In 2013,the Eagle Ford Shale supplanted the Spraberry as the top oilfield in the nation. Though the South Texas field has slowed, just as the Permian has, indicators are that the pace of activity is soon to pick up.
By Lana Cunningham
Call it a “breather,” a chance to catch up and gather steam for the next round of activity. The Eagle Ford Shale in South Texas, like other plays throughout the country, saw a drop in drilling activity at the end of 2014 when the price of a barrel of oil fell to $50. The opening months of 2015 saw the number of drilling rigs declining and prices dropping. It is not like previous economic cycles, experts say.
As 2015 heads into the third quarter, analysts and people in the field expect to see a slight pickup in activity—if not by the end of this year, then next year, when oil supplies possibly decrease. The Eagle Ford Shale is not a flash-in-the-pan discovery. It’s here to stay.
Recently, the U.S. Department named the Eagle Ford Shale the top oilfield in the nation based on estimated proved reserves in 2013. Dropping to second place was the Spraberry in West Texas.
The Eagle Ford Shale is a relative newcomer to the world of energy exploration. The area stretches 600 miles across South Texas from the Mexico border into East Texas, and runs about 50 miles wide under 30 counties. It is located directly beneath the Austin Chalk and is considered to be the “source rock” or the original source of hydrocarbons that are contained in the Austin Chalk above it, according to the website Eagle Ford Shale. “The most active area lies above the Edwards Reef Trend, where the formation yields a gas condensate production stream,” the website notes.
Since Petrohawk drilled the first discovery well in the Eagle Ford Shale in 2008, there has been “almost $30 billion… spent developing the play in 2013. The Eagle Ford had more than a $60 billion impact on the local South Texas economy in 2012 and over 116,000 Eagle Ford jobs were supported in the 20-county area impacted by the play,” according to the EFS website.
The price of oil dropped from over $100/barrel to around $50, and companies stepped on the brakes.
“Things have certainly slowed down, but we are still seeing activity in South Texas,” said Omar Garcia, president and CEO of South Texas Energy and Economic Roundtable (STEER). He works directly with the oil and natural gas industry and local communities to ensure the industry is mutually beneficial to all involved.
“While the growth in the Eagle Ford Shale region through 2014 was remarkable, we knew growth at that level could not be maintained. We should keep in mind that the sweet spots in the Eagle Ford Shale region are still producing,” Garcia said.
Looking at the economic situation from the viewpoint of a small town that bills itself as “the Gateway to the Eagle Ford Shale,” one would have to say that life is still good.
“Have we seen a pulling back?” asked Pleasanton City Manager Bruce Pearson. “We saw it start in late October and then into the second week of January. Some companies had met their projections, and they took a long holiday. And, besides, deer hunting season started,” he joked.
By late January, “it was like someone opened the gate again. Here it came,” Pearson said.
From a high of around 225 oil and gas rigs in 2014, the Eagle Ford posted 115 at the end of June for the 30-county area, according to the Eagle Ford Shale website.
However, production hasn’t declined by the same percentage. Raoul LeBlanc, IHS Energy senior director, served as lead author on the firm’s “Analysis of Drilled But Uncompleted (DUC) Wells in the Eagle Ford Shale.”
When the rig count dropped in the play, “people expected production to plummet,” he said. “We do believe that production is flat. But companies are focusing on their best areas, and we know where the best areas are.”
He explained that during explosive growth such as the Eagle Ford experienced, “the drilling machine gets ahead of the completions machine. You build up an excess inventory of drilled but uncompleted wells.” IHS Energy estimates there are about 1,300 “gross DUCs in the play. Whether you are running 10 rigs or 50, there will always be a certain amount of DUCs. We are trying to estimate what that steady state is, and we think it’s around 2 ½ months. That is somewhere around 350 to 400 wells. We think there are 800 to 900 wells potentially available for conversion from drilled but uncompleted to production status.”
Pleasanton, the capital of the Eagle Ford play, retains its cowboy flavor and its South Texas appeal, as evidenced by these local scenes (here and facing page)
The IHS analysis noted that DUCs could be converted to producing assets for 65 percent of the cost of a new well, significantly lowering the economics when evaluated against the remaining costs. Among the primary owners of 40 percent of those DUCs are BHP Billiton, Chesapeake, Anadarko, Marathon, EOG Resources, ConocoPhillips, and Pioneer Natural Resources.
“Some people are intentionally waiting for prices to rebound,” LeBlanc said. “People don’t want to bring on wells at $40 barrel. And it looks like service prices are coming down hard.” By June, the situation was beginning to turn around with the price of oil heading up to $60.
“We think that starting in the second half of 2015, owners will get more serious about completing those wells and you will see a net reduction in DUCs in the second half,” LeBlanc said.
The IHS report noted that as the “rate of new wells drilled in the play falls, completion crews will be able to convert more wells to alleviate the DUC backlog. The drilling costs of these wells were already incurred by operators prior to 2015, and the completion costs—which comprise the majority of well costs—can be negotiated at a cheaper rate since completion crews are now both available and available at cheaper rates. It stands to reason that wells with higher production will yield better returns on capital.”
An energy research firm, Wood MacKenzie, figures that pumping a barrel of oil out of the Eagle Ford Shale could get $10 to $15 cheaper by summer 2016 as service companies continue to cut their costs. Reported in a May 18, 2015, edition of FuelFix, Cody Rice with the firm said these lower prices and improvements in pressure pumping systems could raise the wells’ initial production rates by an average of 33 percent.
“Those two factors could bring the Eagle Ford’s breakeven oil price down from $56 to as low as $41 a barrel by June next year, putting millions more barrels within reach for producers,” the article noted. Rice added, “The death of the unconventional business has been greatly exaggerated. Operators can still make money in the best portions of the best plays in the lower 48.”
FuelFix noted that “oil companies have cut their U.S. shale spending from last year’s $96 billion to $60 billion this year, but a dollar will go a lot further in the oil patch next year if the service companies’ cost cuts hold out.”
IHS Energy estimates there are 1,750 DUCs nationwide. If 100 were completed a month, LeBlanc estimated that supply would end in 18 months. The supply of DUCs “is a temporary thing. We do see drilling picking up. If a company has the same budget for next year as this year, they would get more for their money. They will have more rigs and completions, because all the costs are cut about 30 percent.”
In its first quarter energy corporate earnings call in May, Chesapeake noted the success of its Eagle Ford asset. Speaking was Jason Pigott, executive vice president of Chesapeake’s Southern Division. He said the down spacing tests had proved successful and added 600 to 700 incremental locations to the development program.
“These additions represent a material addition of high-value oil wells to our corporate inventory,” Pigott said. “The acquisition of these additional locations is essentially zero. The drilling team broke several records in the quarter, having drilled our deepest well, with a total measured depth of just under 21,000 feet, our fastest spud-to-rig release time of 7.8 days, and our lowest drilling cost well, at $1.1 million. We also drilled our first five wells with laterals greater than 10,000 feet, which will help us to continue to drive further efficiencies, as these wells provide an incremental cost reduction of 33 percent on a cost-per-foot basis.
“However, due to market conditions, we continue to ramp down activity in the area. We reduced our rig count from 20 rigs in January to a current count of seven, with the expectation to get to just three rigs by July. We’re going to take advantage of the ramp-down activity to further enhance our development planning,” Pigott added.
With the additional 600 to 700 locations, the EVP said Chesapeake is expecting to increase per well Estimated Ultimate Recovery by 76 percent and reduce the costs by 33 percent per completed foot.
The area still attracts new faces to the playing field. In early June, Noble Energy acquired Rosetta Resources for $2.1 billion in a stock transaction. This merger marked Noble’s entry into the Eagle Ford Shale and the Permian Basin, according to the Oil & Gas Journal. Rosetta’s liquids-rich asset base includes 50,000 net acres in the Eagle Ford.
The ups and downs of drilling in the Eagle Ford is part of daily life in Pleasanton, located 30 miles south of San Antonio on Highway 281 and at the crossroads of Interstate 37 and State Highway 97 and near State Highway 16. Economically, the small town of Pleasanton hasn’t experienced a downturn.
Pearson took the city manager position 3 ½ years ago, just as the heat was turning up in the shale play. The town’s population of 8,200 jumped to almost 15,000 people this year and has remained at that level. “We consider that a static population,” he said.
Like many other cities and towns situated in the midst of a drilling boom, Pleasanton has seen more houses and apartments constructed, seven new hotels added to the tax rolls, and more shops, including H-E-B, Super-Walmart, and a Chili’s restaurant. Residents passed a $64.5 million bond issue for a new elementary school and upgrades to other buildings.
“With our geographical location in the center of the play and five highways that intersect, we have everything in this area: healthcare, good schools, and utility infrastructure,” Pearson said. “We are building the largest water project in our history, one that will take our storage capacity 25 years out. We’re erecting a $1.25 million storage facility, a new well, and five miles of pipeline into the corridor of development for our city. The whole project is $6.4 million.”
The available water supply is another factor attracting companies and employees who want to stay. Five single-family subdivisions are being developed. Two additional apartment complexes will bring the total number of units from the current 80 up to 350.
One industrial park filled up quickly and two more were started independently, he noted.
The oil well servicing companies appear to be using this downtime for expansion. Among reports of expansion are:
Conquest Completion Services LLC is building a new $500,000 regional headquarters in Pleasanton’s Timbercreek Subdivision industrial park. The company provides coil tubing, directional drilling, and other oilfield services.
Pipeline manufacturer Polyflow LLC moved into a two-acre leased facility off IH-35 in Dilley and already has an office in Pleasanton.
National Oilwell Varco is adding an additional 9,600 of workspace to its manufacturing facility in Pleasanton at a cost of $850,000.
Other companies with offices in Pleasanton include Halliburton, Baker Hughes, Weatherford, Pinnergy, Flint URS, and Lufkin Industries, according to the San Antonio Business Journal.
“As far as housing is concerned, we feel healthier than we’ve ever felt,” Pearson said. “Pleasanton is a very spiritual-laden, entrepreneurial community. This city has always had a strong backbone and broad shoulders. We’ve taken care of our people for decades. The credit for Pleasanton’s success rests purely with the City Council and the mayor. When the council and mayor knew this [development of Eagle Ford Shale] was coming, they made a conscious decision to change their thought processes. They welcomed the Eagle Ford but kept their decisions reflective of the community.”
They also became pro-active when the price of oil started dropping in the second half of 2014. “I met with the major department heads, and we decided what needed to be done to be somewhat conservative and yet continue to provide the services and projects we had promised our citizens,” Pearson said.
After addressing infrastructure issues, the city now is turning to quality of life projects, including construction of a new fire station and drawing a new parks master plan.
Pearson maintains contacts within the energy industry to determine what might be happening in the near and far future. A representative of EOG Resources told the city manager that once oil prices get back to $65/barrel, that company will return to its previous level of exploration in the shale.
“We keep our ear to the ground with the folks working out there and with the management,” he said. “This development in the Eagle Ford is not going away. These companies have improved their technology tremendously in the past three to four years.”
This drilling “breather” may not be as prolonged as some analysts have thought. Raymond James and Associates revised its U.S. rig count forecast in mid-June and noted it expects a 2016 recovery to be weighted toward horizontal drilling in three shale plays: Eagle Ford, Bakken, and the Permian.
In its April 13 Industry Brief reported in the Oil & Gas Journal, RJA forecast the 2015 rig count would hit bottom at 930 rigs in June, with the horizontal rig count to bottom out at 703. “We expect the rig count to gradually rebound in the second half of 2015 and continue to grow throughout 2016,” the RJA report noted.
The industry’s seesaw ride is normal, according to Omar Garcia of STEER. “These fluctuations in the price of oil are really the nature of the industry,” he said. “There will certainly be exploration throughout the Eagle Ford Shale in 2015 and 2016—the extent of the exploration and activity in the region are dependent on the price of oil.
“This drop in oil prices isn’t like that of the 1980s when there was a fear of reserves. Today, technology is different. We now know there are plenty of reserves, and there are companies willing to explore those options,” he said.
In other words, get ready. This break may be over soon.
Lana Cunningham is a freelance writer who has lived in Midland since it was a pleasant city of 60,000 people.