The Springer Shale was the hot topic at the recent DUG Midcontinent event in late February in Oklahoma City. But before executives delved into the intricacies of the Springer and its potential, the macro crude demand-supply equation drew comment.

“Our in-laws in OPEC gave us … a self-improvement gift” on Thanksgiving Day, Newfield Exploration Co. general manager, Midcontinent, Pat McCelvey told attendees at Hart Energy’s DUG Midcontinent conference in late February. “They decided we got too used to $100 oil, too … reckless with our investments. I’m not sure they want us to get better, but that’s what we’re going to do.”

Other executives at the conference expressed concern about near all-time high storage levels and an as-yet invisible decrease in crude production.

John Rutherford, executive vice president, Plains All American Pipeline LP, said U.S. producers have done with oil what they did with natural gas. “We practiced too hard and we’ve gotten too productive.”

"It will take time to resolve the current imbalance, but the world needs sustainable North American production growth," John Rutherford, executive vice president of Plains All American Pipeline LP, said. Right: there are North American plays that can make the cut at lower oil prices.

Rusty Braziel, president of market-analysis firm RBN Energy LLC, said, “[Ready supply has] already happened. I don’t think we’ve accepted the fact.”

U.S. crude oil in storage grew by 8.4 million barrels—twice as much as commodity analysts expected—to 1.125 billion barrels for the week ending Feb. 20, according to the EIA’s weekly report. Of that, 434 million was in non-Strategic Petroleum Reserve (SPR) storage, up from 363 million a year ago.

Storage at Cushing, in particular, grew by 2.4 million barrels to 48.7 million, up from 34.8 million a year ago; Gulf Coast inventory, by 4.3 million to 214.5, up from 177.7 a year ago. The day after Thanksgiving, when OPEC announced no cut to its production amid an estimated 1.6-million-barrel daily global over-supply, U.S. storage sans SPR was 379 million barrels; Cushing, 23.9; Gulf Coast, 193.1.

Cushing inventory has more than doubled in three months. Tudor, Pickering, Holt & Co. Inc. analysts reported, “Yuck. ... With Cushing stocks near 50 million barrels, we start to get nervous about operation capacity above 60 million—[which would be reached in] four more weeks at this week’s build rate. ...”

Simmons & Co. International Inc. analyst Arinjoy Ganguly added that the Gulf Coast number is near the all-time high of 216 million that was set last year and will likely be exceeded in the EIA’s March 4 report. In addition, “Cushing is also closing in on an all-time high [of 52 million in early 2013], which we expect will be attained in the coming weeks.”

Meanwhile, Ganguly wrote, “[there is] no impact of rig-count reductions yet on crude production. ...”

Plains All American owns 20 million barrels—or roughly a third—of Cushing storage capacity and a total of 73 million barrels of capacity across the U.S., according to its 2014 annual report filed in February.

Rutherford told attendees, “We—the United States and Canada—are the de facto [world] swing producer. There has been no incremental production added by the rest of the world. We’ve added 5.6 million barrels of [daily] Canadian and U.S. supply and nothing in the rest of the world. ... You used to used to see ‘the call on OPEC.’ We just flipped it.”

The call will be on the U.S. in the future, he said. OPEC spare capacity is 4% of global demand today versus 26% in the 1980s. “It will take time to resolve the current imbalance, but the world needs sustainable North American production growth.”

That’s in the midst of a Lower 48 decline rate of about 30% a year, but overall U.S. production won’t grow at $50 WTI. “We don’t have enough supply in the U.S. at $50 oil to feed the rest of the world. ... Into 2016, there is a call on U.S. and Canadian supply, [but] production is declining [at $50]. [In] 2017, it gets worse.”

At $50, U.S. production will peak this summer as a backlog of wells waiting on completion are put online, while U.S. drilling does continue, albeit at between a quarter and a half of the October 2014 rig count. If with sustained $80 oil, daily Lower 48 production could have grown to nearly 11.5 million barrels, Rutherford said. At February-end, it was about 9.3 million a day, according to the EIA, up by 1.2 million a year earlier.

Dave Hager, COO, Devon Energy Corp., told attendees that, while some E&P companies forecast increased production—despite paring capex by an industry average to date of 34%—overall U.S. oil production will decline as the year unfolds.

“It is important to remember that there is a delay in when you cut capital and when you see a production impact,” he said. “For Devon, on average, the dollar we spend today won’t have a production impact for as much as six months. That’s why you will see a delayed impact on production, but … we will probably start to see that impact later this year.”

Oil-in-storage basins

New U.S. production supply is easier to come by today. Braziel noted that, in 2011, it took EOG Resources Inc. 22 days to drill an Eagle Ford well, for example; now, it can do this in about nine. That’s 41 wells in one year with one rig, producing 30-day IPs of nearly 800 barrels a day (bbl/d) on average. So drill days are down 60%; the number of wells per year, up 151%; and IPs, up 44%. In summary, one rig can bring some 31,000 barrels of new, daily production in a year now, compared with 9,000 in 2011.

Who’s to blame for world oil oversupply? “It was you,” he told producers. “You’ve been too good for your own good.”

Devon is focusing its 2015 capex on development wells in high-IRR acreage, Hager said. Braziel noted, “Producers are going to their sweet spots. ... Their average IPs are going to increase this year versus last year.”

Many producers are hedged at least for 2015; some, for several years. Braziel said. “You put all of these factors together, what’s going to happen to production?”

He forecast that WTI will find a bandwidth just as U.S. natural gas did as a result of shale-gas development. “If prices do get back to the $80 range, that crude oil that was sitting there didn’t go away. It’s going to be produced. ... We’ve seen this story before.”

The Haynesville gas play developed in early 2008, producing consecutive 20-million-cubic-foot wells from virtually Day 1. As that play came online and joined new gas production from the Barnett, Fayetteville, Arkoma Basin-Woodford and the Marcellus, supply surged, gas futures settled into a roughly $3 to $5 window and the Haynesville rig count dived from about 120 to 16.

“But all of that gas is still in the Haynesville, waiting to be produced …,” Braziel said. “That is what we have created for ourselves in the crude-oil basins.” He forecast a “base-oil theory” that is similar to modern dynamics in U.S. natural gas. “Prices rise, production rises, prices fall.”

Springer Shale

In the midst of 1,000-plus-barrel Woodford- and Meramec-well IPs in Oklahoma’s Scoop and Stack plays, Springer Shale potential continues to fascinate producers, according to presenters at the conference.

The Scoop play, south and west of Oklahoma City, targets the Woodford Shale and, increasingly, the overlying Springer Shale. Newfield Exploration Co.’s Jarred 1-16H in Springer posted an IP rate of 1,950 barrels of oil equivalent (boe) and had a 30-day average of 1,220 a day, 81% oil.

Pat McCelvey, Newfield general manager, Midcontinent, said the company’s Scoop, into which the Springer is tucked, and its Stack are economic for Newfield at current oil prices, particularly “with the willingness of our contractors to work with us lately” on cost. “There would be a lot fewer rigs running right now without that willingness to work together.”

Newfield, which also operates in the Williston, Uinta and Arkoma basins, plans to spend 70% of its $1.2 billion 2015 capex budget on the Scoop and Stack. As for the Springer in particular, McCelvey told conference attendees, “we see it as a great addition to the Scoop play. ... We’re excited about that.”

Brandon Mikael, a U.S. Lower 48 upstream analyst for Wood McKenzie, told attendees that, within Scoop to date, “your best Springer wells are not in the same place as your best Woodford wells.” Also, while “this is some of the best rock to drill in the Lower 48,” the areal extent is within a window smaller than the overall Scoop-Woodford window. “It has limited running room.” Even the core of the Scoop play itself “has world-class rocks but just not much of them,” he said.

However, WoodMac reported earlier in February, based on Mikael’s findings, that Scoop-Springer economics break even at $41 WTI; Scoop-Woodford, $47; Bakken (Sanish and Parshall fields), $45; and Eagle Ford (Karnes Trough), $48.

Springer A&D

Marathon is adding 10,000 net acres to its Scoop position, including acreage in the Springer window.

A DUG Midcontinent attendee asked Mikael whether there is any way to enter the Scoop play at this time. He said, “It comes down to how much money you’re willing to spend. There are small private-equity-backed companies that are active [in the area]. Organically, it’s hard to [enter] but, at these [oil] prices, that’s something you don’t want to do right now.”

Privately held Sheridan Production Co. LLC drills and produces from conventional reservoirs in the Midcontinent and has found its leasehold in the midst of the Scoop play. It owns rights to Springer in some 35% to 40% of its 350,000 net acres in the Midcontinent, said Jim Bass, president and CEO.

It has already sold Woodford rights in some 25,000 net acres in the Scoop area to three operators “to facilitate exploration in that reservoir,” he said. Due to the acquire-and-exploit, rather than exploration, nature of Sheridan’s business model, “it’s something in which we would not play.”

The company has also sold Springer rights in about 7,000 net acres to further facilitate exploration. The amount is smaller than its deals for Woodford rights “because it suited the buyer’s needs and it left us with our own unconventional exposure,” he said.

The play may come to Sheridan. “Whether you consider it Goddard or Boatwright [shale members of the Springer group], it is a known reservoir. It may still be new in its life of development … but, as activity continues and years pass and we develop our current conventional opportunities, there will be more known … .

“And we will leave our options open and see if there is an opportunity to drill some of this stuff at some time going forward.” He added, “I stand here and marvel at what this basin continues to offer as it reinvents itself.”

Density tests

Newfield’s Scoop and Stack proved reserves are now 30% of its total 181-million-boe portfolio while, at 295,000 net acres, they are 23% of its leasehold, according to its recent earnings report. The company’s 10-operated-rig program in Scoop and Stack, where its 2014 production doubled from 2013, is expected to produce up to 100 wells this year.

Lee Boothby, chairman, president and CEO, noted in an earnings call that Newfield and Continental Resources Inc. are in a number of each other’s wells in Springer. Springer is demonstrating itself to be a “really high-quality target,” he said, according to a transcript by Thomson Reuters. “Hydrocarbon-rich. Good permeability. All the things you like to see.”

He added that these robust wells are just one-section laterals. “So we … will be testing both 5,000- and 10,000-foot laterals … . We see [Springer] as a strong, economic target …,” he concluded.

Continental began testing Springer in its Scoop position in 2012 and reported the discovery and two confirmation wells this past September. The three wells had made a combined 640,000 boe by then. IPs of those and 12 subsequent wells averaged 1,230 boe, 67% oil and 17% NGLs.

OPEC spare capacity is 4% of global demand today vs. 26% in the 1980s.

Dave Hager, COO, Devon Energy Corp., told attendees that overall U.S. oil production will decline as the year unfolds.

In late February, the company reported plans for three to six rigs to drill Springer this year. It added 16 net Springer wells in 2014, growing production to 5,905 boe a day. IPs averaged 950 boe in the fourth quarter. The Schoof 1-17H yielded an IP rate of 1,465 boe and had a 30-day average of 920 a day; the Lyle Land 1-25H, 1,135 and a 30-day average of 908 boe a day; and the Martha Skid 1-35H, 935 and a 30-day average of 648.

Laterals are some 4,500 feet in each. All three are in Grady County. Oil production from each well is roughly 75% of the commodity mix. In a recent density test in its Hartley area, four wells had an average IP of 1,186 boe from roughly 4,600-foot laterals. Three of the wells are about 1,050 feet apart; one is about 2,100 feet from the others. Half of its 2015 Springers will have laterals of more than 5,000 feet in extended-lateral tests, Continental added.

Canaccord Genuity Inc. analyst Stephen Berman wrote at the time that the Scoop play, including Woodford and Springer, produces a roughly 35% IRR at $55 oil. “We continue to believe that the Scoop is under-appreciated by the Street, given its robust economics …,” he said.

Also notable at the conference was discussion of an innovative financing deal for Midcontinent gas.

Regulated utility Florida Power & Light Co. closed the purchase of a nonoperating working interest in Oklahoma gas drilling in December with PetroQuest Energy Inc. The utility’s vice president of energy marketing and trading, Sam Forrest, said that, while waiting months on state approval of the unprecedented deal, an unregulated affiliate backed it up. “With the bridge, PetroQuest knew it had an agreement, whether it was with us or our affiliate.”