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Producers Flocking to Eagle Ford Shale for Gas and Oil

From a trough of 17 drilling rigs last summer to a current rig count that stands above 40, natural gas and oil producers are flocking to the Eagle Ford Shale in South Texas, which holds the potential for a big nest egg of returns.

Still on the list of "things to do" for many of the largest shale operators in North America, "producers seem intent on keeping the rig count constant or growing it through time in this basin, meaning that the Eagle Ford might lift off in the next few years," said Barclays Capital analysts in a recent report.

One of the biggest operators now in the play is Petrohawk Energy Corp., whose wells are concentrated in La Salle County, an area also under development by El Paso Corp. and Rosetta Resources. Anadarko Petroleum Corp. and a partner are exploring parts of Dimmit County. Plains Exploration & Production Co. (PXD) is finding success in Dewitt County and in Live Oak County, where one well initially flowed at 17 MMcf/d.

Chesapeake Energy Corp. wasn't one of the first movers in the play, but it didn't take long for management to realize it needed to stake out some acreage, CEO Aubrey McClendon said Thursday. He's long touted the company's holdings in the "Big Four" shale plays -- Barnett, Haynesville, Fayetteville and Marcellus. Now, however, Chesapeake is operating in the "Big Six," which includes the Bossier and the Eagle Ford.

"In the Eagle Ford we're up to 150,000 net acres and hope to have 300,000-400,000 net acres before it's all said and done," McClendon told financial analysts in a conference call. "We don't even have our first well fully tested yet but the play looks promising to us."

Said McClendon, "We can get geared up pretty fast...and so we will see how we go here in the first part of 2010, but I would expect there to be a pretty rapid ramp-up here..."

The Eagle Ford holds enough potential to perhaps attract a joint venture partner for Chesapeake, something it has done in its "Big Four" shale plays with Statoil, Plains Exploration & Production Co., Total and BP plc.

"Like all of our shale have the rock there -- the gases and oil in place, the technology exists, the capital exists, the drilling and expertise exists," said McClendon. "It's just a matter of going out and proving all we know is, in fact, a 100% true."

The Barnett Shale is still the largest shale resource in Texas, but the Eagle Ford Shale is the one generating the buzz, said the Barclays analysts.

The Eagle Ford is considered one of the "newer" shales because producers didn't begin to publish their drilling data until October 2008, said the analysts.

"Early results for gas production have shown high initial production rates," they said. "Also, the Eagle Ford Shale contains several 'oil windows' that produce considerable liquids, a factor that has boosted well revenues in certain locations, given the premium of oil/liquids prices to gas."

The Eagle Ford Shale is still being tested at the borders, but it is thought to encompass roughly two million acres over 10-15 counties, according to Barclays.

"Our data on the Eagle Ford show that it is a rapidly growing play, and individual wells share many of the characteristics of some of the more developed shale basins," the analysts noted. "Production reached 140 MMcf/d in June 2009, the last complete month of production data. From October 2008, production growth had averaged 15 MMcf/d per month as rapid additions are offsetting declines. As the rig count has increased over the past six months, we would not be surprised if actual production was well in excess of 200 MMcf/d and indeed closer to 300 MMcf/d."

Similar to other shale plays, the Eagle Ford "displays a double-edged sword of high initial production (IP) rates but steep declines thereafter," said analysts. PXD's well that IP'd at 17 MMcf/d is so far the biggest announced finding in the play, and even though some of the wells will no doubt be prolific, "it has not yielded Haynesville-type wells that produce 30 MMcf/d at initial flow."

One big reason that the drilling growth in the Eagle Ford has been slow is because producers hold acreage in other shales, noted the Barclays team. And most of the large leases in the shale have continuous development drilling clauses, which means there is no hurry to ramp up there until producers slow down elsewhere.

All things being equal, production from the Eagle Ford could reach 1.8 Bcf/d by the end of 2012, said analysts. "Rather than a forecast, this production rate should be taken as simply an indication of the potential production level for the Eagle Ford."

Takeaway capacity will not be the big worry in this play because the Eagle Ford is located in a gas producing area of Texas. However, "pipeline capacity to transport liquids could be a constraint, particularly as gas volumes reach 1 Bcf/d and above, a level our vintage model predicts could occur sometime in 2011," said Barclays.

"Regardless, we look to the Eagle Ford as an exciting source of growth in U.S. gas production," said analysts. "In the current oil/gas environment, with the relative price relationship at 13-15 times (two times on an MMBtu equivalent basis), the Eagle Ford offers enticing opportunities versus pure gas plays."

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