Texas has squarely reaffirmed its status as king of the oil
Oil coaxed from the rapidly developing Eagle Ford and Permian
Basin production areas recently lifted the state's output back
above 3 million barrels per day (bpd) for the first time in more
than three decades. That put the Lone Star state at more than a
third of total U.S. oil production, vs. about 12% for No. 2 North
Dakota. Texas is on track to outpace Iraq, which, at 3.2 million
bpd in April, is the Organization of the Petroleum Exporting
Countries' second-largest producer, behind Saudi Arabia.
Texas' resurgence stems from capital spending that is expected
to top $44 billion in the Eagle Ford area and Permian Basin this
year, says research firm Wood Mackenzie. Effectively all of those
dollars are developing means to reach oil held in shale
reservoirs, part of the shale oil and gas revolution that has
altered not just the U.S., but the global energy landscape.
Since the boom started just after the turn of the century, new
areas, new pipelines, rising efficiency and changing regulations
have forced companies and analysts to reassess their outlooks on
an almost weekly basis. Investors have struggled to keep up, and
to keep current on who the dominant players are in this suddenly
The Eagle Ford sprawls across south Texas from the border at
Laredo to north of Austin. It was first developed as a natural
gas play around 2008. Three years later, gas drilling in the area
fell sharply as prices slumped. But unlike the other large-scale
U.S. gas shale plays -- the Haynesville, in northeast Texas and
in Louisiana; the Fayetteville in Arkansas; and the Marcellus
shale, centered under Pennsylvania -- the Eagle Ford wore more
than one hat.
"As it turns out, the Eagle Ford has highly productive oil
shale," said Thomas Tunstall, research director with the
University of Texas at San Antonio Institute for Economic
In 2011, the Eagle Ford emerged as tops in capital spending
among U.S. shale plays, with Haynesville falling to No. 2. The
Bakken, the well-known shale play driving an oil boom centered in
North Dakota, ranked a distant third.
Eagle Ford spending jumped from $19 billion in 2012 to $28
billion in 2013, easing a bit to $26.9 billion this year. The
most active exploration and production firms includeEOG Resources
) andPioneer Natural Resources (
"Eagle Ford is far and away No. 1, you've got about 200 rigs
active there," compared with about 170 in the Bakken, said Wood
Mackenzie analyst Benjamin Shattuck.
In terms of production, the Eagle Ford's July output rose to
1.4 million bpd, ahead of the Bakken and second only to the
Despite growth in capital spending, the Eagle Ford's
production takes a back seat to the Permian Basin. The Permian is
a century-old oil play covering much of west Texas and southwest
New Mexico. The area is stitched with tens of thousands of
vertically drilled wells. But players led by Pioneer,Devon Energy
) andApache (
) are rapidly ramping up spending as they explore the use of
horizontal drilling techniques to exploit the Permian Basin's
complex of multilayered reservoirs.
In the most recent Baker Hughes rig count, more than 900 rigs
were working in Texas at the start of August. That's more than
four times the 209 rigs in No. 2 Oklahoma.
More than 560 of those were drilling in the Permian -- 21%
more than a year earlier. About 60% of those were drilling
horizontal wells, according to Shattuck, with the rest still
boring vertical wells.
Major oil players includingExxon Mobil's (
) XTO,Chevron (CVX) andOccidental Petroleum (OXY) are all ramping
up production in the Permian. Independent Pioneer gives investors
a fairly direct exposure to the Permian.
May new issueParsley Energy (PE) provides an even more direct
connect to growth in the Permian's Midland basin, analyst Brian
Gamble of Simmons & Co. International wrote in an email.
"Parsley will grow production 175% this year and 75% next
year," he said, while larger Permian players, including Pioneer
andConcho Resources (CXO), "will likely grow production 15%-30%
annually over the next three years."
The Wolfcamp/Cline Shale area, located within the Permian
Basin, is vast, covering an area larger than Nebraska. Within
that territory, the most concentrated development is occurring in
formations named the Wolfcamp and Cline shales, in the central
and eastern part of the basin. Exploration and production
companies are expected to spend $12 billion there this year, up
from $9 billion in 2013, forecasts Wood Mackenzie. That pushes
the two areas past the $11.5 billion earmarked this year for the
What's drawing the big budgets?
"It's just the well performance," Shattuck said. "The rocks
tend to perform really well with horizontal drilling."
Despite all the cash and effort, the strategy to produce
simultaneously from multiple layers is, itself, still in beta
mode. Operators are producing from multiple layers only on a
small scale so far, Shattuck said, and no operator has yet been
able to effectively develop multiple layers over any significant
Still, production in the Permian rose by 2% to 1.6 million bpd
in July, up 30,000 bpd over June and up 17% since the start of
the year. Wood Mackenzie projects the Wolfcamp alone will average
200,000 bpd of crude oil and condensate this year, rising to
700,000 bpd by the end of this decade.
The geology named the Bakken is even larger than the Permian
Basin. It sits within the larger Williston Basin, under North
Dakota, Montana and Canada's Saskatchewan province. The area has
been an oil and gas producing region for more than a half
century. But horizontal drilling and hydraulic fracturing
techniques have boosted production from an average of about 2,500
bpd in 2005 to 1.1 million bpd in July.
Spending plans in the Bakken slipped from $16 billion in 2013
to $15.2 billion this year. But unlike the Eagle Ford and Permian
Basin, much of the science needed to exploit the Bakken's
resources has been determined. That means less spending on risky
"Most of the operators are out there in full-scale development
mode," Shattuck said.
That is part of the strategy behindWhiting Petroleum's (WLL)
$6 billion takeover ofKodiak Oil & Gas (KOG), announced in
July. On Wednesday, the deal earned federal regulatory approval,
effectively creating the Bakken's largest producer, with leases
on 855,000 acres and 3,460 potential drilling targets.Continental
Resources (CLR) is the Bakken's No. 2 player.
Major players are also attacking the turf with
gusto.ConocoPhillips (COP) is quickly building production. In
June, Exxon announced it was done with preliminary exploration
work in the Bakken and put its 570,000 acres into "full
development mode." Norway's majority state-ownedStatoil (STO) is
also a major Bakken player.
Oil is only part of the U.S. shale-play landscape. The shale
boom began post-2000 with gas production, first in the Barnett
shale around Houston, then withSouthwestern Energy's (SWN)
sweeping attack on the Fayetteville shale in Arkansas.
Today, spending and production is slipping in both those
areas. The Marcellus shale, spread primarily beneath
Pennsylvania, is driving U.S. natural gas growth. In July,
natural gas output in the Eagle Ford rose an impressive 1.9% to
79 million cubic feet per day. The Marcellus boosted gas
production by 1.6% to 247 million cubic feet for the month.
That has consistently driven U.S. natural gas production to
monthly records. It also raises a question: As production
continues to outpace demand, when might gas prices recover?
Among the Marcellus' biggest producers,Chesapeake Energy (CHK)
saw earnings drop 29% in the second quarter.Cabot Oil & Gas
(COG) maintained healthy growth whileEQT 's (EQT) EPS growth
slowed to low single digits.
General demand for gas amid an unhurried economic recovery
remains a key challenge. But unlike oil, natural gas can't turn
to railroads and tanker trucks -- it needs pipelines to move from
the well-head to market.
Pipeline constraints in the northeast Marcellus, for example,
recently tamped prices at a key transaction hub there to $2.01
per million British thermal unit, vs. $3.77 at Oklahoma's
benchmark Henry Hub, said Bill Holland, editor of Platt's Gas
Despite that pressure, a July report from Goldman Sachs rated
Marcellus plays Cabot andRange Resources (RRC) as buys on the
firm's Americas Conviction List. Range Resources makes Goldman's
list because it locked up transportation for its production.
Goldman says investors have misjudged the price Range Resources
can command for production.
While gas stocks have fallen largely from favor with
investors, Goldman remains optimistic on gas prices and demand
throughout 2015, but with the clear caveat that a build-up in
stored gas inventories remains a critical risk.