M. King Hubbert’s prescient prediction of peak oil in the United States worked for five decades until 2010 noted Mark Sooby, managing director for Bank of America Merrill Lynch.
“But now, we are way off track,” Sooby told attendees at Hart Energy’s DUG Eagle Ford Conference and Exhibition in San Antonio on Oct. 15. “So what happened?” he asked. “Well, unconventionals happened.”
What started as a technique to develop natural gas has now spread to natural gas liquids and crude oil, thanks to the price differential between dry gas and liquids. The Eagle Ford has been a leader in the transition from decline to growth when it comes to liquids, and that has been good for oilfield services.
“If you are a service provider, drilling contractor, midstreamer —or whaterver — this is probably the best three to four years of your life,” Sooby noted in describing the rapid growth in the Eagle Ford since the discovery gas well in 2008.
“It is an amazing oil story in the midst of a gas play,” Sooby said about the Eagle Ford shale. The oil story is remarkable in part because of differences in scale. The United States Geological Survey estimates there are 388 trillion cubic feet in recoverable gas resources in the U.S. For oil, the estimate is 8 billion barrels.
However, natural gas is relatively easy to recover from shale compared to oil where several factors determine the outcome. But the decline in gas price coupled with challenges in producing viscous oil from low nanodarcy rock has emphasized the midpoint of the two, which is natural gas liquids.
Citing various industry studies, Sooby defined the oil window as areas with less than a gas oil ratio (GOR) of 3,000 cubic feet of gas per barrel of oil. Sweet spots develop whenever that line coincides with very high downhole pressures, which is evident in the prolific Karnes Trough southeast of San Antonio in Karnes and DeWitt counties.
Those sweet spots, according to Sooby, drive transaction value. He provided examples of acreage values rising from $5,000 an acre to $10,000 an acre — to more than $15,000 an acre within a couple of years.
“If you know what you are doing, you can pay that price and have a very good outcome,” Sooby said, noting sweet spots in a play can be 25% to 35% better than surrounding acreage. “The sweet spot is where operators make all their money.”
Sooby outlined the three major shale oil plays in the United States, including the Bakken shale, the Eagle Ford shale and the Wolfcamp shale. All have good hydrocarbon characteristics — especially the Wolfcamp. The Wolfcamp covers a couple dozen counties in West Texas, a region that has produced 30 billion barrels of oil.
“The Woflcamp is the source for most of that,” Sooby said, noting, “This is an up and coming play. It’s a big area and there is a huge energy density in the play.”
However, the best way to compare the relative value in the three oil shale plays is to look what oil and gas operators are doing. Sooby identified companies such as ConocoPhillips, EOG Resources and Marathon Oil, which hold acreage in at least two and often in all three plays. Those operators are voting for the Eagle Ford with their investment dollars. Marathon Oil, for example, is employing seven rigs in the Bakken and 20 rigs in the Eagle Ford, where the company can realize a before-tax internal rate of return of 100% in the Eagle Ford condensate window.
Similarly, EOG Resources has 20 rigs active in the Eagle Ford, seven in the Bakken and four in the Permian Basin Wolfcamp. The company’s after-tax rate of return is 80% in the Eagle Ford vs. 40% in the Bakken, and 35% to 45% in the Permian Basin.
Similarly, ConocoPhillips employs 17 rigs in the Eagle Ford, eight in the Bakken Shale and six in the Permian Basin with respective before tax internal rate of returns of 50% in the Eagle Ford, 25% in the Bakken and 40% in the Permian Basin.
While the focus currently remains on shale oil, long-term value will gravitate back to unconventional natural gas, Sooby suggested. While there are 8 billion barrels in total shale oil resource in the United States, the 388 trillion cubic feet of unconventional gas converts to 65 billion barrels of oil equivalent. Similarly, total cumulative U.S. oil production is 180 billion barrels, Sooby said, quoting the U.S. Geological Survey. Total cumulative gas production is 900 trillion cubic feet, or 150 billion barrels of oil equivalent.
Contact the author, Richard Mason, at rmason@hartenergy.com
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