans to spud two exploration wells-one to 14,000 feet; the other to 17,000 feet-in early 2003. "You can pack a lot of reserves in a small area down there-maybe 100 Bcf per prospect [not per well]. Production of 20 million cubic feet a day is not out of the question," says Tulsa-based Samson co-chief executive officer Jack Schanck. Given all this activity, and the lure of gas reserves with fast pay out, the rig count in District 4 has outpaced most other Texas regions and indeed, the region is second only to Wyoming in the number of drilling permits granted in the last two years. That's not to say it is easy. Many of these wells, whether drilled to the Frio, Vicksburg, Lobo or Wilcox pays, are highly pressured and penetrate a complexly faulted subsurface that resembles shattered glass. They require massive, expensive fracturing and good technical skills while drilling through depleted zones or higher pressures. And, they are being drilled deeper, often below 15,000 feet, as operators seek new gas supply for North America. Most players in the region cite land access as one of their biggest challenges, that is, assembling a large-enough block of contiguous leases to make a meaningful run at glory. Sophisticated ranchers and other landowners, who have been dealing with oil and gas companies since the1920s, drive a tough bargain. Some are trying to buy back their leases from majors so they can turn them over to large independents that will explore more often. "We had a prospect at Mendiola we'd known about for three years, but we couldn't get the acreage at first," says Steve Mueller, senior vice president and general manager for onshore at The Houston Exploration Co. "It took us six months to negotiate with the landowner and we have a 50-plus-page lease. And the industry in general has grown more cooperative and open with its data these days, but in South Texas and offshore, less so. "Still, what royalty owner wouldn't like to be part of a case such as this? In 2000 Houston Exploration bought properties in the area that were producing 28 million cubic feet a day, that now produce 68 million because we drilled 20 new wells after the deal closed." Despite successes, operators here do still fight the decline curve. "The balance point between increasing and decreasing production in District 4 is approximately 1,000 productive wells per year," estimates Mueller. He studied District 4 data from Baker Hughes, IHS Energy and the state to come up with these findings. "A total of 1,034 wells were drilled in 1998 and production increased slightly. When the well count dropped to 874 in 1999, production dropped quickly and then turned round in 2000 with the well count at 1,074. It continued to climb in 2001 with the count at 1,155." The biggest producers in South Texas are names you'd expect-Conoco, Shell, El Paso Production Co., ExxonMobil, EOG Resources, The Houston Exploration Co. Plenty of smaller and private companies, and start-ups such as Laredo Energy, Copano Energy, Contango Oil & Gas Co. and Legend Natural Gas, are staking claims here as well. Camden Resources Inc. One relatively new name to the region is this Dallas-based start-up that was primarily funded with equity from Yorktown Partners, to explore Miocene, Vicksburg and Wilcox targets. It spud its first well in June 2000 in Duval County, and is now testing No. 20 and drilling No. 21. Total gross production is about 35 million cubic feet per day. In Duval County, the company now ranks second behind EOG Resources and ahead of El Paso Production Co. in terms of daily gross gas output. More gas production is forthcoming in 2003. In McMullen County it recently recorded an absolute open-flow test of 108 million cubic feet a day at the #1 Ruckman, from 15,500 feet in Lower Wilcox. Its partners are Dallas-based Hunt Oil Co., Gasco LP of West Virginia, and U.S. Enercorp LLC, San Antonio. And, it was also testing the M Sand in the #1 Burns, on the Garcia Ranch in Kenedy County. The latter reached total depth in Lower Frio at 13,800 feet and already successfully tested the L sand uphole, in a "bailout zone" that can be produced regardless of what else the well turns up. Indeed, that is the beauty of wells in South Texas, which often find multiple productive zones. Swift Energy Co. is a partner in the well, but Camden operates and has 28% working interest. The principals behind Camden are not newcomers to this region. President Marc Rhoades has been operating in South Texas for 25 years, 21 with Greenbrier Operating Co., a private Dallas company that made monthly distributions to its partners for about 40 years. Rhoades took Greenbrier from $40 million in assets in 1990 to more than $250 million in distributions, including a sale to Coastal Oil & Gas (now part of El Paso Production Co.) in 2000. He did it by owning a 50% interest in Jeffress Field in Hidalgo County and operating many of the wells in which Coastal held an interest, before selling it outright. Having been involved in one of the best gas fields in South Texas, Rhoades believes he can find opportunity in the region again-but this time, deeper. "Most of the shallower production between 5,000 and10,000 feet has been found, so the bigger opportunities will be below that. That's where your operational expertise comes in, because the deeper you go, the more inherent the mechanical risks and the expense of setting more pipe." All but four of Camden's wells have been below 11,000 feet and five went below 15,000 feet. At these depths and in this highly faulted area, constancy is an attribute that leads to drilling efficiencies. For example, between Greenbrier and now Camden, he had the same Nabors Drilling Co. rig under contract for four years. And Rhoades makes a point of staying on location during critical days to closely monitor the quality of drilling or cementing operations, even though he also uses Epoch, a software program owned by Nabors. With this, he can monitor drilling data-including bit depth, hook load, penetration rate, rotary speed-in real time from his Dallas office, his home or at the rig itself. "South Texas is a great place to drill, with great rocks," says co-founder and executive vice president Bryant Patton, "but it's not for anybody who hasn't drilled down here before." Geology matters, of course. "All of our prospects contain the four Ss-sand, structure, shows and what I call scenery. That is, if there are no wells anywhere nearby and I'm the only guy in town, I'm likely to back away," says Rhoades. All but one of the company's prospects have been generated based on 3-D data, and all came from third-party generators. Patton notes that one of Camden's biggest problems is finding enough drill-ready, 3-D-based prospects. Rhoades seconds that. "The game has changed," he says. "You don't see people ginning up a lot of prospects because it can cost upwards of $500,000-that's a lot of money if you end up not selling your deal. The costs have gone up because you have to do 3-D now, which is $20,000 to $40,000 per square mile, and the land costs are up around $200 to $250 per acre. A standard lease used to be three pages-now it is 15 and you have to have an attorney involved. Your rig costs are probably about a third of what you are spending." Next on the agenda, says Patton, are two wells in Liberty County and a likely offset to the Ruckman in McMullen County. Longer term, Camden's strategy is to build assets through drilling and development, then sell out in three to five years and start over. "The money is in finding reserves and then selling them, not producing them," Rhoades says. El Paso Production Co. This company might end up being a buyer someday. It already incorporates the old Coastal Oil & Gas Co., Zilkha Energy and Sonat Exploration. El Paso has made South Texas a cornerstone, with output from the region now totaling about 461 million cubic feet equivalent a day. "In 1994 we retooled our business and decided to analyze all the basins and plays in North America," explains president Rodney D. Erskine. "We felt most North American plays were approaching their economic limit, so we set out to become the experts in unconventional plays such as coalbed methane, the deepwater Gulf of Mexico-and tight rocks such as you find in South Texas." That commitment is reflected in the company's activity level. Through August 2002, El Paso had been operating more rigs in the U.S. than any other company, according to RigData.com. Averaging 43, it was well ahead of BP, ExxonMobil, EOG Resources and Chesapeake Energy, the next contenders. About a fourth of El Paso's rigs were active in District 4. In the past, El Paso mostly kept mum on its E&P activity due to competitive leasing pressures. But at the RBC Capital Markets investment conference in Houston in November, Erskine opened up. "More than half of our net onshore production of 886 million cubic feet per day comes out of District 4," he said. The company claims to have found about 5 trillion cubic feet (Tcf) of reserves-3.45 Tcf proved-in the last few years there. At Jeffress Field in Hidalgo County, the company found 1.4 Tcf of reserves and has produced 800 Bcfe. "In 1994, we thought it had 200 Bcf left, but we determined we'd bypassed a significant amount," Erskine says. "Often these 1-Tcf fields were drilled but not understood, as they were so tight. Then we bought a little property next door, Samano, and we now think it is more than 200 Bcfe-120 Bcfe proved. The first well initially produced 30 million a day." Production from the Jeffress complex is averaging 350 million cubic feet a day, net, from Vicksburg, he says. The North Monte Christo Field has 1 Tcf proved and 300 Bcfe probable, while East Monte Christo has 200- to 500 Bcfe of potential. Through September 2002 in South Texas, El Paso had racked up these impressive statistics: 68 wells drilled with an average total depth of 14,493 feet and an average initial potential test of 26 million cubic feet per day-and total gross reserves of 372.7 Bcfe. El Paso said it had 39 prospects last year with net risked mean potential of 500 Bcf in South Texas. Newfield Exploration Co. Best known for its offshore growth-by-drilling story, Newfield has been expanding through onshore acquisitions lately as well. In its biggest deal yet, it closed on the $640-million purchase of EEX Corp. in November. Part of the attraction was the latter's extensive South Texas production and drillable prospects, including its interests in the storied Bob West Field near Laredo, one of the largest onshore gas fields found in the last 20 years-still producing nearly 100 million cubic feet per day. The deal brings balance to Newfield's Gulf and Midcontinent portfolio and gives it entree to the deepwater Gulf with EEX's 60 deepwater blocks. All told, it adds 300 billion cubic feet of proved reserves and an eight-fold increase in acreage. "We've been on a mission to diversify in the last three years," says president and chief executive officer Trice. "As we've gotten larger, we recognized we needed to be exposed to more than a single basin. Now about 40% of our reserves are offshore, not 100% as they were originally, so we feel we are a stronger and more diverse company. This brings us quality production, legacy fields and a great acreage position," says Trice. "It's taken us from 1 Tcfe of reserves to 1.3 Tcfe. We had a footprint in South Texas before [from the purchase of Headington Oil Co. assets in 2000], but now we are a major player in a bigger playground. We acquired 61 fields and now have close to 400,000 acres, so we're in a great place to look." Newfield expects to double the level of capital investment on EEX's onshore properties in 2003, to nearly $75 million. It aims to repeat what it did with the Headington assets, where it grew production in three fields from about 35 million cubic feet equivalent a day to nearly 100 million. "We're excited about these assets, their production and the exploration ideas that come with them," says Elliott Pew, vice president of exploration. "We're looking at 40 or 50 wells this year, mostly in Railroad District 4, with a few in districts 1 and 2. These are identified opportunities with a good mix of 25% exploration and the balance, exploitation." One star asset in the package is the 35% to 50% working interest in Dinn Ranch Field in Duval County. Discovered and operated by EOG Resources, nine successful wells have gross production of about 80 million cubic feet a day since EOG expanded the gas-treating facilities at Dinn Ranch last fall. The play developed out of 3-D shot in the mid-1990s that led to significant discoveries in 2000 and 2001. In 2003, the partners plan at least three development wells. In Hidalgo County, Newfield will hold 20% to 40% working interest in wells in Monte Christo Field, a Vicksburg and Frio producer where one exploratory and five development wells are planned in 2003. In Webb County, Newfield picks up 100% interest in Vaquillas Ranch, where current production of 10 million a day from 40 wells may be increased. Pew thinks significant proved reserves can still be developed. In 2003 it plans a field-wide assessment, remapping and three development wells. This will be the company's first Lobo Trend effort. Finally, Newfield plans seven development wells in Fashing Field in Atascosita County, where EEX had 49%. Improvements such as workovers and lowering the reservoir pressure should increase production. Newfield also will study the field for further exploration and exploitation potential. At press time, Newfield had just completed a proprietary 3-D survey near Bob West and within the same Wilcox Trend, to try to extend the trend. Leasing still was under way, so Pew wouldn't say toward which compass point the company is looking for new pay. "El Paso thinks there's more life at Bob West," says Pew. "But it's a very large, very complicated field." The Houston Exploration Co. What does it take to be effective in South Texas? Owing to complex geology, a successful exploration program requires extensive investment in 3-D data and seasoned personnel to interpret the area's ambiguous formations, according to William (Billy) Hargett, president and CEO. It also calls for a proactive land group for title work and negotiation with landowners due to the challenging fractional ownership structure in the region, and a systematic drilling program, because controlling costs is key, he says. THX has been drilling in South Texas since 1996 and drilled 50 wells there in 2002 versus 35 the year before. Currently it operates five rigs in the region and more than 400 wells. Last year it increased production from Webb, Zapata and Jim Hogg counties by more than 80%. "South Texas yields among the most attractive drilling and production economics in North America," Hargett says. "Our finding and development costs have averaged around $1.30 per Mcf and lease operating costs are about 25 to 26 cents. Costs to drill and complete wells to the Middle Wilcox and Lobo Sand typically are from $1.5- to $2 million. If gas is $3, we'll do better than a 20% rate of return." THX is hedged to collar the highs and lows so its drilling schedule remains consistent. "But it takes a lot of technical expertise. Continuity of working there over time allows us to increase production while keeping costs flat." Hargett vowed to spend less than company cash flow in 2002 and thus, deferred a few projects to 2003. It doubled its position in the region to 57,000 net acres with two acquisitions in 2002. These added proved reserves of 127 billion cubic feet equivalent (Bcfe) for $111 million. It has 3-D data on most of it. "We think acquisitions of production-along with drilling-make an increase in production more probable. We hope to continue to expand down there. It is a strategic growth area for us." The pay off for all this activity? The company produces about 120 million cubic feet a day net in South Texas, or 40% of total company production. In fact, THX is the No. 3 producer in Zapata and Webb counties-two of the top three gas-producing counties in Texas. THX-operated properties have more than 1.8 Tcf of gas in place, yet have produced just under 1 Tcf, so more running room remains. With a drilling inventory of more than 100 locations on company-operated properties, South Texas will be a focus for years to come. The mainstay is still Charco Field in Zapata County, and for good geological reason. "At Charco we have 80-acre spacing, but the highly complex faulting often allows us to drill on as little as 40- and 20-acre spacing and still see no appreciable communication between wells," says senior vice president Mueller. Production at Charco has tripled since THX acquired it in 1996. A recent acquisition of some additional Conoco interests around the field means South Texas is now a third of the company's reserve base. Meanwhile, THX is exploring two new projects in Webb County. The first is Oilton, a Middle Wilcox farm-in where it earned 12,200 gross acres by drilling two wells. The first discovered two sands and the second reached total depth in December, with logs indicating similar productive intervals. The second prospect, in Mendiola, was drilled on a separate structure to test the Lobo at 5,200 to 6,200 feet. The area is dominated by huge slumping fault blocks at about 12,000 feet deep, says Mueller. "On our 12,000 acres, there are 15 different fault blocks, give or take, so these are true wildcats. We're trying to find out how contiguous the sands are. We've always known about the unconformity in the Lobo, but 3-D has progressed enough to where we can see it better than we could have two or three years ago," he says. "We have reprocessed 1,200 square miles of data four or five times in the past two years, and some of that has given us some very good wells." Recently, THX contracted with eLynx Technologies of Tulsa to provide remote real-time monitoring equipment for 242 wells and 29 gas compressors in Jim Hogg, Webb and Zapata counties. New wells will be added as they come onstream. Peoples Energy Production When Chicago utility holding company Peoples Energy decided it wanted to own oil and gas assets, it hired well-known A&D expert Binney Williamson in 1999 to start looking around. Ideas in South Texas loomed large on his radar screen. In September 2000 the company hired veteran executive Steven W. Nance as the new president of its fledgling E&P unit, and moved it to Houston to pursue an acquire-and-exploit strategy. At the time there were two or three employees in Houston. Now there are 30 and production has grown to more than 60 million cubic feet per day. A big portion is in South Texas, although the company also has properties in the Arkoma and San Juan basins and North Dakota. Many of the first acquisitions focused on South Texas. Peoples bought Sierra Minerals' Alvarado Field production and acreage for $120 million in 2001, its biggest deal so far. Since then it has drilled 25 wells on these properties, which are in Starr and Hidalgo counties, and has more than doubled production, which comes primarily from the Vicksburg. In June 2002, Peoples acquired an operated position in East White Point Field north of Corpus Christi for $10.5 million from Abraxas Petroleum. In November 2002, it acquired properties from Magnum Hunter Resources for $33 million. That deal included 175 wells in five fields in Webb, Zapata, Colorado and Duval counties. Peoples will operate four of the five. "Utilities have been notorious for making some bad investments in E&P-a lot have stubbed their toe," concedes Nance. "We are determined to learn from others' experience. "Our first deal, in 1998, was a $30-million equity investment in EnerVest [a large, private Houston firm that acquires and operates production for institutional investors]. That was our entrée. It let someone else manage the assets. Later we began investing in nonoperated working interests as we gradually moved up the risk profile. Today our preference is to operate, as we have matured into a traditional company with operational and technical expertise." Peoples is changing from being a passive institutional investor to owning and operating reserves. In the past two years the company has spent about $55 million with the drillbit and a large percentage of that was in South Texas. At press time the company was reprocessing seismic data from Alvarado Field in preparation for its 2003 program, which, adds Nance, means a rig will be busy in the field through March, probably longer. "The past year was interesting-we looked seriously at more than 125 deals, bid on maybe 25, and made only one. I would like to have spent $100 million but we could not find the right deals-ones that met our investment criteria and risk profile. We've told the Street our new budget is $50 million for acquisitions and $30 million for drilling-but if we have an opportunity to spend more, and it is strategic, we will consider it. But, I am not going to do anything that doesn't fit our profile just to show growth." Nance has been flexible. In 2000 when his budget was $25 million, he did the Sierra deal for $120 million, yet in 2001 when his budget was $100 million, he closed on only a $10.5-million transaction. "We're in an ideal situation-we are a start-up company with a financially stable parent company with capital, that understands the cycles, is disciplined and patient." THE MAVERICK BASIN In Maverick County, Saxet Energy Ltd. has a tiger by the tail. It is not the first time employees of this private Houston company have enjoyed exploration success in South Texas. Saxet primarily focuses on Texas Railroad Commission districts 2 and 4, but has added Maverick County in District 1. It drilled and operated 16 wells in the region last year. Fourteen of those were drilled in Maverick County, into a series of oil-bearing reefs, to develop the company's discovery on the 95,000-acre Comanche Ranch lease. In February 2002, Saxet and its 50% partner, The Exploration Co., hit big with a Cretaceous Glen Rose oil play in an area previously thought to be an exploration graveyard. The partners are now producing about 2,300 barrels per day from seven wells in the new Comanche-Halsell Field. The wells also produce about 3,800 barrels a day of fresh water, which has caused the partners to undertake further engineering study to determine how to limit water production. Average depth is 6,500 feet. Saxet and TXCO's discovery, the Comanche Ranch #1-111, initially flowed at a rate of more than 2,000 barrels a day from a 55-foot section of pay, and later flowed about 500 barrels a day. At press time it was producing about 300 barrels a day. "We followed that up with 13 more wells and we've found the porosity zone in almost all of them," says Saxet president Robert E. O'Brien. An additional seven wells are waiting on completion or recompletion. Cumulative production since February is 560,000 gross barrels of oil. The prospects were generated based on 3-D seismic surveys shot by Saxet and TXCO in 2001. The data indicated more than 30 prospective Glen Rose areas, the largest covering 850 acres. From the discovery to the farthest western well is eight miles. "We were drilling the discovery well when we lost circulation in the top of the Glen Rose section. We were pumping lost-circulation material in the well at the same time it was flowing on us, and it produced 5,000 barrels in the first 48 hours, so we knew we had found something," O'Brien recalls. There are an estimated 30 to 40 prospects on the Comanche Ranch, with 10 to be drilled by mid-2003. "Each well we've drilled so far was drilled on a different feature," says Brian O'Brien, Robert's father and partner. "One well does not lessen the risk of the next well until we get a better understanding of the play." Says Robert, "What makes this so unique is we have not yet found an analog to it. We believe we have found a new trend. To the north of us by about 15 miles, Glen Rose produces gas for TXCO. But this is oil. And whereas TXCO is drilling on a reef, our structure appears to be a fore-reef facies in a depositional environment." There are other deeper zones that look just like it in the seismic data, which Saxet has not drilled into yet. The O'Briens theorize that Cretaceous Sligo, James Lime, Pearsall and Jurassic Smackover equivalents may be productive in the area as well. "In the Glen Rose there are five intervals and we've only developed one," says Robert. "Our plans are to continue to develop the Glen Rose and test the other intervals. TXCO and others are pursuing coalbed-methane plays near us too, although we are not presently concentrating on that play." Started in 1998 and 50% owned by Quantum Energy Partners, Saxet has a proud lineage. Robert started the predecessor in 1992. In 1997, his father, Brian, and his longtime partner, Tony Sanchez, dissolved their storied partnership, Sanchez-O'Brien, by selling their South Texas assets to Coastal Oil & Gas (now El Paso Production Co.) This included interests in Bob West, one of the largest gas fields in Texas. "My father [Brian] still wanted to drill wells, so he and some individuals from the old company joined me to put together a smaller version of Sanchez-O'Brien," says Robert of the new Saxet. "We didn't buy any assets-we hit the ground running with our existing prospects." The strategy is to generate, drill, develop and exit in a timely manner. Saxet and its partners have leased in excess of 300,000 gross acres in the Maverick Basin and have shot in excess of 275 square miles of proprietary 3-D data covering about 50% of their leasehold in the basin. Might the new Glen Rose oil play be expanding? "We have a lot of fresh data. Our technical team is busy now and we'll hit the ground running in February," vows Robert. "We have a tremendous database of both high tech [seismic data] and low-tech [people's experience in the region]. "This Maverick Basin is vastly unexplored. Shallow to deep, there is a lot going on."