Investment and Production Reach New Highs In Eagle Ford, Pipelines Lag Behind

May 2013, Vol. 240, No. 5

Erin Nelsen Parekh, Associate Editor

The Eagle Ford Shale, stretching from the mid-south of Texas just shy of Corpus Christi north nearly to San Antonio and west to the Mexican border, continues to attract massive investments from energy companies. It’s not hard to see why. The play contains economically recoverable light crude oil and natural gas liquids in high proportion to currently low-priced gas.

Geologically, Eagle Ford shale is easier to fracture and closer to the surface than other shale plays. The location of the play, close to Gulf Coast refineries and shipping ports and Texas energy business hubs, helps counterbalance increases in cost inherent in unconventional drilling. Although the margins on every well are different, the big picture is a boom affecting the entire region.

The rapidity of the development has led to a situation in which demand for energy infrastructure is outstripping supply. Many Eagle Ford pipeline projects were completed in 2012 and many more are scheduled to come on line in 2013, but construction of gathering and transmission pipelines in the area is expected to continue into 2015. Meanwhile, in 2012, Union Pacific transported 22,500 carloads of petroleum products per day out of the formation by rail.

According to a new study by the University of Texas at San Antonio’s Institute for Economic Development called “Economic Impact of the Eagle Ford Shale,” there are about 250 active wells in the Eagle Ford Shale. Top oil producers EOG Resources, Inc. and Chesapeake Operating, Inc. completed more than 800 and 600 wells, respectively, in 2012, with a bevy of other companies completing around 200 wells each. Anadarko E&P completed nearly 700 gas wells and several other companies hit 300.

Source: “Economic Impact of the Eagle Ford Shale,” UTSA

All this activity produced approximately 370,000 bpd of crude oil in 2012. Energy Analysts International, Inc. expects total liquid production from Eagle Ford in 2013 to match what it foresees from the Bakken Shale at around 900,000 bpd.

The rapid increase follows a trend that dates to 2008. “According to data collected from the Texas Railroad Commission, oil produced in Eagle Ford has increased from roughly 5 million barrels in 2010 to more than 40 million barrels in 2011. Likewise, condensate production has increased from approxi-mately 6 million barrels in 2010 to more than 24 million in 2011. As of October 2012, crude production in Eagle Ford topped 112 million barrels while condensate production was estimated to be approximately 24 million barrels.” The EIA released a report on a jump in well starts in the first quarter of 2012, and noted later that from September 2011 to September 2012, the combined increases in production from the Eagle Ford and Permian Basin amplified Texas’s total oil production by 500,000 bpd.

Meanwhile, the formation’s proximity to the Gulf Coast refinery complexes has not only increased the economic benefits to producers, but shifted the energy mix for the United States as a whole, per UTSA. “Refiners along the Gulf Coast have begun to reduce the amount of foreign crude oil they import in favor of Eagle Ford and other U.S. based sources.” The study measures an economic boost due to the shale play in these areas as well.

NGLs, meanwhile, are expected to exit the formation at a rate of 500,000 bpd of raw mix by 2015. Current production is between 170,000-200,000 bpd.

Production is expected to continue the upward trend, but the larger impact of the play will center not around its velocity, but its longevity. “By 2022, it is moderately forecasted that there will be a total of 24,363 wells in the Eagle Ford Shale. 2,199 will be new wells completed in 2022. The Eagle Ford will transition from mainly drilling to more extracting and processing of oil and gas.”

There is also the likelihood that as technology advances, it will become better and cheaper, leading to more oil and gas will worth the cost of extraction. Estimates of the total contents of the Eagle Ford Shale range from 3-10 billion barrels of oil and most wells are retrieving between 8-12% of reserves.

The future of natural gas in the Eagle Ford is less clear, though there is enormous potential in that resource as well. Gas production may even decrease in 2013 from 2012, but Thomas Tunstall, Ph. D., professor at the University of Texas at San Antonio and lead author of the economic impact study, noted that gas prices have been steadily rising.

“We think $4 might be an inflection point that starts to revive interest in bringing up gas. Long term, we estimate that in the U.S. gas prices are going to find a range probably between $4-7 per thousand cubic feet, with or without exports. Unconventional natural gas is so abundant that the dramatic price swings that we saw in 2000-2010, from $2-14 per thousand cubic feet, I doubt we’re going to see that in the future.”

With better technology, abundant supply and prices edging up, the gas supply of the Eagle Ford is likely to become a much more significant feature in future years.

“Pipeline infrastructure is significantly slowed by the permitting process as well as the acquiring of right-of-way from private land owners,” the UTSA study acknowledges, but a huge investment in pipeline transportation in the Eagle Ford is underway. A majority of pipelines planned for the area are now complete and many more are under construction, while rail cars and dedicated trucks fill up and earn backlogs of their own.

Pipeline construction in itself is a major contributor to the area economy, with nearly 12,000 people employed directly in 2012, according to UTSA. The university estimates the same year’s total economic impact of pipeline construction in the 14 counties measured to be more than $1 billion. Right-of-way payments alone were estimated at $192 million.

Source: “Economic Impact of the Eagle Ford Shale,” UTSA

However, even when all announced projects are complete, there may yet be unmet transportation needs in the Eagle Ford. The UTSA study warns that while Corpus Christi refineries are being well fed, “these pipelines fail to provide services to large swaths of oil-producing acreage in the northeastern counties of Gonzales, DeWitt, Karnes and Wilson counties where it is evident that most crude is being transported to the Houston refining complexes.”

Transmission Lines
DCP Midstream’s Sand Hills Pipeline connecting the Permian Basin and Eagle Ford to Mt. Belvieu NGL plants has completed the first phase of its 720-mile route and an in-service date of mid-2013 is expected. Copano Energy and Magellan Midstream Partners are constructing the 140-mile Double Eagle Pipeline, connecting Karnes, Live Oak, McMul¬len, and La Salle counties to Corpus Christi with a planned 100,000-bpd capacity. Nustar Energy has reactivated the idled 60-mile Pettus South pipeline to Corpus Christi. NET Midstream has extended the existing Eagle Ford Midstream natural gas pipeline 105 miles from a processing plant in La Salle County to the Agua Dulce Hub in Nueces County and announced a 124-mile, 42-inch pipeline from Agua Dulce to the Texas/Mexico border planned for service in 2014.

Source: “Economic Impact of the Eagle Ford Shale,” UTSA

Source: “Economic Impact of the Eagle Ford Shale,” UTSA

Source: “Economic Impact of the Eagle Ford Shale,” UTSA
Regional Effects
According to the UTSA study, oil and gas industry activity directly produced more than $46 billion and directly or indirectly supported 116,508 workers in the Eagle Ford Shale region during the past year. Sales tax revenues for the 14 included counties were up 68.2% over three years, 2009-2012. State and local governments collected $2 billion in related revenue in 2012.

“By and large, people are happy. Landowners and people who own mineral rights and business owners are happy,” Tunstall said. The increase in “hustle and bustle” has its downsides in traffic, rent and other problems of population, but the question the UTSA regional economic institute was addressing two or three years ago was “how to stem brain drain and population loss. A lot of these towns were shrinking.”

Although the residents of the area have less experience with the oil and gas business than those who surround other Texas shale plays, Eagle Ford communities are aware of the cyclical boom-and-bust nature of the energy industry in a way that Tunstall finds astute.

“One thing I’m encouraged by with community leaders in the Eagle Ford is that no one’s sanguine about this, no one thinks it’s going to last forever and you can just go crazy with all the new revenues and money coming in. Particularly from a community development standpoint (they know) they need to be good stewards of this windfall that’s come their way,” he said.

The costs of the development are real, however. The study cites a Texas Department of Transportation estimate that area roadways need $2 billion worth of maintenance, due to increased strain on local roads and highways – each single well completion requires road usage equivalent to 8 million cars. Although some legislative efforts to redirect tax revenue are underway, there is no current plan to fund repairs.

This has led to unconventional arrangements. The UTSA study reports, “Many counties within the Eagle Ford Shale play receive ‘donations’ from the oil and gas industry or have ‘gentleman’s agreements’ to provide materials for road repair. In DeWitt County, two major drilling companies – Pioneer Natural Resources and Petrohawk Energy Corp. – agreed to pay a road repair fee of $8,000 for each well they drill. Since 2010, the county has collected $1.6 million in fees while $2 million has been collected through voluntary agreements.”

The industry is also taking proactive steps in communication. On March 11, the South Texas Energy and Economic Roundtable (STEER) opened offices in San Antonio. The organization is a stakeholder outreach conglomerate founded by 11 producers, including several names from the lists of most completed wells. According to President and CEO Omar Garcia, “The operators saw a need in South Texas to maintain a cohesive and collaborative stakeholder relations effort throughout the Eagle Ford Shale and developed STEER to lead that initiative.”

Garcia lists the body’s purpose as “to serve as a channel for intra-organizational communication (to ensure that operators are sharing information and resources with one another for the betterment and enhancement of the communities and the industry), and also to be a resource for external communication (to be the recipient and facilitator for questions, inquiries and information).”

With an estimated 10 to 20 years and 25,000-60,000 wells’ worth of resources left to explore in the Eagle Ford Shale, the partnership between operators, midstream companies and the community is likely to be a long-term relationship.

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