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El Paso Putting Oil Ahead of Gas -- in Eagle Ford Shale

Enthusiasm for uncovering oil deposits in the Eagle Ford Shale of South Texas hasn't waned at El Paso Corp. In fact, the company likely will move more rigs into its leasehold as the year progresses, CEO Doug Foshee said Thursday.

The Houston-based company, which earned its reputation building natural gas pipelines and unlocking gas from conventional deposits, is making like its producer peers and has begun to shift exploration to unconventional oil plays. At the top of the list for the Exploration & Production (E&P) unit are the 165,000 net acres in the Texas play.

"In the Eagle Ford we have doubled our activity levels since the first of the year," E&P chief Brent Smolik told investors during a conference call. The estimated ultimate recoveries "are better than expected...We are gaining cost efficiencies." The play should be "seen as a long-term anchor program for us."

Unlike some Eagle Ford producers, El Paso isn't as interested in the liquids -- its focus is oil. Most of the activity today is in La Salle County, where shale production tends to unearth "volatile oil, meaning oil in the reservoir and gas at the surface," he said. Three of 14 wells El Paso has developed there had initial production rates of close to 1,000 boe/d.

But he added that El Paso is only getting started. The company took its learnings from drilling in the gassy Haynesville Shale and moved those practices last year to South Texas where it's been able to trim costs and drilling time per well. El Paso now is able to drill 1,200 feet a day in the play, more than double its 500 feet/day rate in early 2010.

"We are ramping up oil activities in the Eagle Ford and our results are at or better than pre-drill models," Smolik said. "We are seeing the same efficiency gains as in the Haynesville program..." Eagle Ford "will be more 'impactful'" to the company in 2011 because "we expect to double production from the field."

In the near term El Paso has "enough capacity" for its Eagle Ford production. "There is some trucking tightness in the Eagle Ford, and we have to make sure we have enough capacity," said Smolik. "For all of us there are short periods of time when trucking gets tight...There are several oil pipeline solutions; another is to rail some of it. We're looking at all options."

Four wells have been drilled, with two completed, at El Paso's Wolfcamp leasehold in South Texas. "We've also taken whole cores on the two wells...and coring and logging data is very consistent with our expectations," Smolik said. "Horizontal wells drilled to the offset of the acreage add to our enthusiasm."

El Paso will keep four drilling rigs working in the Haynesville leasehold, but "depending on gas prices and service costs, we may reduce and shift to one of the oil programs," said the E&P chief.

The company also continues to negotiate on a potential partnership in the Eagle Ford (see Daily GPI, Jan. 28).

"We are very much in the throes of those discussions..." Smolik said. A decision about whether to forge ahead by itself or with a partner should be decided before the end of March. "If we take a partner...we may shift capital in the second half of the year."

Other gas-rich shales where El Paso holds a position have a lot of potential for the future, but the oily shale today is where it's at, Foshee told analysts.

"We have a sense of confidence that we are going to have a breakout year similar to 2010," he said. "We had a lot of momentum when we entered the year...E&P is ramping up activity in some of the most exciting oil plays out there."

El Paso's production since the beginning of the year has been averaging 800 MMcfe/d, which is "within guidance, which is on plan" as the company shifts from natural gas drilling to oil, Smolik noted. In 4Q2010 the company's production rose 7% from the year-ago period, which was its highest quarterly production since 1Q2009.

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