In Mississippi, just a few kilometres from the town of
Natchez, KFG Resources (TSX.V: KFG) is about to try something that CEO Bob
Kadane believes will create significant value for his company’s shareholders.
Buried beneath the Fayette field is the Fayette salt dome – the last
hydrocarbon-bearing salt dome of its kind in the region that has not been
redeveloped. In February 2008, KFG will carry out the first 3D seismic imaging
survey on the Fayette salt dome in which it holds a 100% working interest. The
data from the seismic survey will be analysed with existing data from more than
100 well logs to determine the best fifteen or more targets for a drill program
to be started this summer. The goal will be to drill through multiple oil and
gas formations in the shallow Wilcox Formation (from 3,500 to 3,900) and the
Lower Tuscaloosa (9,600 feet).
Salt domes like the Fayette were deposited millions of years ago when the
shores of the Gulf of Mexico were located far inland from their current
position. As waters evaporated, they left thick pockets of salt in layers. Over
the millennia, these were buried by sand, soil and sediment. Over time, the
thick layers of salt bowed in the centre and penetrated upward through the
existing strata of rock – hence the “dome” shape of the structures. The salt is
hard and impenetrable; the upward bending of the salt formed traps or pockets
where oil and gas collected, often in large quantities.
There are numerous salt features located in the area surrounding Natchez. While
most have been thoroughly explored and exploited from the 1930s until the
present, the Fayette Salt Dome has seen only limited exploration.
Of the 4,000 acres that comprise the Fayette field and salt dome, only a
fraction has been explored. Historically, exploration companies have drilled 29
deep holes on the east side of the dome. The west side, however, has only seen
eight deep drill holes – which makes the west side a priority target.
The problem with mapping on the west side of the dome, Kadane says, “has been
that the drill holes are too far apart to make any logical conclusions from the
surface mapping (well logs). Some of them had small quantities of oil and gas
production, so they could be the edge of a larger untapped reservoir. These old
wells are 1,000 to 2,000 feet apart and you could have a reservoir easily run
right between them and not even know it. And that’s what the seismic will tell
us.”
3-D seismic surveys, or "seismics" as they are commonly called, use
sound waves to locate rock formations in the earth that are associated with oil
and gas. Acoustic vibrations are created either by a controlled explosion, or
more often, by use of a vibration truck, which thumps the ground creating waves
that radiate into the earth. The sound waves are reflected off subterranean
rock, sediment, salt and other layers. The length of time required for the
waves to travel through layers of varying densities is used to create a profile
of the structure. With the use of computers, 3-D seismics have becomes incredibly
detailed and complex. Billions of data points are compiled to create a three
dimensional image of the underground structures thus dramatically reducing the
element of chance in drilling wells.
Then there are the well logs from more than fifty previously
drilled wells in the Fayette field. These well logs are like electric
cardiogram images depicting a foot by foot image of the types of hydrocarbons
present down a well hole. With the log data, the presence of hydrocarbons is
measured up and down the drill hole and outward about 20 feet in all
directions.
In addition, Kadane says, 3D seismic survey signatures will show areas of
undepleted shallow gas as well as the undepleted oil reserves. In all, this
adds up to a potentially huge amount of hydrocarbons.
Although KFG’s earlier plans to recomplete its existing three Lower Tuscaloosa
gas condensate wells were successful, they represented only the initial phase
of hydrocarbon recovery from the Fayette field. With those online, the Fayette
Field is presently producing 20 barrels of oil and 250 MCF of gas per day.
Kadane says these were just a fraction of what could be underground here.
“If I walk away from this with just five successful wells, I’m going to be
disappointed, Kadane says.”
He points out that every other similar salt feature in the Gulf Region that has
seen 3D seismic survey data used in conjunction with down-hole well log data
has been successful in finding new oil and gas reservoirs in just about every
producing horizon.
The Fayette field is structurally similar to oil company Denbury’s (NYSE: DNR)
numerous projects in Louisiana and Mississippi, including other salt domes that
Denbury has drilled for primary recovery or pumped CO2 into for secondary
recovery. Denbury is one of the largest oil and natural gas operator in
Mississippi and owns the largest reserves of CO2 used for secondary oil
recovery east of the Mississippi River. In recent years, Denbury has
systematically acquired many of the known salt formations throughout
Mississippi and Louisiana.
“These old producing fields with salt features have been redeveloped by Denbury
and others by doing exactly what we’re doing – 3D seismics and well logs – and
then redrilling the areas and finding new reservoir traps, new fault traps,
deeper beds, shallower beds. The reason there are still untapped resources down
there is that using well logs alone didn’t give enough indication for the zones
to be successfully tested for hydrocarbons.”
Historically, more than two million barrels of oil and 8 billion cubic feet of
gas were produced from the Lower Tuscaloosa formation at Fayette. Kadane
emphasises that most of the historical production was from the east side of the
Fayette salt dome, which has seen most of the drilling.
“There no reason I can think of why the same or similar won’t be possible to
find on the west side, where only eight holes have been drilled,” he points
out.
While KFG focuses on drilling the untapped side of the salt dome, there remains
another value-opportunity to consider as well. The Denbury model of secondary
recovery using CO2 requires substantial capital to initiate, but is a very
profitable model for that company. Kadane says the secondary model is one he is
considering – once the company has the seismic data.
“It has been every economic for companies like Denbury to revisit these older
depleted reservoirs throughout Louisiana and Mississippi,” Kadane says.
“Another object of the 3D then is to figure out exactly where the old depleted
reservoirs are so you’ll know where to put your injection wells for a secondary
recovery project.
“We’ve already been approached by Denbury to sell Fayette and we would have
done a JV, but I wasn’t about to sell it. They’ve done their homework – they
know what’s there.”
KFG Resources has 42,147,311 net shares outstanding and presently trades at
$0.09 per share.
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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