August 2016

First oil

Eagle Ford shale is metaphor for the industry
Kurt Abraham / World Oil

Farther back in this issue is our mid-year, revised drilling forecast for the U.S., which is also a study in haves and have-nots. The greatest “have” in the U.S. right now is the Permian basin. It is the single-largest repository of drilling, and there are signs that several operators plan to expand operations there during second-half 2016.

In contrast to the Permian’s relatively rosy outlook, the short-term prognosis for the Eagle Ford shale—another big Texas play—is grim and, frankly, tends to better represent the overall U.S. E&P situation. As Contributing Editor Jim Redden aptly states in his feature article on page 58, “the Eagle Ford finds itself at a gaping competitive disadvantage.”

Here’s the problem: In the U.S., WTI prices have been diddling around in the low-to-mid-$40s/bbl during July and early August, since peaking at $50 in late June. And they show no signs of significant upward movement. This is not a problem in the Permian, where the average break-even price is just $37/bbl. But in the Eagle Ford, where the break-even mark is $48/bbl—and by extension in many other parts of the U.S.—this is a huge problem. Producers simply can’t make a profit.

And that is why our mid-year forecast calls for an historically low figure of 14,430 wells drilled in the U.S. It also explains some ludicrous statewide numbers—who would have believed that more wells will be drilled in New York state this year than in Montana? And who would have thought, that in a state like Arkansas, where 737 wells were drilled two years ago, the total may, if luck holds, hit 45, or just 6% of the 2014 figure?

Lonely stretches of road. There is visual proof, of how the Eagle Ford epitomizes the U.S. E&P condition, along a stretch of U.S. Highway Alternate 90, between Gonzalez and Shiner, Texas. I drove this road earlier this month after departing the URTeC conference in San Antonio (more on URTeC later on this page). This 20-mi section of highway sits in the southern portion of the northeastern Eagle Ford, split evenly between Gonzalez and Lavaca counties.

From 2012 into mid-2014, this area was bustling. It was not unusual to see three to four rigs drilling on either side of the highway, in about a six-mile portion of that 20-mi section. And one could easily see up to a dozen service trucks in that same distance. But as I drove along, nary a rig was to be seen, and only two service trucks passed by. There also is a significantly sized field office for a fairly large independent along the way. Three years ago, its parking lot was jammed with vehicles. But when I passed by, nary a vehicle was parked there, and the place had a ghost town look to it.

Neither has the market downturn been kind to support businesses. For example, the “Eagle Ford RV Park,” which seems to have been built in the last few years along Alternate 90, had maybe a couple of RVs parked among its several-dozen spaces. And there’s no guarantee that the RVs parked there were housing oil field workers—it might have been tourists on a casual trip.

A hopeful presentation at URTeC. Despite current conditions, the Eagle Ford’s longer-term future is brighter, as evidenced by a presentation done at URTeC on a multi-disciplinary study conducted by the Bureau of Economic Geology (BEG) at the University of Texas at Austin. The BEG study found that “the Eagle Ford shale still holds great promise for future output and resource totals, but the magnitude of these items will all be a function of oil price.” Dr. Svetlana Ikonnikova, a BEG researcher, said that her group based its conclusions on expected per-well production, expected completion details, and expectations on cost and productivity improvements.

Thus, several scenarios were worked up, and it is easy to see how price affects the outcome. At $40/bbl, BEG researchers estimate that the Eagle Ford could total 6.5 Bbbl of oil reserves and 32,000 producing wells. At $50/bbl, the figures rise to 8.2 Bbbl of oil reserves and 47,000 producing wells. If the price goes to $80, researchers expect 10.9 Bbbl and 83,000 wells. Finally, if the price should jump to $100, then there would be 11.3 Bbbl and 93,000 wells. wo-box_blue.gif 

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Kurt Abraham
World Oil
Kurt Abraham
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