While low natural gas prices may help you with your utility bill, it isn’t helping energy companies’ bottom line.
Low gas prices have slowed drilling in shale plays where gas is predominant because the wells aren’t bringing in a decent return.
But no one is sounding an alarm that the boom in the Eagle Ford Shale of South Texas is soon to bust. In fact, drilling activity in the Eagle Ford Shale is intensifying because it’s blessed with oil.
“With gas prices falling, many, many companies are rebalancing their portfolios and going to oil,” said Stephen Trammel, senior manager of industry affairs at consulting firm IHS/CERA. The fallen price of natural gas has squeezed profits for many drillers. It closed Thursday at $2.99 per million British thermal units after reaching a high of $4.58 per million Btu as recently as July 21, 2011. By contrast, crude oil hit a two-month high Thursday at $92.66 a barrel.
That’s made shale formations that also have oil the hot plays in North America right now.
The Eagle Ford Shale is one of the hot ones. Not only is it vast — stretching 400 miles from East Texas south of San Antonio to Mexico — it also has a sizeable “oil window” in the northern part of the play, where most of the drilling activity now is based.
It now boasts 251 working rigs in the whole play compared with 182 a year ago.
Two other major shale plays where drillers are going after oil — the Permian Basin of West Texas and the Williston Basin-Bakken Shale of Montana and North Dakota — also have logged an increase in the number of rigs, according to data from Houston-based Baker Hughes Inc. The Permian Basin has 528 rigs now, up from 445 last July, and the Bakken has 218 rigs now, up from 166 a year ago.
By contrast, in the Haynesville Shale of northeast Texas and northwest Louisiana, there are 42 rigs running now compared with 134 a year ago. The Haynesville Shale contains mostly natural gas.
Oil production in the Eagle Ford Shale is accelerating, too. It produced 27.1 million barrels for the first four months of this year, Texas Railroad Commission figures show, while Eagle Ford oil production for all of 2011 totaled 36.6 million barrels.
“So we’re already 75 percent of the way to equaling last year’s number,” said Thomas Tunstall, director of the Center for Community and Business Research at the Institute for Economic Development at the University of Texas at San Antonio.
That’s not to say that natural gas drilling isn’t profitable in all cases.
“The break-even point for natural gas drilling varies almost by every individual development,” said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University’s Cox School of Business. Where companies can extract natural gas liquids that include ethane and propane, “it’s still pretty economical to drill,” he said.
In some cases, though, energy companies continue to drill in natural gas areas to hold on to their leases in the hope that prices will recover. Usually, a driller’s lease includes a deadline to drill wells. If the company doesn’t meet the deadline, it gives up the right to drill.
R.T. Dukes, a director at the website EagleFordShale.com, which posts news about the shale, said oil companies’ budgets “are being pressured by natural gas prices, but drilling activity hasn’t really slowed down in the Eagle Ford.” However, if the price of oil should drop again and gas prices remain low, “you’ll probably see some sort of slowdown in the second half of the year.”
Yet Dukes remains bullish on the Eagle Ford.
“It’s a first-class play in the United States,” he said. “That usually doesn’t change over short periods of time. On a relative basis, it’s still better than most plays in the U.S.,” he said.
Should natural gas prices go much higher, “you’ll see additional capital come to the Eagle Ford,” he said.
Elected officials in DeWitt and Dimmit counties previously have expressed concerns about the longevity of the play. They worry that the Eagle Ford boom could end as quickly as it has begun.
Not to worry, said Trammel of IHS/CERA.
“Drilling shows no sign of slowing down in the oil window of the Eagle Ford Shale,” he said. “I think the play has legs.”