Super independent EOG Resources Inc. has identified 21 Tcf net natural gas resource potential with an estimated 1,250 net locations in the South Texas formations of the Austin Chalk and Eagle Ford Shale.
The discovery on the Dorado prospect is in Webb County, where EOG has 163,000 net acres, were in 700 feet of stacked pay.
The Houston-based producer has drilled 17 wells in Dorado since early 2019, including five wells targeting the Austin Chalk. EOG also has drilled 12 wells since January 2019 targeting the Upper and Lower Eagle Ford, where it has long been a top operator.
CEO Bill Thomas, who led a conference call to discuss third quarter results on Friday, called Dorado “a great rock in a great location.” EOG is “decentralized,” he noted, which means it creates value “in the field, not at headquarters. The idea behind Dorado emerged from the bottom up from one of our operating areas, perhaps for the first time in our history.”
Exploration and production chief Ken Boedeker said breakeven costs to develop the Dorado gas reserves are under $2.50/Mcf.
“We believe this play represents the lowest cost supply of natural gas in the United States,” he said.
EOG in 2016 initially identified Austin Chalk as an oil formation, an extension of its Eagle Ford footprint. To date, EOG has captured around 59 million boe net of reserve potential from around 100 core Austin Chalk oil wells.
EOG then began evaluating the Austin Chalk formation within the Gulf Coast Basin and identified its potential as a dry natural gas play in Webb County. The Austin Chalk is a massive formation that extends across Texas into Louisiana.
EOG paused its drilling activity earlier this year in South Texas to evaluate the production results and the technical data collected from petrophysical logs and 3-D seismic surveys. Using its proprietary knowledge of the first batch of wells, EOG was able to “move quickly down the cost curve,” Boedeker said.
Initial development indicates finding costs of 39 cents/Mcf in the Austin Chalk and 41 cents/Mcf for the Eagle Ford.
Plans are to evaluate the capital allocation for the South Texas gas “each year based on market conditions,” Boedeker said.
“The addition of Dorado to EOG’s diverse portfolio of premium plays improves the financial profile of EOG by every measure,” Thomas said. “It also allows us to diversify capital deployment throughout the organization and across our assets.
“We believe this prolific new discovery represents the lowest cost natural gas play in the U.S., which will be both operationally efficient and have a small environmental footprint…Dorado competes today with EOG’s premium oil plays, and we expect it to move rapidly into the top tier of our inventory as development unfolds. This is just the latest example of how EOG continues to organically improve.”
The Austin Chalk formation has an estimated net resource potential of 9.5 Tcf with 530 net drilling locations identified, according to EOG. The well rates of return “are supported by low cash operating costs and proximity to several natural gas markets,” including options for liquefied natural gas and pipeline export pricing.
To minimize the environmental footprint, EOG said it would apply the latest water and emissions management technology to the development.
The five initial Austin Chalk wells produced an average of 3.5 Bcf/well in the first year of production, with an average lateral length of 6,600 feet/well. Fifteen Austin Chalk wells are set to be completed in 2021.
“A typical Austin Chalk well is expected to recover 22 Bcf of natural gas, or 18 Bcf net after royalty, from a 9,000 foot lateral at a targeted well cost of $7.0 million per well,” EOG said.
The company has identified additional net resource potential of 11.5 Tcf and 720 net premium drilling locations in the Lower and Upper Eagle Ford, which underlies the Austin Chalk in the same area.
EOG said the first 12 wells targeting the Eagle Ford produced an average of 2.8 Bcf/well in the first year of production, with average lateral lengths of 7,700 feet/well.
“A typical Eagle Ford well is expected to recover 19 Bcf of natural gas, or 16 Bcf net after royalty, from a 9,000 foot lateral at a targeted well cost of $6.5 million per well.”
Including the Dorado locations, EOG said it added 1,400 net drilling locations to its undrilled premium inventory in 3Q2020.
“Taking into account wells drilled over the past year and updated location counts across its portfolio, EOG’s premium inventory now totals approximately 11,500 net locations,” management said.
EOG reported the discovery as part of its third quarter results. Oil volumes were 19% lower year/year at 377,600 b/d. Natural gas liquids (NGL) production was 1% lower and natural gas volumes were 13% lower, contributing to a 14% decline overall in total output.
EOG continued to return shut-in wells to production during the third quarter, and nearly all of the curtailed output was back on production by the end of September. On average, 28,000 boe/d was shut-in during 3Q2020. Initial production also ramped up from about 100 net wells, after activity was deferred earlier in the year in response to lower oil prices.
Lease and well costs declined 24% on a per-unit basis in 3Q2020 from the same prior year period.
“Notably, we are not playing defense in the current challenging environment,” Thomas said. “In fact, the opposite is true. We are aggressively moving EOG forward, advancing new plays, identifying innovative solutions to lower costs and improve well productivity, sharpening our technological edge and further demonstrating our commitment to sustainability.
“All of this is driven from the bottom up by a decentralized organization and a unique culture. This year more than ever, we are focused on investing in our people and enhancing our culture to sustain our competitive advantage and enable EOG to play an increasingly vital role in meeting the long-term global energy needs.”
EOG’s management team expects the current imbalance in the global oil market “to extend into 2021, and therefore expects to maintain its crude oil production at approximately the same level as the fourth quarter 2020.”
Assuming a balanced oil market after 2021, EOG expects to reinvest 70-80% of its discretionary cash flow and generate up to 10% compound annual oil production growth in 2022 and 2023 at a $50/bbl West Texas Intermediate oil price.
EOG also noted that during 3Q2020 it divested its Marcellus Shale assets for about $130 million. Production from the divested assets is around 40 MMcf/d.
Net losses totaled $42 million (minus 7 cents/share) in 3Q2020, versus profits of $615 million ($1.06) in 3Q2019.
Realized oil prices averaged $40.15/bbl, down 29% year/year, while gas prices fell 21% to $1.68/Mcf. The declines were partially offset by an increase in NGL prices, up 13% from a year ago, to $14.34/bbl.
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