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Eagle Ford Shale takes flight

Despite US natural gas prices in freefall, it’s full-steam ahead for Texas’s liquids-rich Eagle Ford play, providing an economic shot in the arm for the state

 

It’s a typical lunch shift at Los Poncho’s cantina in Carrizo Springs, southwest Texas. It’s packed with oil workers and rig hands looking to escape the 100°F (37°C) heat with a glass of iced tea and a bowl of chilli-tortilla soup. The cantina is a family run business and Rosica – everybody calls her Rosie – and her brothers are tending tables, while mama doles out homemade Mexican specialties in the back.

Thanks to the influx of oil and gas workers, business is better than it’s ever been. The day’s soup is sold out barely half an hour into the lunch rush. “It’s like this every day,” Rosie says. “It’s really taken off in the last year – since the rigs came.”

Carrizo Springs is one of Texas’s oldest towns – and also one of its poorest. According to the 2009 census, the average income was about $23,000 a year, less than half the state average of $48,000. As of 2006, more than a third of its 5,000 residents lived below the poverty line, which is about $22,000 for a family of four. Since 2000, the number of people living there has dropped by about 6%, in part because the town’s youth are heading to cities in search of work.

But that’s all changed, as drilling rigs and hydraulic fracturing (fracking) crews flock to this area of Texas, which is known more for hunting and ranching than oil and gas. The streets are now packed with heavy trucks filled with hungry rig hands. In a small town, a good bowl of soup can be hard to come by. That’s why Rosie’s family, which hails from Crystal City, to the north of Carrizo Springs, makes the trek to the restaurant each day.

Carrizo Springs gets its name from free-flowing artesian wells that dot the arid landscape. The water is considered so pure that it’s been the town’s main export for the past 160 years – the holy water used in parishes throughout southern Texas and northern Mexico (just 45 miles away) comes from the town.

Today, Carrizo Springs is a focal point for the Eagle Ford Shale, the fastest-growing unconventional oil and gas play in North America. All along Highway 277 to Laredo, oilfield services companies are building marshalling yards in fields of sage brush previously known for a bounty of deer, quail and pear cactus.

In just two years, all the industry’s large services companies – including Weatherford, Halliburton and Schlumberger – have set up field offices, transforming Dimmit county. Neighbouring Asherton, a town of 1,500 people, about 10 miles south of Carrizo Springs, is the 19th-poorest municipality in the US, according to census data. Yet it reported a 900% increase in tax revenues in October, to about $9,000 – although a relatively small number, it’s a huge jump for a town of 1,300 people and almost all attributed to increasing oil and gas activity.

The town is adding hundreds of housing units to accommodate an expected rush of new workers. Oil companies claim that they can’t hire fast enough. A study by the University of Texas, at San Antonio, says the Eagle Ford has created 6,800 full-time jobs, at an average salary of about $80,000 a year since 2005. In November, Halliburton announced the creation of a new Eagle Ford division in San Antonio, which will create 1,500 new jobs. Including spin-off jobs, employers paid out more than $500 million in wages in 2010, providing a huge economic shot in the arm at a time when Texas’s unemployment rate is one of the highest in the US – a seasonally adjusted rate of 8.5% in September.

Texas-sized prize

The Eagle Ford is a late-Cretaceous marine shale underlying the Austin chalk – itself a huge oil and gas reservoir, and the source of Texas’s early discoveries at the turn of the 20th century. The rocks form a band about 50 miles wide and 400 miles long, starting near Dallas, where they outcrop at the surface, and extending to the Mexican border, where they lie at depths ranging between 4,000 and 12,000 feet. The shale contains high levels of limestone carbonate, making it brittle and easy to frack. It’s long been a source of fossils studied by palaeontologists to reconstruct the geologic history of the state, but new drilling technology has transformed it into a vast oil and gas field.

The resource estimates are impressive. The US Energy Information Administration (EIA) pegs the Eagle Ford Shale’s oil reserves at 3.4 billion barrels, with gas resources of 21 trillion cubic feet (cf), which would make it the largest petroleum deposit in the Lower-48 states, with up to a combined 7 billion barrels of oil equivalent (boe).

Yet those numbers could be low. In August, Virginia-based FBR Capital said the Eagle Ford holds a minimum of 7 billion boe, possibly as much as 20 billion boe. Although the first Eagle Ford well was drilled in 2002, almost all of those reserves have been added since 2009.

Production has climbed from virtually nil in 2008 to about 125,000 barrels a day (b/d) of natural gas liquids (NGLs) and 900 million cf/d of gas, from only 800 wells. The liquids tally alone is expected to reach almost 500,000 b/d within the decade.

But when including gas production, that figure rises to 1.3 million boe/d, which would more than double Texas’s oil production of just under 1 million b/d in August – according to the Texas Rail Road Commission, which regulates the state’s oil industry – up by about 7% from August 2010. Most of the output increase is attributed to the Eagle Ford, in the absence of new offshore developments since last year’s Deepwater Horizon disaster.

New York-based ITG Investments says producers such as Apache, EOG Resources and ExxonMobil are drilling 100 new wells a month at an average cost of $7 million to $8.5 million each, depending on depth and the number of fracks. About 180 rigs are punching holes as fast as they can be drilled, rig counts which have also doubled from a year ago. For now, most of the production is delivered to refineries by truck or rail while new pipelines are built. But completion delays, resulting from a lack of manpower and infrastructure constraints (such as field-gathering systems and fracking crews) have resulted in a backlog of wells awaiting tie-in, which in turn is driving up costs.

In November, Halliburton complained that new Eagle Ford wells are costing upwards of $8.7 million to drill and complete, up from $5 million only a year ago. Almost 60% of the total cost is for the fracks. That in turn is placing pressure on margins and reducing full-cycle returns. That the Eagle Ford is profitable at all is testament to the liquids content of the gas, which fetches a premium price.

Full steam ahead

While activity in the US’ dry shale-gas basins slows, it’s full steam ahead in the Eagle Ford. Although it’s considered to be gassy, what separates the Eagle Ford from shale plays such as the Haynesville is a high concentration of NGLs that more than offsets low – and falling – North American natural gas prices (see Figure 1). That Eagle Ford remains economic results from its location close to a plethora of infrastructure, including one of the world’s largest gas-processing networks, further reducing costs.

 
 

And development is just beginning. Although existing infrastructure allows new wells to be tied in relatively quickly, Bentek Energy says the surge in NGLs volumes from wet-gas plays such as the Eagle Ford will spur huge midstream investment across North America – in gas-processing, pipelines, liquids fractionation and petrochemicals facilities.

In short, it’s huge – befitting Texans’ love of all things large. And it’s one more reason why US oil and gas production is rising for the first time in four decades (see Figure 2), creating an almost giddy sense of optimism and belief that the US could once again become self-sufficient in oil and gas.

Aubrey McClendon, chief executive of shale specialist Chesapeake Energy, told the World Shale Gas conference in Houston that the US could double output to reclaim the title as the world’s largest oil producer, thanks to the shales – it’s presently number three, behind Russia and Saudi Arabia, with crude production of around 5.5 million b/d, according to the EIA.

More realistic predictions, for example from Washington-based PFC Energy, suggest the US will hit 6.7 million b/d by 2020, which still represents a healthy 20% increase and some of the highest output rates since the 1990s. Including natural gas, that equates to more than 20 million boe/d: a volume that would rank the US among the world’s largest hydrocarbons producers.

The rise of the Eagle Ford is significant for several reasons: its rapid ascent to prominence is proof that there is no shortage of energy resources in the US – there could be far more than anyone imagined, or knows what to do with. In less than three years, North America has gone from fears of a crippling domestic-resource scarcity to an over-abundance that is damaging gas producers’ bottom lines.

While it’s good news in terms of securing cheap, affordable supplies for consumers – and could have a transformational, positive effect on the economy – it poses a dilemma for producers, especially those that have spent billions snapping up any kind of unconventional acreage they could find. Many plays are uneconomic without the NGLs and oil that accompany Eagle Ford gas production, ushering in a new era of basin-on-basin competition, even in Texas’ own unconventional plays.

That drilling is taking place at all in areas such as the Haynesville Shale is more a result of legal requirements to drill new wells to retain the land or lose it. Consequently, companies such as Chesapeake – a large Eagle Ford player – are spending millions to drill Haynesville wells that may never be economic, with multi-billion dollar investments made at the start of the shale-gas revolution never showing a positive return.

Chesapeake’s McClendon is emphatic that he’s not worried about gas prices and will keep drilling no matter how low they fall. By his own numbers, Chesapeake is responsible for 43% of the increase in US gas production in the past five years – or for half of the reserves-value destruction as gas prices plummet.

What next?

What follows next is less clear. The shales’ main players, such as Chesapeake, are courting foreign partners to fund their drilling campaigns – a euphemism for selling assets. More players will try to break into liquids-rich plays such as Eagle Ford as the inevitable consolidation starts to take place.

Chesapeake may be North America’s second-largest gas producer, but there are plenty of majors with far deeper pockets waiting in the wings. ExxonMobil’s $41 billion take-over of XTO is a case in point. Conspicuously, Shell and Chevron remain on the Eagle Ford sidelines.

And more Eagle Fords will emerge: in unlikely places with established infrastructure providing competitive advantages. In that sense, south Texas is the template. As Texans like to say, the best place to look for oil is where it’s already been found. And, in Texas, there’s always more where that came from.

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