Over the next three years capital expenditures (capex) in the Eagle Ford Shale could top the projected spending for the Kashagan project in Kazakhstan, now the world’s most expensive standalone energy project, according to an analysis by Wood Mackenzie.
In 2013 alone, $28 billion is slated to be spent in the South Texas region, according to upstream research analyst Callan McMahon.
With Eagle Ford development “now in full swing, the excitement…and value being extracted from the play continues to exceed expectations,” McMahon said. “In terms of overall investment, from 2012 through 2015, Wood Mackenzie expects capital expenditure in the Eagle Ford to surpass the projected capex of the entire Kashagan project in Kazakhstan…”
The latest figures show the offshore Kashagan project, considered the world’s largest discovery in the last 30 years with the Tengiz Field, will require a total capital investment of $116 billion. Commercial production was slated to start up by the end of this year, providing the main source of supply for the Kazakhstan-China oil pipeline.
Optimism about the Eagle Ford could rival that project, said the Wood Mackenzie analyst.
“Since the beginning of 2011, liquids production, including natural gas liquids (NGL), has grown from around 100,000 b/d to 700,000 b/d,” McMahon said. “The Eagle Ford has become one of the top producing shales in North America, with average 3Q2012 production topping 1 million boe/d,” including natural gas.
Liquids production “is now projected to account for 15% of total onshore U.S. oil production,” and after the Bakken, the Eagle Ford “is the second largest tight oil play, while also ranking fifth in terms of shale gas production.
“The U.S. shale play holds huge value for producers with “premium acreage and are well positioned in the play.” The leading players “not only hold core acreage positions, but hold a larger quantity of this quality acreage. There are high expectations for the Eagle Ford Shale and as impressive investment returns continue to attract capital…
“This is apparent in the massive amount of capital being deployed in the play, come 2013 the area will represent 27% of the total capital expenditure of the onshore Lower 48 total,” said McMahon.
The three biggest operators — EOG Resources Inc. BHP Billiton Ltd. and ConocoPhillips — “have a combined remaining value” of about $30 billion. The trio is outperforming competitors “in different manners,” said McMahon. All of them hold core acreage and have “quickly moved to large-scale development.”
The Eagle Ford, for instance, holds about 38% of EOG’s upstream value, according to Wood Mackenzie’s analysis. “EOG was one of the first companies to shift its strategic focus to liquids, a decision that has been well rewarded in the Eagle Ford,” said McMahon.
The formerly natural gas-centric producer began to turn its focus to the Eagle Ford more than two years ago as it moved to oily and NGLs. CEO Mark Papa, a strong and vocal advocate, said last year EOG expected to be “the largest net Eagle Ford oil producer for at least the next decade” (see Shale Daily, Nov. 3, 2011). In 3Q2012 the Eagle Ford was the Houston producer’s “biggest driver was oil outperformance as it has been all year,” he told investors last month (see Shale Daily, Nov. 7).
Australia’s BHP entered South Texas last year when it bought Petrohawk Energy in 2011 (see Shale Daily, July 18, 2011). The BHP leasehold now represents “20% of the company’s entire upstream global portfolio,” according to McMahon.
ConocoPhillips, said McMahon, also targeted the liquids-rich core area “early on, enabling a substantial acreage position to be built at a lower entry cost.” CEO Ryan Lance said in April 26% of ConocoPhillips’ North American production by 2016, or about 210,000 boe/d, would come from the Eagle Ford and Bakken shales, as well as the Permian Basin (see Shale Daily, April 17). The independent has about 228,000 net acres in South Texas and invested close to $2.3 billion this year to drill more than 180 wells using 16 rigs.
Having the financial resources has enabled producers to unlock the tremendous natural resource potential, said McMahon. “Larger capital budgets” have enabled the biggest producers to progress their development programs “increasing overall valuations, while smaller players are able to leverage joint venture and cost-carry agreements to maximize on a value per-acre basis.”
South Texas counties with crude and condensate exposure will drive future growth, with almost three-quarters of the planned rigs targeting liquids, McMahon said. Gonzalez, DeWitt and Karnes counties “have established themselves as the sweet spots of the play, and now account for over 50% of daily liquids production.”
The Eagle Ford’s success has come from several factors.
“Operators have successfully delineated acreage, well productivity has increased thanks to both technology and experience, and depressed natural gas prices have continued the diversion of capital to liquid-rich plays such as the Eagle Ford,” according to Wood Mackenzie’s analysis. “In tandem, the capacity constraints faced earlier in the play’s development have been eased, as midstream and service companies invest aggressively to capitalize on the growth in production.”
Motley Fool’s Aimee Duffy said in a recent note the “Eagle Ford Shale is moving rapidly to challenge the dominance of its oilier brother” in Texas, the Permian Basin. She cited statistics from the Railroad Commission of Texas, which indicated that in 2011 the Eagle Ford produced 914 MMcf/d of natural gas and 119,353 b/d of oil.
“So far this year, the gas number is down slightly to 880 MMcf/d, but the oil number has risen significantly to 297,079 b/d through August. Remember, that is an average number: the commission reported that July’s production was more than 310,000 b/d. For perspective, in 2008 when PetroHawk…drilled its first well, oil production in the Eagle Ford was only 358 b/d.”
Duffy also pointed to the “bevy of midstream outfits” that “are getting in on the Eagle Ford action too.” She said Energy Transfer Partners LP since 2010 has invested more than $1.2 billion in South Texas and higher output in the shale play boosted its fee-based revenue in 3Q2012.
In addition, “the words ‘Eagle Ford’ are all over the capital expenditure sheet at Enterprise Products Partners LP,” which has completed “$2 billion in projects this year and half of them are in the Eagle Ford. Of the remaining $7 billion or so it plans to spend between now and 2015, about $4 billion is geared toward our favorite Texas shale play.”
Kinder Morgan Energy Partners LP also is “happy to get in on the game as well, and will repurpose existing assets if need be,” said Duffy. “In June, the company brought a new Eagle Ford pipeline into service that has a capacity of 300,000 b/d. Sixty-five miles of the pipeline were new, while 113 miles were converted from a natural gas pipeline.”
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