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What’s Wrong With The Eagle Ford Shale?


Written by David Blackmon

Click HERE to Read the Article by the Publisher.

“What’s wrong with the Eagle Ford?” a friend asked me a couple of weeks back.  This was shortly after I’d posted a piece chronicling the somewhat amazing boom in new investments (more than $6 billion during August alone) and rising rig count (over 200 as of last Friday, 50% of the national total for oil rigs) in the Permian Basin over the last couple of months.

My buddy, who resides in South Texas, was confused as to why West Texas was benefitting so richly while the economic engine of his part of the world has remained mired with a rig count in the 25-30 range.  Of course, the first correct answer to his question is that there is nothing “wrong” with the Eagle Ford Shale.  It has been and remains a world-class oil and gas play, a formation that has the potential to ultimately become the single most-prolific oil formation ever discovered in the Lower-48 states.

Having said that, it’s still a good question, and one worth more fully exploring.

The first and most obvious reason for this disparity is well economics.  The Permian benefits from the existence of multiple potential pay zones, i.e., different horizontal underground formations capable of producing oil and/or natural gas in paying quantities.  In many locations more than one, and often several such pay zones lie beneath a single drill site.  Obviously, the ability to produce oil and gas in paying quantities from multiple formations by drilling a single hole will have the effect of lowering the well’s overall costs per unit of production.

The Eagle Ford shale is itself a gigantic oil and gas-containing formation, but throughout the 20+ county region in which it has thus far produced, it is typically the only source of production in any given well.  Because of this disparity, the average expected break-even oil price throughout much of the Permian tends to be significantly lower than what we see in the Eagle Ford region.  As an example, Pioneer Resources CEO Scott Sheffield told an interviewer just last Friday that producers can break even in many parts of the Permian Basin at $30/bbl and even lower.  A more common per-barrel number one sees these days for the Eagle Ford region is around $50.

Capital investment in the oil and gas industry is always going to tend to flow to the highest anticipated rate of return; thus, right now it is mainly flowing to the Permian Basin, and to a lesser extent, the adjacent Delaware Basin.  That pretty well explains the capital investment part of the story.  The rig count story, however, is a bit more complicated.

That complication has to do with drilling obligations, which are a part of any traditional oil and natural gas drilling lease.  The typical lease on private lands – which make up more than 90% of Texas – has an initial 3- to 5-year term during which the operating company has the opportunity to assess the property and initiate drilling of a first well.

If a successful well is drilled during that initial term, then the operator is able to hold the lease so long as the initial well and any additional wells drilled on the leased land are still producing in paying quantities.  The reality for the Eagle Ford region is that, during the boom period beginning in 2009 and extending well into 2014, the great preponderance of drilling obligations were met, and the great majority of existing leases are now held by ongoing production.

Thus, while this period of low commodity prices continues, operators are not going to be anxious to engage in additional drilling on such leases.  The natural gas-producing Haynesville Shale in northwest Louisiana has seen a similar dynamic in recent years:  virtually all the drilling obligations were met during the boom from 2006 through 2010.  Pretty much nobody has been drilling in-fill wells in the recent, low natural gas price years.

In the Permian we see a different story.  The region is so vast – roughly the size of the state of South Carolina – and there are so many recently-discovered play areas that many leases at this point are not in the status of being held by production.  So a good number of the rigs that are currently active are drilling mainly in order to satisfy this lease condition, not necessarily because the wells are especially attractive to drill at current prices.

Were it not for such obligations, it is likely that the Permian rig count would be lower than its current number, though still significantly healthier than we see in other major play areas due to superior economics.

At this moment in time, the story we see in the Eagle Ford is pretty typical of the story we see across the country.  A comparison of the Permian to, say, the Bakken, the SCOOP and STACK in Oklahoma, or Colorado’s DJ Basin would probably deliver a very similar plot line.

So there is nothing “wrong” with the Eagle Ford Shale at all.  It’s just that a variety of factors have combined to make this the Permian Basin’s time to shine.  The Eagle Ford’s time will return, and when it does, the advances in technology that have come about during the down times will most likely make it more prolific than ever.

Tags: oil, natural gas, gas

Written by David Blackmon

Click HERE to Read the Article by the Publisher.