Dry Gas Pursuit Returns In Eagle Ford Shale

SAN ANTONIO—A revolution is building in the overpressured dry gas portion of the Eagle Ford Shale in South Texas.

Despite being overshadowed by the oil window, dry gas producers in the southern Eagle Ford are reporting economics that are competitive with not only other gas plays but oil plays as well. This is being driven by its strategic location, premium pricing, low operating costs and implementation of new technology, according to a panel of private operators Escondido Resources and Laredo Energy at Hart Energy’s recent DUG Eagle Ford conference and exhibition.

“There’s always been industry knowledge of the Eagle Ford gas window as containing a lot of hydrocarbons ready to produce,” Michael J. Wieland, president and CEO of Laredo Energy VI LP, told attendees of DUG Eagle Ford.

However, Wieland noted the industry has come full circle since the initial discovery of the Eagle Ford Shale in La Salle County, Texas, by Petrohawk Energy Corp. in 2008.

William E. Deupree, founding partner, president and CEO of Escondido Resources II LLC, said his company has been in the dry gas portion of the Eagle Ford even before its discovery.

When Deupree formed Escondido II in 2007 with funding from Mountain Capital Partners, the company’s original targets were the Escondido and Olmos formations. Escondido later expanded its acreage to include the Eagle Ford following the company’s participation with Petrohawk on a number of Eagle Ford wells that Deupree said revealed its potential.

“In the early time frame—in 2008 to 2012 when gas was $4 and $5—it was a very economic play,” he said, later adding “and now it’s a very economic play again because technology has caught up.”

The story of the rise and fall of Eagle Ford gas, Wieland said, begins with the crash of gas prices after its discovery and then the transition of the industry from the Eagle Ford and the Haynesville to the Marcellus.

RELATED: Executive Q&A: Laredo’s Eagle Ford Restart

In recent years, though, the Haynesville has seen a resurgence of activity spurred by enhancements of completion techniques, which has led the industry back to Eagle Ford gas, he said.

“I was talking to my colleague after the last DUG Eagle Ford and I said, ‘You have to go to DUG East up in Pittsburgh just to hear about gas.’ Because the last time we were here, it was all about oil. So, it’s great to see that change,” Wieland said. “It’s great to be up here with all our peers in this great gas play.”

Location, Location, Location

Earlier in the conference, another panel of operators in the gas fairway of the Eagle Ford Shale—Vitruvian Exploration LLC and SilverBow Resources Inc. (NYSE: SBOW)—also explained the appeal of the play over other shale basins.

“If you’re going to produce gas in the United States, this is where you want to be,” Gleeson Van Riet, CFO and executive vice president of SilverBow, told DUG Eagle Ford attendees. “And why is that? The old real estate mantra is location, location, location. We are next to all the main growth drivers in gas demand—petrochemical complex, LNG exports, Mexico. We’ve got it all there.”

Wieland and Deupree echoed this point during their panel noting the premium natural gas prices their companies are seeing compared to the Houston Ship Channel and Henry Hub benchmarks.

“Our realized prices are about 105% of Nymex right now; so we’re really in a great place for getting our gas to market,” Deupree said.

According to Wieland, Laredo’s gas is also selling at a premium to Nymex largely due to the company’s relative position to Mexican export pipelines, where he said: “a lot of gas is leaving the country.”

“Over 3.5 [billion cubic feet] a day going to Mexico, which is what’s really leading to the strong basis in our area,” he said.

Wieland also said the location of Laredo’s position as the southernmost, producing Eagle Ford asset gives the company the advantage of having the “first Eagle Ford molecule to Mexico” available via the Nueva Era pipeline system, which began commercial service this past summer.

Exit Strategies

In addition to the premium pricing, Eagle Ford gas producers said operating costs are low on their acreage positions thanks in part to low water yields and no need to process the gas.

In South Texas, Laredo operates roughly 72,000 gross acres of contiguous leasehold in Webb County near the U.S.-Mexico border. The company, which is backed by Avista Capital Partners, holds about 70% working interest with gross production in August of 100 million cubic feet of gas per day.

“The acreage position is set up wonderfully for development in terms of long lateral development… economies of scale and efficient operations,” Wieland said.

Laredo has identified more than 300 potential drilling locations in the Lower Eagle Ford on 1,000-ft spacing with average laterals of over 9,300 ft.

Wieland said Laredo is already seeing promising results from the three wells it brought online beginning in late 2017.

So far this year, Escondido has drilled 12 wells and completed 10 on its 81,000 net-effective-acre position in “the heart of the dry gas trend” in the Eagle Ford in Webb and La Salle, Deupree said.

The company has current net production of 100 million cubic feet equivalent per day (MMcfe/d), of which 85% is producing from the Eagle Ford with the remaining 15% from the Escondido and Olmos formations.

Deupree said Escondido is targeting multibench development of the Lower Eagle Ford and Upper Eagle Ford with a single-rig program.

“We went to a multibench approach mainly because we didn’t want to run the risk of parent-child relationship from top to bottom as well as side to side in the future,” he said.

According to Deupree, Escondido has a substantial undeveloped inventory of about 300 proven locations with a well-defined plan to develop its position. The company expects to grow net production to about 200 MMcfe/d by year-end 2020 still running a single rig program.

Deupree said the strategy for Escondido is to “just execute.”

As a result, the company will convert its proved undeveloped reserves (PUDs) to proved developed producing, probables to PUDS and bring in another layer of possibles into the mix, which he said will ultimately lead to “a successful exit when the market is ready for us.”

Escondido’s neighbor, Laredo, might already be looking for the door, according to a report by Bloomberg on Oct. 2.

Bloomberg reported that unnamed sources said Laredo is working with an adviser on an auction process and in recent weeks has opened a data room for a sale that could value the company at as much as $300 million.

Though Wieland didn’t mention Laredo’s exit strategy during DUG Eagle Ford, he told attendees that the company has an asset it can grow “in a sustainable way for a decade and beyond.”

In the Lower Eagle Ford, Laredo currently has three uncompleted wells, which it plans to bring online by year-end 2018. For 2019, the company will target a 12- to 15-well drilling program, Wieland said.

“We’ve got a lot to deal with in the Lower Eagle Ford right now and we’re going to stick there and continue to delineate and make the Upper Eagle Ford co-development more of a 2019 question,” he said.

Laredo’s estimated net resource potential from the Lower Eagle Ford is about 3 trillion cubic feet equivalent (Tcfe). However, when the company adds in the Upper Eagle Ford, Austin Chalk and shallow horizons, the total net resource potential for Laredo’s position grows to more than 10 Tcfe.

“We’re excited about the future and I think we’ve only scratched the surface in terms of what the potential is in this asset in this area,” he said.

Emily Patsy can be reached at epatsy@hartenergy.com.