Varying economics in the Eagle Ford shows resilience

Edward Coll, GlobalData's Upstream Analyst covering Onshore Americas, says:

“The last five months have seen a drastic drop in the rig count for oil and gas development in the US. Oil production has continued to grow, but the increase in month-to-month production has slowed significantly since the swell earlier in 2014. The Eagle Ford Shale, like the other shale plays, has experienced slowing production levels. This is notable because, over the past five years, oil production growth from the Eagle Ford has been one of the main drivers behind the US’ return as the top oil producing country in the world.

“The initial 30-day production rates (IP30), which is the average production rate of a new well brought online over the first 30 days of commercial production, is an industry standard used to measure production efficiency. This rate is particularly significant due to the fact that shale wells produce the majority of their resources in the first year or so of life before declining significantly. The majority of value realised from each well will therefore occur early in the well’s life, and looking at the initial production rate gives a sense of the well’s overall economics.

“Looking at the average IP30 rates for all wells in the Eagle Ford since 2010 shows that overall well production efficiency has been relatively flat, if not trending downward, from 2010 through 2014. The first technical modern Eagle Ford well was drilled in 2008, which spurred the rush to acquire prime acreage in the region and conduct testing to improve production efficiencies through different completion techniques and well configurations. It is common to see improved well productivity during these earlier stages, but the play is now in a phase where potential well productivity has stabilised and operators are focused on developing key acreage. Major advances in productivity will be limited in this stage; however, there are variances more apparent when looking at the individual operators.

“Over the last two years, four of 30 top operators in the play have seen increases of 22% in median IP30 rates when reviewing the wells that they have brought online between 2012 and 2014. Generating estimates for expected ultimate recovery per well (EUR), based on the average well performance for the top and bottom operators, shows a difference of 850 000 bbls of oil equivalent (mboe). The third quartile wells for Pioneer will produce roughly 1200 mboe as compared to Murphy’s 350 mboe. These successful companies have focused the majority of their development activities in key core acreage counties (DeWitt, Lavaca, Gonzales, Webb, and Karnes), in which 226 wells out of 240 have been brought online in the final six months of 2014 for these counties. Looking at recent permit activity for these companies, 125 wells have been granted approval in the core counties, comprising roughly 92% of their new Eagle Ford well permits.

“The aforementioned key counties make up the first of three tiers of counties in the Eagle Ford, based on IP30 rates. In the first half of 2014, each tier brought on 947, 504 and 429 wells, respectively. It would be fair to assume that with a much weaker crude market, current wells brought online will now be in the first tier of counties, which have a more favourable average breakeven price.

“Breakeven costs for each of the three tiers, compared with a range of well costs, shows that even the most expensive well drilled in a top-tier county is a great deal more profitable than the cheapest well drilled in a lower-tiered county. The importance of acreage in the economics of a company’s position within the Eagle Ford is especially important in the current crude price environment.

“Currently in the Eagle Ford, 61% of active horizontal rigs fall into the first tier of counties. The top tier of counties has seen an average rig count drop of 18% so far this year, compared to 49% and 146% in the other tiers. Taking into account the average breakeven prices for these three tiers, it shows the varied states in which each tier sits during this challenged crude market. First-tier counties have shown resilience during this weak time and will still have positive returns. The second tier of counties offers scalable flexibility so that, as the market improves, favourable well economics gradually return, triggering rig mobilisation and a return to development activity. Third-tier counties have a great deal of risk associated with them and may prove favourable if the market returns to levels seen before the collapse in the fourth quarter of 2014. However, they still rely on further optimisation of development techniques to reduce costs or improve productivity for consistent economic dependability.”


Adapted from a press release by David Bizley

Published on 22/04/2015


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