How An OPEC Deal With Non-OPEC Nations Could Benefit The Eagle Ford Shale

Floor hands Jose Garza, left, and Jose Salinas set slips to hold drilling pipe in the mouse hole on the Orion Perseus drilling rig near Encinal in Webb County, Texas, U.S., on Monday, March 26, 2012. Photographer: Eddie Seal/Bloomberg *** Local Caption *** Jose Garza; Jose Salinas

With prospects for an agreement between OPEC and non-OPEC countries looking promising, Texas stands to be a big beneficiary.  Conversations I’ve had with friends and colleagues about the pending deal to limit production and exports have invariably moved to ‘what does it all mean for the Eagle Ford Shale?’  It’s a good question.

Many experts believe that the implementation of a deal to take about 1.5 million barrels of oil per day off of the global market will result in a further increase in the price of crude oil, perhaps taking it into a trading range of $50-$60/bbl.  If that happens, it will in turn result in the activation of additional drilling rigs here in the United States.  Given that more than half of all active U.S. rigs are currently doing business in Texas, there is no doubt that the Lone Star State will also become the host to many if not most of however many new rigs come online in the coming months.

No doubt, many of those rigs would set up shop in the Permian Basin, which has remained a hotbed of drilling activity even in a $40-$50 price world.  In a world with the price in the $50-$60 range, there is no question that we would see the Permian rig count, which currently sits at 235 active rigs, rise up over 250 in short order, as companies that have invested billions of dollars in acreage acquisitions eagerly begin to drill up their prospects.

By contrast, the Eagle Ford Shale region in South Texas has remained the sleeping giant of the Texas oil patch in the lower price environment, as its own rig count, which topped out at 259 in mid-2012, reached a low of 29 in June of this year.  Since then, the count has recovered to 40 as of December 2, as the oil price has gradually firmed up.   While that is a positive sign, unemployment in South Texas remains significantly higher than the overall state unemployment rate, and the small towns in the region that had experienced unprecedented economic development during 2010 through 2014 thanks to the Eagle Ford boom still find themselves struggling to cope with the effects of the downturn.

So would an OPEC agreement with Russia and other non-OPEC countries mean a return of the boom times to the Eagle Ford?  It’s a good question, and the answer is complicated.

Back in August, I discussed the main reasons why the Eagle Ford was not at that time seeing the same levels of drilling and influx of new capital investment that has been ongoing in the Permian Basin throughout 2016.  Those reasons boiled down to:

• The Eagle Ford is by and large a single-formation resource play, while the Permian region is characterized by the availability of multiple, stacked formations that can produce in economic quantities through a single wellbore;
• While ultimate expected recoveries (EURs) from Eagle Ford wells make it a world class resource play, the stacked nature of the Permian results in even better EURs, and thus a lower commodity price needed to make drilling projects economic in nature; and
• All the new investment and acreage acquisitions in the Permian has created a ton of new drilling obligations in order to hold acreage;  in contrast, the leasehold obligations in the Eagle Ford region are pretty much all drilled up.

As companies with holdings in both major play areas, like Pioneer Resources, ConocoPhillips and EP Energy, go through the process of arraying their available drilling prospects for 2017 from the highest anticipated rate of return on investment to the lowest, Permian prospects are likely to be at or near the top of that array.  As a general proposition, Eagle Ford prospects are likely to move up that rate of return scale in what will hopefully be a higher price environment, but they would still not rank as highly as comparable Permian prospects.  So the Eagle Ford would, even with higher oil prices, most likely continue to play second fiddle to the Permian among Texas play areas.

There is reason for optimism here for residents of the Eagle Ford region, though, for two reasons:

• Companies whose portfolios of prospects include Eagle Ford holdings but none in the Permian would find a higher number of those Eagle Ford projects now economic to drill in a higher price environment; and
• There is a limit to the number of active rigs even a region as gigantic as the Permian Basin can support at any given time, simply due to infrastructure limitations.  So as the rig count in the Permian approaches that critical mass, rigs will begin migrating to other regions simply due to shortages of crews, equipment and pipeline takeaway capacities.  Obviously, the Eagle Ford will be high on the list of those other regions.

Of course, all of that is dependent upon the OPEC and non-OPEC nations reaching a final agreement to limit production when they meet in Moscow on December 10.  If that happens, and if the nations and organizations involved adhere to their pledged production limitations, then the industry could move into a higher price environment.

If all of that takes place, the Eagle Ford won’t be the earliest or biggest beneficiary of that higher price environment, but it will be high up on the list of those who will.  So, while the boom times of 2010 thru 2014 won’t be coming back for the foreseeable future, Eagle Ford residents at least have some reason for optimism for better times ahead, something they haven’t had for quite some time.