Tuesday, August 17, 2010

Why Eagle Ford Is So Hot

Improvements in directional and horizontal drilling techniques, as well as hydraulic fracturing methods, have revolutionized shale exploration and development in the US. Thanks to new horizontal drilling techniques perfected in the Barnett and Haynesville shale that can extract hydrocarbons from unconventional sources, The Eagle Ford has become a hugely profitable oil and gas play. Eagle Ford operators have the technical know how and the enviable ability to produce vast quantites of oil from shale. Operators in the area have acquired vast chunks of high grade acreage at bargain prices, that acreage in the years ahead, will dramatically boost the output of crude oil locally. This huge oil window acreage will yield extraordinary profits and enormous gains in proven reserves. The oil and condensate percentage in the DeWitt/Gonzales area has been quite high giving the companies a huge premium.

EOG Resources, Pioneer, Chesapeake, Conoco Phillips and Petrohawk are the leaders in the quantum shift under way in the exploration and production shift away from natural gas and towards more oil and liquids development in the area. Beginning about three years ago, using stealth and flying under the radar, they began building their mega acreage portfolio positions on the cheap, paying in the $100 to $400 per acre price range, with a paltry 20% royalty. Today, that same acreage brings in the neighborhood of $3,500 an acre and 25% royalty without a whimper. Savy landowners who did not sign early have seen lease signing bonuses and royalty rates steadily increase ten fold in the past three years. Since we are very early in the development of the Eagle Ford,it is impossible to predict with accuracy how high bonuses and royalty will go, although the trend and bias is definitely much higher.

The economics of the Eagle Ford shale is unmatched in any other shale play. The EF shale is very uniform and very thick in most of the trend. The cost to fracture wells is approximately half what it cost in the Barnett and Haynesville, which is a huge advantage. The Cheapside area where the EOG T R Marshall Unit is located has the best fracture characteristics of the entire Eagle Ford trend. The economics of the Eagle Ford shale is expected to attract huge investments in the DeWitt area over the next decade with a rapid increase in activities in the play. The major eight companies in the play plan to spend over $1billion in 2010.

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