Tuesday, October 06, 2009

MAMMOTH DISCOVERY: Companies bet big on South Texas gas find By Brett Clanton

Source: http://www.chron.com/disp/story.mpl/business/energy/6653999.html

Oct. 6, 2009

Last October, just as the economy was tilting into crisis, a small oil and gas company in Houston quietly announced the discovery of a mammoth natural gas field in South Texas that at any other time might have garnered bigger headlines.

Petrohawk Energy's find, however, did not go unnoticed in the oil and gas industry — and it didn't take long before oil companies large and small began making their moves.

Today, though the economy and natural gas prices remain weak, the Eagle Ford shale remains one of the hottest prospects in North America, and energy companies are moving forward there even as they're pulling back elsewhere.

That's because of what some companies suggest is a virtually recession-proof combination of highly productive wells and low drilling costs they say can yield profits even as natural gas prices hover near seven-year lows.

Also attractive: the flat South Texas ranch land, where obstacles are few and Gulf Coast oil and gas infrastructure is nearby; and landowners have grown comfortable with the industry after decades of oil drilling.

“You can certainly make more money from wells than cows,” said Joe Martin, whose family leased nearly 20,000 acres of land to Petrohawk in LaSalle County for drilling.

But it may still be a while before the full potential of the Eagle Ford shale is known. Though early results are promising, companies have been cautious about overstating what could be in the ground, especially since so few wells have been drilled so far.

“What we're going to find out, as with most shale plays, is there's going to be sweet spots,” said Bob Banks, chief operating officer at Swift Energy, a Houston-based oil company with nearly 90,000 acres leased in the Eagle Ford. “That's what we don't know yet, which areas are really going to work better than the others because it's pretty early days.”

Recently discovered U.S. shale plays, including the Haynesville in Louisiana and Marcellus in Pennsylvania, are expected to provide a major boost to U.S. natural gas supplies in coming years. The dense rock formations, once thought too difficult to explore, have been unlocked with the help of recent advances in drilling technology.

The core areas of the eight largest U.S. shale plays may contain 475 trillion cubic feet of recoverable resources, according to an estimate by Ross Smith Energy Group, an industry research firm in Calgary, Alberta. That's roughly ten times the size of Texas' famed Barnett shale play in the Dallas-Fort Worth area, which supplies nearly 10 percent of U.S. natural gas production, excluding Alaska.

$3.88 break-even point
While the Eagle Ford is among the smallest of the group, with some 19 trillion cubic feet of natural gas remaining, the economics is among the best, the firm said.

Producers in the Eagle Ford can break even when natural gas is priced as low as $3.88 per million British thermal units, the firm said, versus break-even prices of $5.18 in the Barnett, $3.74 in the Marcellus and $4.49 in the Haynesville.

Natural gas closed at $4.99 per million BTUs Monday in trading on the New York Mercantile Exchange, down from nearly $14 in summer of 2008, amid a recession-related drop in demand and bulging stockpiles. Consumption will fall by 2.4 percent this year and remain flat in 2010, according to the Energy Information Administration's most recent short-term forecast.

A potential boom
Yet that has not stopped companies from pushing ahead in the Eagle Ford play, which starts near the Mexican border and extends east below San Antonio across a string of counties including Webb, Dimmit, LaSalle, McMullen and Live Oak.

“It's got the potential of being a boom,” said Martin, whose family leased to Petrohawk, noting that land prices in the region have risen to $1,500 per acre in some places, 10 times what they were two years ago.

Houston's Petrohawk, with 210,000 acres in the Eagle Ford, has been the most active. It operates 17 wells in the Eagle Ford and aims to add another seven or eight by year-end, said Joan Dunlap, the company's head of investor relations. This month, the company said it will sell its properties in West Texas' oil-rich Permian Basin to an unidentified privately held company for $376 million to focus on its assets in the Eagle Ford and Haynesville shale plays.

Asked if the Eagle Ford could be as big as other major U.S. shale gas plays, like the Barnett shale, Dunlap said, “it's a big question mark.”

Other oil and gas companies including Pioneer Natural Resources, Swift Energy and Anadarko Petroleum Corp. also have drilled wells in the Eagle Ford or are planning to in coming months.

Less clear are the intentions of Houston-based ConocoPhillips and Irving-based Exxon Mobil Corp., each of which has large acreage positions in the Eagle Ford.

Houston's ConocoPhillips, with 300,000 acres, considers the region “one of the top resource plays in the lower 48” and will concentrate much of its 2009 exploration spending in the Eagle Ford and other North American unconventional resource plays, spokesman Charlie Rowton said. But he declined to elaborate.

Exxon Mobil confirmed it holds an interest in the Eagle Ford shale in La Salle and McMullen counties, but a spokesman said, “the details of the exploration program are considered confidential.”

Exxon Mobil confirmed it holds an interest in the Eagle Ford shale in La Salle and McMullen counties, but a spokesman said, “the details of the exploration program are considered confidential.”

Bob Fryklund, industry analyst with IHS-Cambridge Energy Research Associates in Houston, said highly diversified oil majors may not have the same urgency to act as independent oil and gas producers do.

“This is just one portion of their portfolio, while for a lot of the independents it's their whole portfolio,” he said.

But increasing moves by major international oil companies into U.S. shale plays, he said, suggest they may see more potential there than they once did.


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