« Back to Get the Point main page

Gas Production in the U.S. at a Standstill?

Regional Production Analysis Part 4 – Eagle Ford

October 20, 2015 | By Charles Nevle

In this issue of Get the Point we will discuss the U.S.'s most prolific natural gas producing state, Texas, and how an environment of sub $50 per barrel oil prices is impacting producer activity and hydrocarbon production.  Specifically, we will dive into production within the Eagle Ford Shale in South Texas.

In Part 1 of this series we discussed the fact that wellhead natural gas production rose to average 81.0 billion cubic feet per day (Bcf/d) in  December 2014, an impressive 7.5 Bcf/d increase over December 2013 levels.

Thus far in 2015, wellhead production has averaged only 81.4 Bcf/d, representing a shadow of the growth witnessed last year.  Part 1 of this series focused on the Marcellus Shale and Part 2 focused on Ohio and West Virginia and Part 3 focused on production in Louisiana.  

In 2014 growth occurred in several regions of the U.S. with the only real area of production slowdown being the Gulf Coast North region driven by the continuance of declines in Haynesville Shale production.

By contrast, 2015 is shaping up to be a mixed bag with a slowdown of production in several regions offset by several by a step up in declines from other regions that has resulted in modest production growth.  So far this year the significant growth regions have been East Central (Utica), Offshore, Permian, and Western (Bakken) while the regions showing significant decline are the Gulf Coast South (Eagle Ford), Mid-Continent (primarily Barnett), and Gulf Coast North (Haynesville).


Deep in the Heart of Texas

Texas is among several of the regions in flux this year.  With about 23.9 Bcf/d of wellhead production, the state makes up about 29 percent of all gas production in the lower 48.  While the state is home to five major shale plays (Permian, Eagle Ford, Barnett, Haynesville, and Granite Wash) it is also the home of a substantial amount of conventional production.  Wellhead production growth in the Lone Star State has increased by 2.7 Bcf/d since 2011 to average 24.1 Bcf/d in 2015.  In that timespan there have been substantial shifts in production within the state as producers moved from gas centric plays like the Haynesville and Barnett to more oil and liquids focused plays like the Permian and Eagle Ford.  Given the prolonged low oil and gas price environment, new trends are starting to develop this year.

The above chart measures both wellhead production as reported by the Texas Railroad Commission, for which the most recent data available is through July 2015, adjoined with modeled flow data from pipeline scrapes in Texas for the period August through October.  From this data we see that wellhead production peaked at 24.4 Bcf/d in December 2014 and has since fallen by 0.6 Bcf/d to average 23.9 in October.

What is also apparent is that the Permian region is bucking the trend of declining production this year.  Since December Permian production has risen 0.6 Bcf/d to total 5.2 Bcf/d in October representing the only region of the four showing growth.  The Midcon and Gulf Coast South regions have each declined by 0.4 Bcf/d while the Gulf Coast South region has declined by 0.3 Bcf/d.

Eagle Ford

The Eagle Ford play in South Texas dominates production in the Gulf Coast South region.  Dry gas production from the counties which span across various sections of the Eagle Ford totaled 6.8 Bcf/d in December 2014.  Since that time, Eagle Ford production topped 7.0 Bcf/d in March before declining.  Based on PointLogic flow data it is estimated that production in the Eagle Ford has fallen further,  to 6.5 Bcf/d in October.

The region has three separate areas of development, a dry, wet, and oil window as seen in the map below courtesy of the Energy Information Administration (EIA).  The map is somewhat dated so ignore the well information, but it gets the point across in terms of the various windows.

Using this graphic as well as our own analysis we can break out the Eagle Ford by county into the windows as shown below:

Using the above county breakout and represented in the line graph below there is a clear distinction in the oil to gas ratio of the individual windows with the oil window providing substantially more barrels of oil per MMcf of gas production than the wet window and wells within the dry window producing a very little oil.

Using this break out we can break out rig counts to see how producer activity is proceeding in this environment.

What we see is that the recent peak of rigs occurred on October 31, 2014 when 227 rigs were operating.  These rigs were broken out among the windows as follows: Dry 25, Oil 48, and Wet 154.  Since then the rig count rapidly declined to a low of just 77 rigs by the latest count on October 16, 2015. 

As previously mentioned, overall Eagle Ford regional wellhead production was roughly 6.8 Bcf/d in December 2014.  This includes production from the above named counties regardless of whether the production is from wells directed at the Eagle Ford Shale or from conventional wells.  That said, about 1.2 Bcf/d or 18 percent of the production in counties within the Eagle Ford footprint is ‘legacy’ production – production from wells drilled prior to the targeting of the Eagle Ford play. 

Based on the latest wellhead production data from the Texas Railroad Commission, July 2015 production was 6.83 Bcf/d, an increase of 0.06 Bcf/d from December 2014 levels.  Looking at this from a window (oil/wet/dry) perspective we see that since December, production from counties in the dry area declined by 0.07 Bcf/d, oil counties stayed flat and wet counties rose by 0.13 Bcf/d.

Clearly, the dynamic of unabated growth has changed for the time being in the Eagle Ford, one of the standout basins over the last several years.  In fact, for the Eagle Ford region as defined above we have seen production growth of over 1 Bcf/d every year since 2011, while current production estimates indicate Eagle Ford production has actually declined since December 2014.  Perhaps this is not surprising since we have, as noted above, seen rigs decline by nearly 70 percent from their recent peak. Given that this region has been one of the major growth engines for Texas production over the past few years, this creates a significant change in the dynamics within the Lone Star State.

Producer Analysis

In order to gain insight into what the future may hold for Eagle Ford we will take a look at the activity of some of the major Eagle Ford producers.  Starting with the Wet region of the Eagle Ford, wellhead production as reported by the state for July 2015 amounted to 3,851 MMcf/d with the top producers shown below:

Production in the Wet region is relatively diversified among producers, with the top three producers making up about 33 percent of total regional production.

Topping this list is Anadarko whose production, though higher in July than at the end of the year, is down about 30 MMcf/d from peak production levels seen in March.  Based on our analysis Anadarko has dropped rigs from a high of nine in the region back in 2014 down to just two rigs operating since late August, though a recent company presentation indicates their intent to operate four rigs in 2015.  The same company report from September of this year indicates a goal of drilling 200+ wells in 2015 while deferring around 40 completions.  

Our analysis indicates that 2015 well starts have declined from an average of around 20/month through June to just about six per month since August.  Although the company has indicated it is seeing gains to well productivity it is hard to imagine production growth given the scope of their decline in drilling activity.

Devon Energy’s production in the Eagle Ford Wet Window also peaked in March at 536 MMcf/d and has declined by about 12 percent to 470 MMcf/d as of July.  According to Devon’s 2014 annual report plans are to drill 225 wells in 2015. A recent company presentation indicates that Devon is pulling about 60 percent oil from its wells in Eagle Ford and that with 90 day IP rates of 1,000 Barrels of Oil Equivalent per Day (BOED) that they are about 125 percent greater than the industry average.  Like many other producers, Devon indicates it is experiencing significant increases in well productivity while also driving down drilling and completion costs and thus significantly improving well economics.  However, as is the case elsewhere within the oil and gas industry, low commodity prices have significantly cut drilling activity despite achieving significant efficiency gains.

BHP Petroleum appears to be bucking the trend, at least through July.  State reported data indicate a sharp increase in production within the Wet Window from 249 MMcf/d in June to 322 MMcf/d.  We will be watching upcoming data to see if this is an anomaly or if this indicates a true trend by BHP in the region.

Production in the Oil Window is dominated by EOG Resources and to a lesser degree Marathon.  Within this window production peaked in June 2014 at 313 MMcf/d.  Throughout this year production has been relatively flat.  In a recent presentation accompanying their second quarter results EOG indicated that within the Eagle Ford they can achieve an after tax rate of return of 45 percent at $55/bbl West Texas Intermediate oil currently compared to 60 percent at $95/bbl during 2012.  EOG highlights some of their achievements in the Eagle Ford in increasing efficiency that has allowed drilling to remain profitable in this price environment such as reduced drilling and completion costs from $6.1 million in 2014 to $5.5 million currently and reducing the number of days it takes to drill a well from 8.9 days in 2014 to 7.7 currently with a record of just 4.3 days.

The Dry Window of the Eagle Ford is dominated by Lewis Energy and SM Energy.  As a private company, not as much information can be gleaned from Lewis’s activities, but both SM Energy and Lewis Energy’s production appear to be holding steady through July 2015.  SM does not appear to have reduced their rig count in the region this year, though overall rig counts in the area have certainly declined.  Looking at SM Energy’s rig counts across basins, it appears that they have enacted a plan to reduce activity in the Niobrara, Permian, and Bakken in order to concentrate efforts on their Eagle Ford position.

Common Threads

A common thread among producer presentations these days is the effort to display how efficient they are with a focus on disciplined capital expenditures. Producers want investors to focus on their efforts to improve production efficiency while reducing drilling costs.  This is a significant departure from the theme of presentations in the higher price environment of years past, where the focus was on asset and play development – essentially the growth story. 

Although it is not surprising, it is certainly indicative of what the goal is for producers over this period of depressed prices – survival.  Survival in this environment is achieved by ‘right sizing’ capital expenditures to market conditions and making sure deployed capital can achieve gains even at reduced commodity prices. 

Another common thread among producer reports, particularly with regard to the Eagle Ford, is the buildup of drilled but uncompleted wells (DUC’s).  The build-up of this ‘behind the well’ production potential and the gains in efficiency are further bearish signs in a market that is supply rich.  The overall robust U.S. storage inventory and early predictions for a warmer than normal winter, compound this bearish outlook and don’t show any signs of letting off.    

Most producers are calling for average 2015 production in the Eagle Ford to be flat to just above 2014 production levels.  Given that 2014 was a ramp up year for production, an average equivalent to 2014 means production will need to decline through the remainder of the year.  State reported data through July shows essentially flat production to end of 2014 volumes, while our flow data for this region for August through October is declining modestly. 

Even with increases in drilling efficiencies the reduced number of wells being drilled and the fact that a not insignificant number of wells are being inventoried via DUC’s, the reduced drilling activity should, and is, leading to lower production in the region.  However, to truly bring down 2015 average production by the end of the year to a point that it is equivalent to average 2014 production would mean reducing Eagle Ford production by somewhere near 3.5 Bcf/d for the remainder of the year.  We do not anticipate production levels to drop nearly this much meaning that 2015 average production from the Eagle Ford will very likely be greater, perhaps as much as  0.5 Bcf/d higher than 2014. 

The outlook for 2016 is less certain, but higher storage inventories at the end of March (as discussed in last week’s Get The Point), means the price situation for Eagle Ford producers will not likely improve next year.  The impact on  drilling activity could be severe, with Eagle Ford production falling off sharply without further price support.    

In upcoming issues of Get The Point we will continue to discuss activity and dynamics in other producing basins and how production is responding to this challenging price environment.

« Back to Get the Point main page

PointLogic Energy Pipeline Module

 

Sign up here to have Get the Point delivered to you each week!


 
EMAIL
 
FIRST NAME
 
LAST NAME
 
COMPANY

 

 

 

Share With Your Colleagues

 

 

 

 

 


© PointLogic Energy, an OPIS Company | Site Map