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EOG Holding Marcellus Leases for Long Term, Says Papa

EOG Resources Inc. has taken its Marcellus Shale leasehold off the market because it's a "core holding" and big plans are on the table to develop it once natural gas prices recover, CEO Mark Papa said Tuesday.

The Houston-based independent owns around 210,000 net acres in the Northeast shale formation and only needs to make small investments to hold the leases, Papa told an industry audience at the Howard Weil Energy Conference in New Orleans.

Papa acknowledged that the leasehold had been on EOG's "to-sell list" but "it's now what we would consider a core holding...We are going to hold onto it." The Marcellus acreage may hold 3 Tcf of reserves, he said, noting that adjacent acreage held by other companies was producing some "monster wells."

The news clarified why EOG abruptly terminated a $405 million transaction with Newfield Exploration Co. in late December (see Shale Daily, Dec. 27, 2010). The deal would have doubled Newfield's position in the play (see Shale Daily, Nov. 17, 2010).

EOG in the past two years has transitioned from a gas-focused producer to an oil-focused producer, with more money invested in its oily and liquids-heavy shale properties onshore.

The company's gas production in 2010 fell about 2% from the year before. This year gas output should be down another 5%. That's just fine with the company's chief.

"We're not throwing incremental gas into an already flooded market," Papa told the industry audience. And he's not sure EOG's gas production will kick into high gear for another year or so. "North American gas production in 2012 will be a function of economics."

However, gas demand should "rebound over the long term," the CEO said. Management is optimistic about increased demand for gas generation because of more stringent federal coal regulations. In addition, Papa sees a "movement" toward natural gas vehicles around 2015.

EOG still plans to sell around $1 billion of its natural gas midstream properties this year, which would add to the $673 million of oil and gas properties sold in 2010. However, don't expect the producer to slough off a lot of its substantial gas-weighted leasehold.

The company has a "massive inventory of captured gas assets in low finding costs plays," the EOG chief noted. However, unlike many of its peers, the company has no plans to keep some of its properties by taking on joint venture (JV) partners.

"We plan to maintain sole ownership in the resource plays. We don't intend to dilute them with JVs," Papa said. For the gas-weighted assets, "we intend to focus limited technical staff on 100%-owned projects."

As for the oily onshore leaseholds, which include the prospective Eagle Ford Shale, the reasons for not bringing aboard a partner are "obvious," Papa said. As the "biggest producer" in the play with a leasehold of more than 520,000 net acres, EOG's direct rate of return is expected to be 65-110%.

In February Papa told analysts that EOG expected almost 70% of its 2011 and 73% of its 2012 North American wellhead revenues to come from liquids (see Daily GPI, Feb. 22).

Tuesday he said 80% of the company's $6.4-6.6 billion capital expenditure budget this year is to be focused on "high rate of return crude oil and liquids-rich gas. The remaining 20% primarily will be focused on dry gas drilling" to hold acreage in the Haynesville/Bossier, Marcellus and Horn River shales.

In 2010 about one-third (35%) of EOG's production resulted from crude oil and condensate; this year it's expected to be closer to 55%, falling to around 30% in 2012. Natural gas liquids (NGL) accounted for 29% of the company's output in 2010, and this year NGL output is expected to make up around 34%. In 2012 NGL production is forecast to be about 18% of EOG's production.

"Horizontal oil from unconventional rock is real," Papa said. The "assets are generating consistent and repeatable results," and EOG has a "multi-year drilling inventory."

The company has no shortage of oily prospects from which to choose. It's the biggest oil producer in North Dakota, with 600,000 net acres in the Bakken/Three Forks shale formation. EOG also is the biggest oil producer in the Niobrara play, where it has 300,000 net acres.

In the Eagle Ford Shale EOG has a leasehold of more than 520,000 net acres, and it holds a "dominant acreage position" in the Barnett Shale "combo" acreage, which is liquids-heavy. Additionally, EOG has around 120,000 net acres each in the Wolfcamp and Leonard shales.

With oil prices strong, the company also is "reactivating vintage vertical fields," said Papa. These include holdings in Canada's Manitoba Waskada and in the Midcontinent's Cleveland play, as well as a leasehold in the Permian Basin's Bone Spring.

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