U.S. Shale Play is Gaining Steam - By Loren Steffy

During the past month, big U.S. oil companies have been making big bets on shale production — and not just in the white-hot Permian Basin. Although commodity prices have remained modest, drillers continue to press forward, turning up activity in basins such as the Eagle Ford Shale of South Texas.

Drillers applied for 175 more new wells in the Eagle Ford last year than they did in 2017. The Eagle Ford is in its tenth year of production, and its been enjoying a slow but steady comeback from its salad days of early 2014, before oil prices collapsed.

Part of the reason for the Eagle Ford’s resurgence is that land values are cheaper than the Permian, and the equity markets are rewarding more disciplined growth, for which the more mature properties of the Eagle Ford are well suited. Many of the wells in the area can be drilled for cash flow, reducing the need for companies to carry the high debt levels that were once the trademark of shale producers — and the bane of investors.

Protégé Energy III, which operates exclusively in the Eagle Ford, told investors recently it plans to return as much as $50 million in free cash flow to investors this year, even as it increases production by 40 percent.

Protégé has been successful because it’s focused on improving efficiency to offset lower commodity prices, Chairman and Chief Executive Officer Martin Thalken told SPE Gulf Coast Section’s recent Symposium. “When you have a situation where you’re driving down costs and your wells are improving over time, you can be much more economic in a lower price environment,” he said.

Across the country, other shale producers are doing much the same thing. Progress in lowering costs and improving efficiencies have helped boost profitability. About 40 percent of current projects can be profitable at $45 oil, and some, especially in the Permian, can make money at prices as low as $20, according to a new study by Rystad Energy, a Norwegian research firm.  

At the same time, more producers are looking beyond the Permian, and the Eagle Ford has become the next basin of choice. Chesapeake Energy of Oklahoma City, once the biggest gas producer in the U.S., completed its $3.98 billion acquisition of Houston-based Wildhorse Resource Development in February. The deal makes Chesapeake the No. 2 producer in the Eagle Ford, surpassing ConocoPhillips. EOG remains the most active driller in the basin.

Marathon Oil, in reporting its fourth-quarter earnings, noted that the Eagle Ford was its biggest producing region at 107,000 barrels a day, a 2 percent increase over its production a year earlier. The company brought 38 wells online during the quarter.

Since the last bust in 2015, smaller independents have been the most active participants in U.S. shale plays. But smaller producers have struggled to make money because of the large amounts of capital and higher operating costs associated with hydraulic fracturing.

Now, larger companies are moving in. Deep-pocketed producers like Exxon Mobil and Chevron are beginning to dominate shale production. Indeed, both companies announced record production in the fourth quarter. These company can better meet the capital requirements, and they have the financial resources to acquire large blocks of acreage, giving them advantages of scale, according to another Rystad study.

That was part of the reason for BP’s $10.5 billion acquisition of BHP Billiton last year, which gave it a major presence in the Eagle Ford, as well as assets in the Permian and Haynesville plays.

Given all this activity, it’s little wonder that a recent survey of oil and gas professionals found that 75 percent are optimistic about growth prospects for 2019. About 70 percent said they expect to maintain or increase spending this year.

Even American lawmakers are feeling a little giddy as the country’s oil and natural gas production continues to rise. A group of U.S. senators unveiled a bill in early February that would allow the U.S. Justice Department to sue members of OPEC for antitrust violations over the cartel’s growing relationship with Russia. Saudi Arabia and other key members in the Persian Gulf support a formal alliance with a 10-nation group, led by Russia and including Mexico, to better manage global oil prices. The legislation, which the senators dubbed the “NOPEC Act” for “No Oil Producing and Exporting Cartels, supports President Trump’s call for lower oil prices ahead of next year’s presidential election. Ironically, it was booming U.S. production — and the disruption it has caused for global pricing — that pushed OPEC to consider the alliance in the first place.

Meanwhile, the surge in U.S. production is bolstering midstream and downstream operations. Last month, Exxon announced it was expanding capacity at its refinery in Beaumont, Texas by 250,000 barrels a day, making it the largest U.S. plant. It’s also working with Plains All America and Lotus Midstream to build a 1 million barrel a day pipeline to the Beaumont refinery and its sister plant in Baytown, Texas.  

Other producers and midstream developers are looking farther east, hoping to build new routes to refineries in Louisiana in an effort to avoid growing dock congestion in Texas.
In the Eagle Ford, Howard Energy Partners of San Antonio teamed up with Florida-based NextEra Energy Partners in a joint venture that will look at new pipelines to transport natural gas from the western end of the shale play to the Agua Dulce hub in Mexico. Howard owns an extensive gathering network in the Eagle Ford, as well as the Nueva Era Pipeline that runs from Laredo to Monterrey, Mexico, with a capacity of 2.6 billion cubic feet a day.

The pipeline projects are addressing one of the biggest bottlenecks for U.S. production. Oil and natural gas in the Permian and the Eagle Ford, in particular, have been coming out of the ground so rapidly that there was no way to move the hydrocarbons to refineries and processing plants. As that production makes its way to the market, it could further drive down prices globally. America recently became a net exporter of oil for the first time in 75 years, and it is working on becoming a major exporter of natural gas as well. Sempra Energy recently got government approval to begin the startup process for its liquified natural gas export terminal in Cameron, Louisiana, the third such export facility along the Gulf Coast.

While all eyes have been on the Permian during the past year, it’s become increasingly clear that the dramatic increase in American oil and gas production isn’t limited to just one basin.

Loren Steffy is an author, a writer-at-large for Texas Monthly and a managing director of the communications firm 30 Point Strategies.