EOG Resources CEO Thomas on the future of domestic, unconventional oil

Mike Ellerd     Petroleum News Bakken      Week of September 14, 2014

Advances in the development of unconventional, horizontal oil exploration have had a significant effect on U.S. oil production in recent years, but exactly what does the future look like for the horizontal revolution? According to Bill Thomas, chairman and chief executive officer of EOG Resources, a company instrumental in advancements in the field, there probably aren’t any more major domestic plays of the magnitude of the Bakken or Eagle Ford looming out there, but that doesn’t mean there aren’t ample opportunities for the horizontal oil revolution to continue.

In his keynote address at the Barclays CEO Energy Power conference in New York on Sept. 4, Thomas provided an overview of the U.S. horizontal oil revolution and the impact it has had on domestic crude oil supplies, the U.S. economy, U.S. foreign policy, as well as a reduction in carbon dioxide emissions to 1995 levels as more natural gas is being used in electric power generation.

However, Thomas pointed out that 95 percent of all horizontal oil produced in the U.S. comes from just six plays, which he said is “really a key understanding as you think about what’s going on and what could go on in the future.”

Leading among those six plays are the Eagle Ford and Bakken at 39 and 30 percent of U.S. horizontal oil production, respectively. The other four areas of domestic horizontal oil production are the Permian Basin at 15 percent, numerous Midcontinent plays at 5 percent, the Denver-Julesburg Basin at 4 percent, and the Powder River Basin at 2 percent.

“So currently 69 percent of all of horizontal oil production is really only from two fields,” Thomas noted, adding that “the Bakken and Eagle Ford have dominated the production growth so far and they’re still dominating the production growth.”

While the Eagle Ford and Bakken have seen some remarkably rapid development growth in recent years, Thomas noted that the rate of production growth in those two plays is beginning to slow down. “We are beginning to see, certainly in the Bakken, that rate of growth is slowing,” he said. “And we are starting to see the early signs in the Eagle Ford that that rate of growth is slowing. In absolute terms, they are still growing quite strongly, but they are beginning to slow. It is like all fields do.”

Now to the future

So what does the future hold for domestic horizontal exploration? Thomas believes the future lies in plays consisting of combination plays which tap multiple, vertically stacked oil-bearing formations.

“First of all, we don't see another Bakken or Eagle Ford out there,” he said. “And when I say Bakken or Eagle Ford, I am talking about two giant oil fields, world-class oil fields that are 15 billion to 20 billion barrels of recoverable oil.” He said those two fields “have driven this tremendous amount of horizontal growth up to date.”

And while the Permian Basin is one of the larger horizontal oil plays in the U.S., Thomas said EOG foresees slower growth in that basin. “The Permian - very large reserve potential, tremendous reserve potential. But in our opinion, we do not see that the Permian will be able to grow as fast as the Eagle Ford.”

For pure shale plays, Thomas said only the highest quality shales are economically feasible to develop. “If you look at shales, to get oil out of shales, you are only limited to the very, very best shales. There are not that many shales that are capable of producing oil,” Thomas said. “So there is limited potential, I believe, for new shale oil plays,” he continued, adding that “We do see potential for additional gas plays, wet gas plays, maybe even condensate plays with shale, because it is a bit easier to make gas from shales.”

But that doesn’t necessarily paint a dark picture for unconventional domestic oil plays, and Thomas is optimistic about the potential for vertically stacked plays involving a combination of formation types such as tight sandstones and tight carbonates “because the frack technology works there just as well as it did in the shale.”

The Delaware Basin in southeast New Mexico and western Texas is an example of one such play. The stratigraphy in that basin is similar to the Bakken in that there are high-quality shale intervals overlying overpressured sandstones, which, in turn, overlie other shales. The upper shale in that play is the Leonard, which has an estimated oil content of 50 percent. It overlies the Bone Spring sandstone with an estimated oil content of 70 percent oil content. Thomas said two EOG wells completed in the Bone Springs sandstone in the second quarter made 1,200 to 1,500 barrels of oil per day. And under the Bone Springs sand is the Wolfcamp shale with an estimated 31 percent oil content.

Another stacked unconventional play EOG is pursuing is in the Denver-Julesburg Basin in northern Colorado where the company is simultaneously developing the Niobrara shale and the deeper Codell sandstone. EOG estimates the oil content of the Codell sand at 78 percent and the Niobrara Shale at 71 percent.

In the Powder River Basin of Wyoming, EOG is pursuing two separate sandstones, the Parkman, estimated to have a 69 percent oil content, and the Turner sandstone with an estimated oil content of 34 percent.

“So these are just examples of some of the emerging things that could be happening and are happening today and directionally where we see the exploration potential for the U.S.”

The export incentive

Thomas noted that predictions are for the growth in U.S. oil production to slow down and eventually flatten out by 2020. He also said that if unconventional, horizontal plays develop at a normal pace, production in those plays will flatten by 2020 as well. “So what we need is some new plays,” he said. “And we need some new significant plays to continue the growth beyond 2020.”

But to encourage exploration for new plays, according to Thomas, there must be incentive. As U.S. light crude production continues to gain on domestic light crude refining capacity, in the absence of other markets, the demand for domestic light crude will wane. The solution, according to Thomas, is lifting the ban on U.S. crude exports, “Because if we are going to carry on the growth of U.S. horizontal oil forward from 2020 forward, we are going to have to have new plays. And we are going to have to have the export ban lifted to lift the uncertainty and to encourage new exploration and new inventiveness going forward.”

Thomas added that domestic refining capacity will stay ahead of domestic production over the next few years, but beyond that, the incentive must exist if there is to be more domestic exploration. “We have got a few years left, but we really need to aggressively move towards exporting oil if we are going to continue the curve … beyond 2020.”

International prospects?

While Thomas sees the potential for more horizontal play exploration in the U.S., outside of the U.S. he said the costs would be too high at the present time. “The issue in the success on these horizontal plays is that you have to have low costs. They will not work in a high-cost environment,” he said in response to an analyst’s question, pointing out that outside the U.S., the services and infrastructure simply don’t exist for economically viable horizontal shale development. “So to get your well costs down to an acceptable level that you can make money is very, very difficult anywhere right now, except in the U.S. You don't have the service infrastructure. You just don't have all the things you need to really drive down the cost to make them economically successful.”

While that situation will likely change at some point in the future, Thomas doesn’t believe that change will come in the short term. “So there will be, at some point down the road, I am sure there will be successful horizontal shale or maybe even oil plays elsewhere in the world, but we see that as much further down the road - five to 10 years, something like that.”

More about EOG

EOG Resources, under the direction of then CEO Mark Papa, was one of the leaders in developing horizontal oil production beginning with multi-stage fractured wells in the Permian Basin in 2000 (where the company is still active), in the Barnett shale in Texas in 2003 and in the Bakken in 2006. EOG continued horizontal shale exploration expanding into the Eagle Ford in 2009, and since has refined its technical knowledge of shale development. That strategy has now positioned the Houston-based independent as the largest crude oil producer in the Lower 48 states.

In North Dakota, EOG ranks as the fourth largest Bakken oil producer, averaging 71,731 bpd in June for operated, non-confidential wells according to North Dakota Department of Mineral Resources data.

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I don't think EOG is dumb. I just don't think they are always smart and certainly not as smart as some on this forum think they are when they assume that the TMS isn't economic just because EOG dropped out and also hasn't snatched up GDP or HK like chump change. I don't see EOG demonstrating that they are that much smarter than other shale operators. I also didn't read into this article that the west TMS was one of the areas this author had in mind when he was talking about stacked formations of  great potential. I hope it is, but I don't think EOG does or they wouldn't be practically invisible in the TMS and selling or letting leases expire.

You may have heard Floyd Wilson talking about comparable rock in the west TMS under the Broadway, but, I see him drilling exclusively in the east TMS at this time after giving the west a try. That tells me he isn't that interested in the west TMS, stacked formations or not. Floyd Wilson hasn't gotten where he is by being dumb either.

Those who would care to debate the TMS, which by the way is not the subject of this discussion thread, may start their own discussion.


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