The past decade has been all about gas, gas, gas, but new technologies developed for that commodity are turning out to be just as effective in a burgeoning rejuvenation of a more storied fuel:
oil.

Increasingly, more companies are switching drilling rigs from gas plays to plays with oil-rich reserves, such as the Eagle Ford Shale play in southwest Texas and the Bakken Shale in North Dakota – both of which
have seen keen interest from local operators.

“Oil has taken such a bad rap over the years – it’s a has-been and all that – but people in the industry knew there’s lots of oil left in the ground, more than we’ve even produced so far,” said Alex Mills,
president of the Texas Alliance of Energy Producers. “So there’s lots of
optimism out there about the future of oil.”

Going on four decades of decline

Texas oil production rose steadily throughout the 20th Century. In 1935, the state produced 375.6 million barrels of crude. Less than two decades later, producers had crossed the 1 billion barrel mark in 1952,
according to the Railroad Commission of Texas.

The state’s oil production peaked in 1972 at 1.26 billion barrels from more than 167,200 wells. While the number of producing wells continued to grow through the years – peaking in 1985 at 210,477 wells –
the production of crude began its steady decline.

Just 10 years after that early 1970s peak, oil production had declined by 31 percent to 871.8 million barrels.

Last year, the state produced 344.5 million barrels from 157,807 wells – a 73 percent decline from the peak just shy of four decades ago.

“Since the ‘70s, we’ve been on a decline for oil production in Texas,” Mills said. “But this new technology for drilling, fracing and completions that was developed in the Barnett Shale is now being
massaged and used for oil production in some shale.”

About-face

Although gas has been the recipient of much attention during the past decade, the price of that commodity has been anything but rosy. The price of gas has fallen about 38 percent this year to just more than $4
per million British thermal units, while the price of crude has risen
more than 4 percent.

“There’s increasing concern about natural gas that is leading some operators to try to diversify their asset base away from natural gas,” said Gene Shiels, assistant director of investor relations at Baker
Hughes Inc. “None of the shale reservoirs are homogenous – the
Haynesville is very different from the Marcellus – so one of the things
many operators are focusing on in these shales are the areas that have
wet gas,” which often have oil and condensate nearby.

Ten years ago, about one quarter of all domestic rigs sought oil. That number had fallen to just more than 10 percent within five years as operators increasingly switched to gas exploration – the lowest
oil-seeking rig versus gas-seeking rig percentage in history, according
to Baker Hughes data.

But then came a rebound, and by the end of last month about 35 percent of all U.S. rigs was seeking oil.

Today in Texas, about three rigs of every eight rigs are looking for oil.

Furthermore, during the past decade, oil production has continued its decline. That is, until 2008, when oil production jumped more than 3 percent year over year – the first positive gain in oil production
since the 1972 peak if one doesn’t count 1991’s negligible 0.13 percent
increase. Even last year – which had a massive idling of rigs due to the
recession – production was basically flat.

“It’s a little early to tell if this is going to be a trend but it certainly is good to see that we’ve reversed the oil decline in Texas,” Mills said.

Where they’re looking

The most interesting Texas prospects have been the northern portions of the Barnett Shale, in Archer and Montague counties, and the Eagle Ford Shale in the southwest part of the state.

Petrohawk Energy Corp. was one of the first companies in the Eagle Ford Shale. The company originally went looking for a play similar to the Haynesville Shale but found something better.

“It became clear there was a pretty high condensate zone,” said Joan Dunlap, vice president of investor relations. “When we looked a little further around, we found crude, which is a red-hot product.”

The company’s first discovery well was drilled in fall 2008. Since then, the company has leased 360,000 net acres in the Eagle Ford, 225,000 acres of which include prospects for oil and condensate.

“It’s a very good time to be in that business because of the direction of the oil market,” she said.

Natural gas makes up about 98 percent of the company’s asset base. Within two years to three years, Dunlap expects oil to become 10 percent to 20 percent of the total. And although the company cut its annual
budget this year, management still expect a revenue increase because of
the oil prospects.

“If oil continues to increase in price, it makes much more sense for the independent producers to step up their investment in oil and hopefully helps to mitigate that price for consumers.”

When asked whether the company was looking for oil prospects elsewhere, Dunlap said only, “our exploration team is a pretty restless group.”

The search for oil goes out of state, too.

“There are some old oil fields (in Texas) where they’re horizontal drilling, and some parts of Wyoming in the Powder River Basin – EOG is in there, Chesapeake is in there and we’re in there to find oil,” said
Charlie Moncrief, of Moncrief Oil.

The Bakken Shale, in the Williston Basin of North Dakota, also has seen strong interest from operators.

How it’s working

“All the horizontal and directional drilling they developed in the Barnett Shale, it makes a lot of difference when you apply these technologies to oil,” Moncrief said.

Mills agrees, saying those Barnett-bred techniques are producing stronger oil wells than previously seen.

“The wells that used to come on producing 50 and 60 barrels a day come on producing 500 barrels a day,” he said.

“We know we’re going to leave a lot of oil in the ground under the old drilling and completion technologies. We know the oil is there,” Mills added. “But now with the tools that the industry has and the
prices that are out there right now it’s become profitable to take on
these extra costs.”

The bottom line: could Texas production turn around?

“It’s a possibility – in terms of production volumes I don’t think we’ll get to the point where we’re not importing but this will help,” he said, adding that if prices stay at more than $70 a barrel it will
remain attractive. “Not every oil shale play is going to be as good as
some areas of the Williston Basin, but of course everybody has been so
focused on natural gas (over the past decade) that oil really was not a
focus.”

Petrohawk Energy’s Dunlap agrees, with more focus on oil the future is bright.

“People have been over and over those rocks for decades and yet there are still new products to be found,” she said.