The prolific Barnett Shale natural gas field, second only to the San Juan Basin in New Mexico, appears to extend much farther south than previously estimated, EOG Resources Inc. CEO Mark Papa said Wednesday. And based on its success in the Texas shale, Papa said EOG is going to focus on discovering new plays amenable to horizontal drilling -- a key driver in the Barnett's growth.
In an afternoon conference to tout the company's growth plans and expectations for the coming year, Papa said EOG expects better-than-expected success from its extended Barnett leasehold. He also expects that the Barnett's horizontal drilling success will extend across the natural gas industry in the years to come. EOG has shown particular success with horizontal drilling, which begins vertically and then bends parallel to the surface.
"The macro view is that about 10% of all wells drilled onshore now are horizontal wells," Papa said. "Over the next five years, we think that figure will go to 30%...to 35%. Resource plays can be developed a lot more intensely through horizontal drilling. Some wells are not amenable to vertical wells, but they are amenable to horizontal wells. Those are the types of plays we'll be going after."
EOG's newest horizontal wells in Hill County, TX, are producing "substantially" more gas when compared with its gas wells in Johnson County, which is located in the Fort Worth Basin of North Texas. Barnett Shale activity has been focused northeast of Tarrant County, TX, in the Fort Worth Basin of North Texas. However, EOG is encouraged by tests to the southeast of the basin in Central Texas, Papa said.
EOG has leased 103,000 acres in Hill, McLennan and Bosque counties, which are in the "heart" of the state, and it has extended its total leasehold in the Barnett to more than 600,000 acres.
"EOG's previous net reserve potential in the Barnett Shale was 3,000 to 4,700 Bcfe," said Papa. "We've increased our estimate by 1,500 to 2,000 Bcfe...and our current estimate is now 4,500 to 6,700 Bcfe."
Several things are driving EOG's increased Barnett production expectations: Johnson County downspacing added 500-700 Bcfe net; discoveries in Hill County and additional acreage in its "southern extension" counties added another 800-1,300 Bcfe net; and increased acreage in its "western extension" counties added 200 Bcfe net.
By the end of this year, Papa said, EOG's estimated year-end exit rate in the Barnett will be around 200 MMcfe/d. By the end of 2007, EOG is estimating Barnett output will be around 280 MMcfe/d.
"We have a step change in service agreements that we've secured in 2007," he said. EOG's new drilling rigs sport new technology, making them "significantly faster and cheaper." It also has fractionation agreements in place to reduce costs and increase the number of wells completed.
"We are applying new technology, with improved well design and cost optimization in all phases of our drilling, completion and production operations...which continues to improve our well performance and reduce costs."
EOG is testing some horizontal drilling techniques on a leasehold in South Texas and has located about 500 Bcf of gas in sandstone at an undisclosed location, Papa said. EOG also is exploring a new shale play in West Texas, he said. Besides its expanded drilling program in the Barnett, EOG wants to accelerate development of its Mesaverde legacy properties in the Uinta Basin of Utah. Based on recent pressure and core-testing data, EOG plans to increase drilling activity in the area on 20-acre spacing between wells, with the ultimate potential to go to 10-acre spacing.
The producer's organic assets alone remain on track to achieve 9% growth in its oil and natural gas output this year, Papa said. In 2007, EOG is targeting 10% growth. Annual production growth between 2008 and 2010 is expected to range between 7% and 11%.
"We're very unlikely to pursue mega-acquisitions," Papa said. "About 90% of our budget this year went toward organic, and it will likely be the same in 2007. We never had the goal to be the largest E&P [exploration and production] company. We never bought into the super-independent, the mega-independent. We've had two goals. One was to always have the best profit metrics. The second goal was to have the best long-term equity performance. Since 1999, we've achieved both goals."
Capital spending in 2007 will jump to $3.4 billion, excluding acquisitions, from $2.8 billion this year. About one-third of the increase will be directed for service cost increases, but most of the boosted spending will go toward expanded drilling programs, Papa said.
In a note to clients, energy analyst John Gerdes of SunTrust Robinson Humphrey/the Gerdes Group, wrote, "Assuming that [EOG's] North American liquids, Trinidadian and UK production remain constant, this guidance implies '07 North American gas production growth of 15.8%. Notably, we forecast '07 North American gas production growth of 18.8% and are unlikely to change our expectation as we view this updated guidance as positive and modestly conservative."
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