A reader asked yesterday when we can expect the boom going on in the Permian Basin to spill over into the Eagle Ford Shale? It’s a good question – let’s try to answer it as best we can.
The Eagle Ford is a vast 23 county region encompassing much of South and Central Texas. As recently as early 2014, more than 250 active rigs were drilling oil and natural gas wells into the giant Eagle Ford Shale formation, which will ultimately go down in history as one of the most prolific oil and gas formations ever discovered in North America.
But then the oil price bust hit in mid-2014, and the area’s rig count dropped dramatically, ultimately bottoming out at 32 in May, 2016. The current count now stands at a more healthy 88, but that has been essentially static for about a year now. Meanwhile, the rig count in the Permian Basin is over 450 according to Baker Hughes, a 50% increase since early 2017.
The main reason why the current oil boom has been focused in the Permian region is simple economics: the presence of multiple prolific producing formations in that part of the world makes it more profitable to drill wells there right now than in other basins with only a single producing formation, like the Eagle Ford. But a couple of events are conspiring right now to indicate we could see a reallocation of capital out from West Texas to other plays, including the Eagle Ford:
- First, the current shortage of pipeline capacity to bring crude oil out of the Permian Region has resulted in a very large basis differential for oil being produced there. In English, this means that some oil produced in the Permian is realizing a lower price than oil produced in other areas because transportation costs are at such a premium right now.
- July 1 marks the first day of the second half of the year, and that means that the large corporate independent producers will begin executing on their second half 2018 budgets on that date. These companies initially establish drilling budgets in January each year, and then perform reassessments during April and May that can result in a reallocation of capital depending on market conditions.
- Many of these companies – most of them, in fact – drill wells in multiple basins and states. It is likely that, due to the current market constraints in the Permian, some of these companies will reallocate capital originally budgeted for the Permian to other basins, including the Eagle Ford.
Due to these factors, it appears likely that we will see the rig count in the Eagle Ford and some other basins begin to rise on July 1 and continue to do so throughout the rest of 2018, unless a serious decline in crude prices takes place. That seems unlikely at the moment, but you never know.
Make no mistake – the rig count for the Eagle Ford will not be shooting back up to 250 anytime soon, but it is reasonable to expect that it could approach 100 a few months from now.
Not exactly a giant boom, but not too shabby, either.
This concludes our Shale ‘Splainer for June 6, 2018.