After NYMEX WTI climbed higher all last week, topping $90/Bbl, euro-zone worries yesterday caused a 4 percent fall in crude to close at $88.14/Bbl. That is a still a long way above estimates of $50/Bbl break-even prices for crude produced from Eagle Ford shale. Oil production in the Eagle Ford is now close to 600 MB/d and estimated by Bentek to rise to over 700 MB/d by the end of this year. This South Texas play is attracting producers like bees to a honey pot. Midstream infrastructure projects are springing up left right and center. In the first of a series we look at how Eagle Ford crude prices compare to the Bakken.
The Eagle Ford is a sedimentary shale rock formation stretching 400 miles from just northwest of Houston, to an area south of San Antonio and finally all the way to Mexico. The shale lies between 4000 and 14,000 feet below the surface. The formation has 3 windows (see map). To the north is the oil window, directly south of that is the "wet gas" window - high in natural gas liquids (NGL) and condensates, and further south, the dry gas window. Because of the high relative value of crude and NGLs versus natural gas, most of the current Eagle Ford drilling activity is in the northern part of the play. In this blog series we are focusing on crude oil and condensate production from the Eagle Ford. We covered the challenges of NGL production in the Eagle Ford earlier in the year (see “Lumpy – Soaking Wet – Moving Fast – That’s Eagle Ford NGLs”).
“Eagle Ford” sounds so gosh-darn-all-American that they might as well have named it Apple Pie. In fact it derives its name from the old town of Eagle Ford, now a neighborhood in West Dallas, where outcrops of the shale were first observed. As it happens, the current oil bonanza is located closer to San Antonio, 300 miles to the south of that old Eagle Ford neighborhood. Otherwise some bright spark in Hollywood might have justified resurrecting that thar 70’s TV show about oil barons in Dallas. Wait! They did that! http://www.ultimatedallas.com/
Compared to Bakken shale crude landlocked in North Dakota with limited takeaway capacity by pipeline, train and truck, a logjam at Cushing and tortuous paths to market on the East and Gulf Coasts, (see The Bakken Buck Starts Here Part I, Part II, Part III and Part IV) Eagle Ford is knocking on heaven’s door. Much of the crude production is located less than 100 miles from the Texas Gulf Coast – the world’s largest refining center with 16 MMB/d of capacity. The South Texas area is also crisscrossed with existing pipeline infrastructure that can and is being readily adapted to transport Eagle Ford production to market.
This fortunate locational advantage combines with some of the highest initial production rates of any US shale region to make Eagle Ford a beacon for producers. In the Eagle Ford, drilling depths are less and the shale fractures easier than Bakken shale. According to EOG Resources, Inc, Eagle Ford wells come in around $5.5 million while Bakken wells average over $8 million. New wells can take as little as 2-3 weeks to drill in the Eagle Ford. This July (2012) there were 251 working rigs in the Eagle Ford play compared with 182 a year ago.
Given all these advantages, how do the prices Eagle Ford producers realize for their crude compare to Bakken and WTI crude? To understand these differences we took a look at the prices being quoted by midstream crude aggregators such as Plains All American and Flint Hills Resources (part of Koch). The Plains posted prices for the first 6 months of 2012 (see Chart 1 on the left below) show an average $31.5/Bbl premium for Eagle Ford Crude (40-44.9 API) over North Dakota Williston Light Sweet (40-44.9 API). The Eagle Ford prices posted by Flint Hills this year so far are priced at an average $8.5/Bbl premium to WTI and have recently traded closer to light Louisiana sweet (LLS) the US Gulf light sweet benchmark (see Chart 2 on the right below). This is because sufficient takeaway capacity to deliver Eagle Ford crude to Houston has now become operational. We will detail the new takeaway capacity later in this blog series.
The only rain on the Eagle Ford parade comes in the pricing that condensate producers realize for their production versus crude oil. As we discovered previously (see “Fly Like an Eagle Ford”) about 40-50 percent of Eagle Ford “crude oil” production is actually condensate. The average API gravity of this material is 50-70. Typical crude oil API’s range between 10 and 44. Eagle Ford oil production for all of 2011 totaled 36.6 MMBbl while condensate production was 21 MMBbl. We unraveled some of the mysteries of condensate in (“Neither Fish nor Fowl”) - finding out that it is a hydrocarbon classification somewhere between crude oil and natural gas liquids. It is valued differently from crude, can require different handling from crude, and can go into different markets than crude. Condensate is not a natural gas liquid. Condensates are produced in the field, not extracted from a wet gas stream by a natural gas processing plant.
As detailed in “Neither Fish nor Fowl” there are 3 principal markets for condensate: (a) sale as crude oil, (b) sale as diluent for heavy crude blending, and (c) processing in a splitter and sold as component products. Refiners find condensate less attractive as a crude oil blend because it produces less of the valuable middle distillate blends. The diluent market is attractive but requires shipment to Canada. Some of the Eagle Ford condensate is being shipped south to Corpus Christi by pipeline and then by barge up the Gulf Coast to St James LA and on up the Capline pipeline to Canada (see Draggin the Capline). Midstream players in the Eagle Ford are also developing condensate processing facilities (more on this later in the series). At the moment, however, we can see from Plains All American posted prices that refiners are paying less for Eagle Ford condensate than they do for crude and then applying a gravity adjustment factor (we explained these in The Bakken Buck Starts Here Part I) to reduce the price they pay for condensate even further.
For example, Plains posts a price for “Eagle Ford Condensate” with an API gravity of 60.1 or above. The gravity adjustment factor is then “less $0.03 per barrel for each 0.1 API (tenth of a degree) above 45.0°”. What does that mean? Well if Condensate has an API gravity of 60.1, then it has (60.1 – 45) or 149 tenths of an API degree over and above the “posted” gravity. You then multiply the 149 by $0.03 to arrive at a $4.47/Bbl discount to the posted price.. So instead of the posted price, the condensate producer gets $4.47/Bbl less. The chart below shows how Plains Eagle Ford condensate prices (with the discount applied) track against Eagle Ford crude (API 40-44.9). The average posted condensate to crude discount this year was close to $17/Bbl.
Overall, posted prices show that Eagle Ford producers are in a much happier place than their brethren in the Bakken. Even producers who are getting ~$17/Bbl less for their condensate than they do for crude are still receiving several dollars a barrel more for their condensate than Bakken crude posted prices. When you add the low transport costs to market and the lower cost of Eagle Ford fracking, it is no wonder that Eagle Ford producers are knocking on heaven’s door. As we will detail in the next episodes of this series, the newly opened and planned infrastructure in the Eagle Ford will only add to the attractiveness of producing liquids in South Texas. The posted prices appear to still be pegged to WTI but market talk has larger Eagle Ford crude producers being paid at a $6 discount to LLS – the Gulf Coast benchmark Bakken and Canadian producers can still only dream about.
Knocking on Heaven’s Door was recorded by Bob Dylan in 1973
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