Greater Baton Rouge Business Report: What's wrong with our cash cow? With oil at $50 a barrel and Te

Texas oilman Chris Cone walks across the vibrating deck of a drilling rig in a muddy field near Lafayette, explaining the guts of his company's $2.7 million gamble.

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A five-man crew on the leased drilling rig will spend most of April grinding down inch by inch through 2.3 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% 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 mill about the media event hoping reporters will take note of one-liners printed on posters at the podium: "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. Why? 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 "only" $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 oil field activity in the past year alone. Majors continue to drill far offshore in federal waters, but the coastal zone is relatively quiet.

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

The good news is 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.

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The bad news is 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 law-suits 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 number one 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. And while Baton Rouge's economy may not rely directly on oil and gas, the impact of a gasping oil industry reaches all the way to the Capital City, says LSU economist Loren Scott.

"East Baton Rouge has the highest concentration of state employees, and if there's no drilling, there's no mineral revenues," Scott says.

Permit me, please

Louisiana has plenty of oil and gas left, but it's more expensive and difficult to get than it used to be. The low-hanging fruit has been picked.

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 guiding cooperation 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.

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"In the past, egos got in the way. There were a lot of turf battles," Landreneau said. "We've tried to eliminate all that."

Full-court press

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 in-shore 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 card-board 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 deep-pocketed 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% say they would shy away from buying Louisiana prospects if there were even a chance they might be sued over legacy; 60% 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.

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"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."

Ginger Sawyer, vice president of the Louisiana Association and Business Industry and head of its energy council, says a bill might be introduced to hold today's operators harmless for earlier environmental problems. Yet Sawyer says such legislation could be a hard sell. While it would take the new, smaller drillers off the hook, the big companies that originally developed the fields would be left vulnerable.

"It would be a divide and conquer thing between the independents and the majors," Sawyer says. "It might spur drilling, but it won't solve the larger legacy site issue because the majors could still be held liable."

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No bonanza for you

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% 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.

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 said.

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.

TOM GUARISCO covers telecommunications and utilities, retail, oil and gas, and insurance. Reach him at tguarisco@businessreport.com.