Analysis: E&P Companies Continue to Refocus on Shale Oil Drilling

Exploration and production (E&P) companies are continuing to switch their focus from shale gas to shale oil as stronger oil prices and abundant U.S. gas supply and weak prices make oil-rich plays more attractive investments.

By 2011, EOG Resources said it will have transformed itself from a primarily North American gas-focused company to a company mainly focused on North American oil plays, the culmination of its four-year effort to switch its focus from shale gas to oil. In 2007, 77 percent of the company's North American revenue came from natural gas; by next year, crude oil and natural gas liquids will comprise 67 percent of its estimated North American revenue, said Loren Leiker, EOG senior executive vice president of exploration at the Wells Fargo Energy Symposium earlier this month.

The company estimates its has 900 million BOE of estimated resource potential from its 505,000 net acres in the South Texas Eagle Ford play and 420 million BOE from its 580,000 net acres in the Bakken/Three Forks play. EOG also has estimated resources of 370 million BOE from its 160,000 net acres in the Barnett combo core play and more than 65 million BOE on 49,000 out of 120,000 net acres in the Leonard shale play. It's too soon to estimate the potential resources of EOG's 400,000 net acres in the DJ Basin Niobrara play.

As part of its 2011-2012 strategy, EOG will not change its oil and liquids rich investments, continuing to invest around 80 percent of its capital expenditures towards holding and developing these assets and limiting debt increase with gas asset dispositions. The company will continue to direct around 20 percent of its CAPEX spending to dry gas, holding sweet spot acreage in the Haynesville and Marcellus plays while meeting internal economic hurdles at $4/Mcf Henry Hub gas.

EOG will perform minimal Horn River drilling to tenure acreage and will conduct essentially no drilling in Barnett gas, Uinta Basin or other gas assets.

The company's South Texas Eagle Ford assets are comprised of 77 percent oil, and 88 percent crude, condensate and natural gas liquids. The Eagle Ford is not a typical shale, with borderline carbonate reservoir, horizontal data indicating significant early matrix flow, and vertical data indicates long-term sustained matrix support. However, EOG has found the Eagle Ford to be a predictable play with repeatable well results across its 120-mile lease position, relatively simple geological setting, and 100 percent success rate, "which is outstanding for a start-up play," EOG noted.

Due to the large spread between initial reservoir pressure and bubble point pressure, EOG is confident in its Eagle Ford assets oil recovery factor and anticipates wells there to produce 40 percent of reserves in the first five years of production.

The company anticipates it will outspend its operating cash flow in 2010 and likely in 2011; to make up for the shortfall, EOG will rely primarily on natural gas asset sales, with $600 million to $1 billion in sales expected to close by year-end and plans to sell an additional $1 billion in gas acreage and/or production next year. The company also is willing to do a joint venture for its Horn River or Haynesville plays if it cannot sell properties. The company will retain all of its horizontal oil plays, as these "will drive the country over the next few years," said Leiker.

Chesapeake Energy, which has also been transitioning its focus from shale gas to oil over the past few years, has quietly built leasehold positions in unconventional plays that would benefit from advancements in drilling and completion technologies. After working from 2008 to 2010 to confirm that play concepts would work, the company now has around 2.9 million net acres in unconventional liquids-rich plays with 3.9 billion BOE of risked unproved resources and around 12.6 billion BOE unrisked unproved resources.

Chesapeake expects to increase liquids production to around 250,000 b/d or around 30 percent of total production and between 45 percent and 50 percent of production revenue 2015 through organic growth. The company has reduced drilling of gas wells except for those required to hold acreage or to use a drilling carry provided by a joint venture partner until gas prices rise above $6/Mcf.

Plains Exploration & Production (PXP) earlier this month said it would return to an oil-focused strategy for investment in 2011, with an estimated capital program of $1.2 billion focused on oil growth in its California and Eagle Ford assets in Texas, said Flores. The company's California and Eagle Ford assets will each be allocated 23 percent of PXP's estimated 2011 budget, with 18 percent earmarked for Haynesville assets and 16 percent for PXP's Granite Wash assets.

The company will shift its capital expenditure profile to contain 54 percent oil versus 46 percent gas, a shift from 20 percent oil and 80 percent gas in 2010. During 2011, the company also will operate 70 percent of its assets compared to 36 percent operated-assets PXP held in 2010.

Officials with U.S. onshore drilling contractor Union Drilling report seeing an increased focus on "liquids rich" areas of the Marcellus play, which should sustain drilling activity in a soft natural gas market. The company will add another rig to its Marcellus fleet in the first quarter of 2011. Ultra also is seeing increased demand for oil drilling in West Texas as oil prices of around $80/barrel boost oil drilling demand; the company sees opportunities to expand earnings from the 13 rigs it currently has drilling for oil in West Texas with significant additional growth expected next year.