Cover Story

Drilling Deficit

With oil at $50 a barrel and Texas and Oklahoma striking it rich, Louisiana is missing out.

Texas oilman Chris Cone walks across the vibrating deck of a drilling rig in a muddy field in Scott, the guts of his company's $2.3 million gamble.

A five-man crew on the leased drilling rig spent most of April grinding down inch by inch through more than 2 miles of sand and shale in search of natural gas. An experienced geologist familiar with the area around Scott brought the prospect to the company, says Cone, operations manager for Tri-C Resources Inc.

But even with seismic analysis and a steady stream of drill-bit data that Cone can watch like an EKG on his computer in Houston, the well is at best a 60 percent shot to pay off.

"It's about like going to Las Vegas, or maybe the casino in New Orleans," Cone says.

On this day, Cone has some important guests on the Elmore J. Anderson Rig. They include the secretaries of the state, Natural Resources and Wildlife and Fisheries departments.

With the rig as a dramatic backdrop, officials are sending a message with the posters placed at the podium, which advertise "Cost savings for applicants" and "Faster coastal use permits."

The government asked Tri-C to let them hold the press conference at the brand new rig ' to try to convince independent drillers that South Louisiana is a good place to be.

How times have changed.

As bets in the oil patch go, south Louisiana is a crapshoot, and not a very good one. Drilling activity has doubled over the past five years in Texas, Oklahoma, Wyoming and New Mexico. In Louisiana, drilling is about the same as it was in 1999, when fuel prices were much lower.

And that's despite dizzying prices for crude oil and natural gas and the staggering $100 billion in profits made by the 10 largest oil companies last year, when crude was $41 a barrel. If not for a bump in north Louisiana drilling, the state's oil sector would actually be in decline.

It's so bad, LSU's Center for Energy Studies estimates, that Louisiana has missed out on nearly $100 million in oilfield activity in the past year alone. Majors continue to drill far offshore in federal waters, but the coastal zone is relatively quiet.

As the oilfield business has evolved, south Louisiana's vast wetland terrain has become more burdensome for oil companies. Over the past 15 years, oil and gas exploration has grown increasingly dependent on precise seismic 3-D data to locate underground mineral deposits. These readings are easier for oil prospectors to get when working far offshore or in the rocky terrain of Oklahoma and Texas, as compared to the environmentally sensitive Louisiana marshland. As awareness increases about the oilfield's role in coastal erosion and water contamination, the alignment between landowners, oil prospectors and the state is shaky.

"You really can't compare us to Texas," says Paul Hilliard who founded Badger Oil Corp. in Lafayette in 1957. "We have so many wetlands in Louisiana and that can pose a problem. You leave a bigger footprint and there's a lot more involved."


A triple-whammy of draconian red tape, lawsuits by landowners and high drilling costs have put a chokehold on south Louisiana's oil patch.

Relief might be on the way. A recent Louisiana Supreme Court decision favoring independent oil companies has emboldened oil executives. And simplified procedures unveiled by state officials at Tri-C's rig promise to slash weeks from the time it takes to pull some permits for coastal zone wells.

In addition, six new bills in the state Legislature offer a variety of tax incentives to attract more drilling in Louisiana. One bill would even compensate oil companies that drill a dry well for their expenses with a future tax write-off.

It all may be too little, too late for Louisiana to reap the benefits of this oil boom. On a recent anonymous survey about the impact the lawsuits alone have had on individual companies, one oil executive wrote simply: "Trying to sell Louisiana properties."

Louisiana's crimped budget has lost oil royalties and severance taxes ' as well as personal and corporate taxes ' to other states.

"Oil and gas is still the No. 1 wealth-creating industry in Louisiana," says Henry Florsheim, vice president of business development for the Lafayette Economic Development Authority. "We have to nurture that."

Even in its shrunken form, oil and gas means $19 billion a year to the Louisiana economy.


Louisiana has plenty of oil and gas left, but getting to it has become more expensive and difficult. Louisiana's coastal zone remains a land of riches for independent drillers willing to squeeze oil and gas out of old wells and to drill new ones to tap half-empty reserves. But red tape continues to choke many prospects before they get started.

"We had a cavalier attitude in Louisiana," says Scott Angelle, secretary of DNR, the primary state regulator of drilling permits. "In the past, if you were a major player, you had to be in Louisiana. But now the ExxonMobils can go anywhere in the world. They have a choice. And independents don't have a reason to stand around and wait while state and federal agencies point fingers."

Drilling in the marshy coastal zone means getting approval from the federal government as well as multiple state agencies. Some parishes, such as Plaquemines, have even gotten into the act by requiring drillers to pull a building permit.

In coastal zones, taking a year to land a permit is not unheard of. Compare that to 45 to 60 days for a promising prospect in Texas or Oklahoma. Louisiana regulators now recognize how hostile the drilling environment has become here.

For more than a year, DNR worked with Wildlife and Fisheries to untie unnecessary knots in what had become a tangled permitting process. They discovered that the working agreement between their two agencies was a one-page document drafted in 1981.

Earlier this month, the two agencies signed a new memorandum of understanding that streamlines the permit process. Wildlife and Fisheries, which is responsible for protecting oyster beds and other fisheries, now will be involved with permits up front, which will help to cut a month off some permits, says Dwight Landreneau, secretary of the department.

DNR also agreed to fund through its budget a new position, a person who will coordinate permits as they bounce between the two agencies but who answers directly to Landreneau. "In the past, egos got in the way. There were a lot of turf battles," Landreneau says. "We've tried to eliminate all that."


Adam Singer wishes he'd never tried to do business in Louisiana.

He is a third-generation co-owner of a Colorado-based company called Prospective Investment and Trading Co. Ltd. It specializes in identifying producing wells and buying them from major energy companies for their current production value then performs work-overs or applies newer drilling techniques to boost production.

"We're willing to do work, spend money, pay attention to the details," Singer says.

The company for years operated in many states, though not in Louisiana. But when so many majors started pulling out of coastal and inshore fields in the 1990s, opportunities opened up, and PITCO made its move into the state.

Of the 300 wells PITCO operates, none has given the company more problems than a field it acquired in southwest Louisiana. PITCO has been waging an expensive legal battle with the landowner, who named the company in a lawsuit seeking money for damage to the marsh by operators dating back to the 1920s. Singer won't talk about the details of the suit.

"It makes one not want to make further investments, which results in loss of revenues for the state and for the sundry service companies," Singer says. "Until there's a resolution on these legacy lawsuits, I will not be purchasing any more properties in the state."

That lawsuit is one of more than 90 that fill a cardboard box in the office of Don Briggs, president of the Louisiana Independent Oil and Gas Association. Most were filed by landowners represented by a handful of trial attorneys, who have made a lucrative business out of suing oil companies on behalf of landowners.

More than 700 oil companies are named as defendants in the lawsuits. The allegations include damage dating back to the beginning of the state's oil patch.

The so-called "legacy" issue keeps many operators from pursuing smaller-scale wells in Louisiana's coastal zone. LIOGA polled its members recently with the help of Southern Media Opinion Research to find out what independents really think ' many of their attorneys have advised them not to speak publicly about it for fear that plaintiffs' lawyers would try to use their words against them in court.

The survey, which allowed oilmen to respond anonymously, revealed some stark numbers: 91 percent say they would shy away from buying Louisiana prospects if they might be sued over legacy; 60 percent say they've already reduced their investment in Louisiana because of the litigation. The answers read like a group-therapy session on the effects of lawsuits.

"Have been involved in one ' it's extortion," wrote one.

"Scared to do anything, will not expand," wrote another.

But a recent case has given hope to the industry. The Terrebonne Parish School Board sued Castex Energy, claiming dredging of pipeline canals in the marsh damaged the hydrology of School Board-owned wetlands. The School Board wants to force Castex, the last lease operator, to fill in canals that were dug long ago.

The School Board won at the trial court level. But in January, the Louisiana Supreme Court overturned the ruling, saying that unless the lease specifically requires the operator to fill in the canals, a court can't require it.

LIOGA had considered pushing a bill at the upcoming session of the state Legislature to turn back the lawsuit tide but opted not to in light of the Castex decision. Briggs says he hopes the case will be interpreted by lower courts around the state to favor independent operators making a good faith effort to do business in Louisiana. "We feel it could have a very significant impact."

One bill before the current legislature, filed by Livonia state Sen. Rob Marionneaux, aims to repeal the Castex decision and repeal any indemnity agreements related to mineral leases, making such liability protections "against public policy of the state of Louisiana."

The Louisiana Association of Business and Industry, the Louisiana Landowners Association and LIOGA have already lined up against the bill. Ginger Sawyer, vice president of LABI, says her organization and LIOGA considered pushing a bill to prevent liability lawsuits, but for now, they are resting on the Castex decision.

"We're confident the Castex decision gives us at least a certain comfort level as what the costs of drilling in the state are going to be," she says.

Local conservationist Harold Schoeffler, president of the Acadiana chapter of the Sierra club, disagrees that legacy lawsuits are running off oil companies. Schoeffler, who has been involved in Clean Water Act litigation against oil companies to prevent dumping into Louisiana's wetlands, says Louisiana is one of the most polluted states in the union, largely due to oilfield waste. He believes the state should be careful not to impede environmental cleanups.

"99.9 percent of [environmental] damages go unnoticed, unchecked, unresolved," Schoeffler says. "The folks who have succeeded in collecting on damages only represent the tip of the iceberg."

Schoeffler sees higher severance taxes coupled with the high royalty payments demanded by large landowners along Louisiana's Gulf coast ' not environmental lawsuits ' as the main impediment to the state's oil business. "That's the real issue," he says.

Steve Maley, operations manager at Badger Oil, says the most problematic litigation unique to Louisiana is the result of a slew of new oyster leases the state has granted. The new leases come on the heels of the state's liability for damaging old oyster leases with freshwater diversion projects aimed at combating coastal erosion.

"The [lawsuit] problem would be better if the state hadn't so aggressively granted oyster leases in so many places that probably aren't even prospective for oysters," Maley says. "When you run into oyster leases a lot of companies don't even want to deal with it. They'll throw up their hands and go to west Texas."

Maley says too often oil companies get stuck in the middle of disputes between the state, private landowners and various fishermen claiming rights to the land.

All those factors make drilling offshore in federal waters more appealing for a company like Badger, which has deep roots in Louisiana and little desire to move into Texas. Venturing out into the deep waters of the Gulf of Mexico allowed the company to more than double its overall production in 2004, a year in which its in-state drilling remained relatively flat. "The only way we were able to do that was that we made our move offshore," Maley says. "Offshore there's only one landowner. So right there that strips away a lot of our difficulty."


Some of the seeds of today's anemic Louisiana oil patch date back to the oil price spike of 2000. Smaller entrepreneurs rushed into Louisiana and other states. But prices quickly plummeted, leaving many operators exposed with expensive obligations that suddenly became unprofitable.

Many point to that event as yet another reason Louisiana lags behind other states in drilling activity.

Regulation and geology add significant costs to developing new prospects in south Louisiana. When prices started to rise this time, drillers flocked to Texas, Oklahoma, New Mexico and Wyoming, where they could turn a faster profit'especially important if the spike turns out to be short-lived. Those financial concerns are compounded by the fact that a tax break suspending severance taxes on new wells until payout was allowed to expire in 2000.

LSU energy economist David Dismukes suspects that short-term plays attempting to capitalize on fuel price spikes simply aren't feasible in south Louisiana. "Louisiana has always been more expensive, but the cost for operating offshore and in-state waters has gone through the roof relative to other states," he says.

Adding fuel to the fire is the demand for rigs. Most have been snapped up, as have the skilled hands to operate them, for drilling in other states.

Supplies of rigs are so tight that day rates have shot up more than 50 percent in recent months. Tri-C's Lafayette-area rig, for example, runs about $14,000 a day.

"The same rig probably would have cost $9,000 a day just six months ago," Cone says. "The rig hands are making great money, and it's tough to keep them."

Cone considers himself lucky even to get that one. He contacted virtually every drilling rig contractor in the United States, and the next rig was not available until August. More costly than the bill for rig is the wait to get one. The longer it's expected to take to go "from prospect to pipeline," the less attractive an oil play becomes.

Even when everything goes smoothly in the prospecting process, of course there's still no guarantee of striking black gold. Last week, Tri-C Resources discovered that its promising prospect in Scott was, in fact, a dry hole.

"The sand was there just as we expected, but it just didn't trap hydrocarbons," Cone says. "It was a great prospect. We'd do it again in a heartbeat." One good aspect of the deal was that it was a cut-and-dried result ' Tri-C didn't have to run costly drill casing down the hole first to discover it was dry.

"It's just how it goes ' it's why I said it was like going to the casino," Cone says.

The rig was Tri-C's only new Louisiana prospect for 2005, although the company is a partner on some producing wells in Lake Borne, and Cone says the company will drill again in Louisiana eventually.

Meanwhile, Tri-C continues to explore new opportunities. The company is spending $600,000 just to transport another drilling rig that had been stacked and stored in South Texas to a new prospect. Tri-C had to agree to lease the rig for a full year. "It was my only option," Cone says.

But that won't be a problem. Tri-C plans to drill 10 consecutive wells at the promising new site.

It's located in North Dakota.

- Additional reporting by Nathan Stubbs