EOG Resources' Monster Wells Are Getting Bigger

EOG Resources South Texas Eagle Ford Map 2012

EOG Resources' monster Eagle Ford wells are getting bigger! The company brought one of its best producing wells to date in the third quarter of 2012. The Baker-DeForest Unit #4H tested at 4,598 b/d of oil and 4 mmcfd of rich natural gas at normal choke rates. At LLS oil prices, the well is yielding gross revenue of almost $500,000 per day! It doesn't matter what the decline curve looks like. A well like this will potentially pay back in the first month of production. It's a boon for mineral owners too. The well will pay between $50,000-$100,000 per day to royalty owners. You can read more about the company's biggest well here: EOG Reports Record Eagle Ford Well.

In Gonzales County, the Baker-DeForest Unit #4H came on line at 4,598 barrels of oil per day (Bopd) with 488 barrels per day (Bpd) of natural gas liquids (NGLs) and 2.9 million cubic feet per day (MMcfd) of natural gas. The Baker-DeForest Unit #1H, #2H, #3H and #12H were turned to sales at initial rates ranging from 3,346 to 4,216 Bopd with 457 to 537 Bpd of NGLs and 2.7 to 3.2 MMcfd of natural gas. EOG has 100 percent working interest in these five Baker-DeForest wells.

EOG's monster wells are are defined by the company as having initial production rates of 2,500-4,800 barrels of oil production per day plus natural gas and NGLs. The company completed 16 monster wells in the second quarter of 2012 and brought on 12 more in the third quarter.

EOG's Eagle Drilling Cost is Falling

EOG's average well costs in the play are falling near $5.5 million as the company realizes the benefits of sourcing its own frac sand, improving service costs, and increased operational efficiencies.

The company's average drill time has fallen to 13 days per well. That means a lot of wells can be drilled with 20 rigs active. EOG will drill 320 net wells in 2012 alone.

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EOG Operations Expand Across South Texas

EOG's production eclipsed 109,000 boe/d in the quarter - 75% oil, 13% NGLs, and 12% natural gas. The play has been the biggest driver of crude oil production growth across the company's portfolio. The four main takeaways from the company's Eagle Ford update were:

• Monster Wells are improving – 16 wells came online with IPs between 2,500 and 4,800 b/d of oil
• Th company continues to test multi-well pilots at denser spacing (65-90 acres)
• Oil is being priced at LLS, which is trading at a premium to WTI
• Average well costs are falling near $5.5 million
• 20 rigs are expected to drill 320 net wells in 2012, with an average drilling time that has decreased to 13 days per well.

EOG also completed notable wells in McMullen County and La Salle County:

• In McMullen County, the Lowe Pasture #9H and #10H produced at initial production rates of 1,905 and 2,075 b/d oil, 112 and 115 b/d NGLs, and 673 and 688 mcfd of natural gas
• In La Salle County, the Martindale L&C #1H and #2H came online at 1,522 and 1,876 b/d oil, 220 and 208 b/d NGLs and 1.3 and 1.2 mmcfd of natural gas

Near the DeWitt County line in Gonzales County EOG reported the following:

Reilly Unit #1H had an initial oil production rate of 3,579 Bopd with 483 Bpd of NGLs and 2.9 MMcfd of natural gas. EOG has 70 percent working interest in this well. Also in the new area northeast of the Reilly, the Boysen Unit #1H and Baird Heirs Unit #4H were completed at 2,540 and 2,242 Bopd with 268 and 181 Bpd of NGLs and 1.6 and 1.1 MMcfd of natural gas, respectively. EOG has 100 percent working interest in both wells. EOG also has 100 percent working interest in the Henkhaus Unit #8H, which was completed offsetting the previously drilled Henkhaus Unit #10H and #11H. The #8H had an initial production rate of 4,012 Bopd with 495 Bpd of NGLs and 3.0 MMcfd of natural gas.

Chesapeake Selling Eagle Ford Acreage in the Northern Block

Chesapeake's Eagle Ford Northern Block

Chesapeake's Eagle Ford assets will be trimmed down as the company's focuses on its core areas of development. As part of the company's "core of the core" strategy, they will divest areas of the Eagle Ford that might not be held by production as leases expire. Chesapeake is simply capital constrained.

The CEO Aubrey McClendon put it best:

"We’re long assets and short capital"

Chesapeake is selling Eagle Ford assets to create cash flow for ongoing development. The company simply doesn't have the money needed to develop all of its acreage across the U.S. As you would expect, the company is rationalizing all of its assets and focusing development in areas offering the highest returns.

The company calls the area for sale its "Northern Block", where the Eagle Ford is largely an oil producing formation. The majority of acreage in the Northern Block is located in Zavala County. Production associated with the area currently amounts to 10,000-11,000 boe/d. The company expects to close the deal by the end of the year and its should be an attractive acreage position. There's a rough outline of what might be sold in the image above. Especially if the Pearsall proves to have liquids potential across portions of the acreage.

Chesapeake Third Quarter Eagle Ford Highlights

While they're selling a portion of their acreage, the company continues to impress operationally. Highlights from their quarterly earnings release include:

• 120,500 gross (52,200 net) boe/d of production; Up 371% year over year and 44% sequentially
• Production is 68% oil, 14% NGLs, and 18% natural gas
• 124 wells reached first production during the quarter
• 233 wells have been drilled, but are not yet producing
• Will exit the year with 22 rigs, down from 34 at its peak
• 93% of wells brought online in Q3 produced more than 500 boe/d and 35% produced more than 1,000 boe/d
• Three wells highlighted during the quarter came online at rates between 1,600 and almost 2,200 boe/d.

Tied Down: Load Securement in the Eagle Ford Shale Play

Cargo Load Securement

A few weeks ago, Land Line Magazine reported a story that caught our attention. A Texas truck driver waged a lawsuit against Dole Fresh Fruit Co. and Chevron over an injury that he sustained last year when a bungee cord on a Dole trailer snapped back into his eye.

Of course we felt badly for the injured driver. The matter of who was or was not at fault in this particular situation is not the subject of this post. The incident reminded us of the importance of cargo securement.

The suit maintained that Dole had responsibility for cargo securement, but ultimately load securement is the driver’s duty. As a commercial motor vehicle driver, you are responsible for all load securement. Federal Motor Carrier Safety Regulation 392.9 (b) states specifically that the driver must inspect the cargo and the devices used to secure the cargo prior and during the route to determine that is safe to be transported. Here are the highlights of the regulation.

Driver and Carrier Responsibilities

Both the driver and the carrier have cargo-securement responsibilities. A driver may not operate a commercial motor vehicle and a motor carrier may not require or permit a driver to operate a commercial motor vehicle unless:

• the cargo is properly distributed and adequately secured
• the tiedowns and other means of fastening the cargo are secured, and
• the cargo or any other object does not obscure the driver's view ahead or to the right or left sides.

Driver Duties

According to the regulations, drivers of a truck or truck tractor must:

• assure themselves that the responsibilities described above have been met before driving a commercial motor vehicle
• inspect the cargo and the devices used to secure the cargo within the first 50 miles after beginning a trip and make necessary adjustments, including adding more securement devices, to ensure that cargo cannot shift on or within, or fall and
• reexamine the cargo and its load securement devices during the route.

Cargo and cargo securement should be reinspected:

• at a change of duty status
• after driving the commercial vehicle for three hours or after driving the commercial vehicle for 150 miles, whichever comes first.

The only exception is for drivers hauling sealed loads that can’t be inspected.

Oilfield Operations Call for Extra Care

Much of the area in the Eagle Ford Shale Play consists of rough caliche roads miles off the highway. These roads take a beating from weather and heavy loads. The unevenness of the road surface alone can cause loads to shift. Drivers have to pay extra attention to the securement of their loads when entering and exiting these sites. Even traveling at low speeds on a bumpy road loads can reposition a load. Straps and chains can loosen.

Oilfield Cargo Is King

Sure, driving a heavy vehicle takes a lot of skill but in the end, truck driving isn’t about the truck or driving, it’s about hauling cargo. If freight isn’t being hauled, no one is making any money. For that reason alone you will rarely bobtail or pull an empty trailer. As important as deadlines and schedules are, what’s more important is to deliver the cargo undamaged while guarding your safety and the safety of those who share the road with you.

How Long Will the Eagle Ford Shale Boom Last?

Eagle Ford Shale Impact Map

A Texas A&M economist met with business leaders to share his projections of how long the Eagle Ford shale boom will last. He expects the play will have a productive lifespan of 16 years. I'd like to see what is behind the 16 year number, but I believe the message was well delivered. This Eagle Ford development isn't going to fizzle out any time in the near future. The opportunity is too big. Billions of barrels of oil & gas resources mean billions and possibly trillions of dollars in economic development.

The economist speaking at the 2013 Executive Economic Outlook breakfast was simply conveying there is significant opportunity in South Texas. Most real estate developers are being cautious and not making commitments unless they can project a one-year payout. If the play has a lifespan of decades, more permanent developments are needed. South Texas will need every thing from grocery stores to home developments, gas stations and Wal-Marts.

Eagle Ford Shale's Lifespan

[ic-r]The Eagle Ford is still relatively young, so everyone is wondering if the play will go bust. The answer to that question lies in the future oil price. As long as oil prices hold steady at a level of more than $70, South Texans don't have much to worry about. The Eagle Ford returns more to operators than almost all plays in the country. Even if oil prices drop, it will still have the same relative position as the investment of choice in North America.

An old industry addage is "The easiest place to find hydrocarbons is where you've already found them". That will likely prove true in South Texas. We're actually seeing it play out today. Operators have new development plans in several other oil & gas plays including the Austin Chalk, Buda, Escondido, Olmos, and Pearsall Shale formations.

I wouldn't say never, but I'd place the probability of a bust in South Texas lower than anywhere else in the country.

Is U.S. Energy Independence a Possibility or Dream?

Energy independence is the talk of the presidential election and a modern cliche we're hearing more and more. The U.S. never really had an energy policy, but high gasoline prices over the past few years have made energy the center of the political debate.

Energy Independence in Natural Gas & Coal

The U.S. has been "independent" from the standpoint of having enough capacity to supply both coal and natural gas needs for several years. That wasn't always the case. Just a little over a decade ago, oil & gas companies begin building LNG regas facilities to make sure the country could import the natural gas it would need. The whole idea was flipped on its head when the Barnett, Fayetteville, Haynesville, and Marcellus shales were discovered. We now have predictable supply and oil & gas companies are building LNG export facilities. We'll come back to this point.

Oil Imports are Declining and Production is Rising

oil-rig-pump-jack-300x

Crude oil imports have been declining for a few years now. The recession hit demand as people began to drive less and domestic production from places like the Bakken Shale, Eagle Ford, and West Texas are driving growth for the first time in decades. If you extend what has happened the past few years into a forecast, it is possible we could push imports out completely.

The problem with the forecast we see is that most assume we have supply that is cheaper than imports and it will stay that way for the foreseeable future. Ding. Ding. Remember what everyone thought about natural gas? Technological improvements and exploration can change the energy dynamic very quickly. South Texas folks can attest to how fast the Eagle Ford has blossomed.

The possibility the U.S. has the reserves and production potential to supply its needs is relatively high, but the probability that other crude sources will be more competitive is high as well.

The Reality of Energy Independence

The reality of energy independence is that it doesn't mean much. We could likely be energy independent right now if we produced from the oil shales in Colorado, Utah and Wyoming. The problem is you'd be paying twice as much to fill up your car, so don't focus on the two words "energy independence". We could do it and be worse off.

What is important is that we can supply our oil appetite reasonably without indirectly supporting hostile oil exporting countries.We currently import 9 million barrels of oil per day and produce a little more than 6 million barrels of oil per day. Even if the Bakken, Eagle Ford, Permian Basin, Mississippian, Utica and Gulf of Mexico all added 1 mmbbls/d of production we'd still fall short 3 mmbbls/d. That's aggressive and we still don't get there.

Natural Gas Production Could Get the U.S. Close

If we can't produce enough, what could change our consumption habits? We might not be able to produce enough oil, but we still might be able to drill our way there. If the transportation fleet begins to shift to natural gas, the chance we could become an energy island is much more feasible.

Today, oil is trading at more than thirty times natural gas prices. On an energy equivalent basis, oil should trade at six times natural gas prices, but history would tell us 8-10 times is more realistic. Still, thirty times means there is significant disparity in the oil and natural gas markets. We have the cheapest natural gas in the world and we're buying oil and international prices.

It would take approximately 6 Bcf/d to replace 1 mmbbls/d of oil. That means we'd need a field producing more than Barnett, Haynesville, or Marcellus for every million barrels of oil we'd need to offset. There's a lot of gas being produced from oil fields, but we won't likely get to energy independence without a major worldwide event....... Changes as big as the one we just laid out just don't happen unless the psychology of an entire culture changes. We're not there, but at least we have supply for once and can talk about it.