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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good article, skip.

Thanks, jim.  I think it's a good article also but I think it missed an opportunity.

Thomas believes the future lies in plays consisting of combination plays which tap multiple, vertically stacked oil-bearing formations.

Then Mr. Thomas goes on to list some better known unconventional "stacked combo" plays.  He does not mention "stacked conventional combo" plays.  Since the author frames the article focus as  horizontal revolution I don't think it should exclude conventional reservoirs and  I think he is missing the real scoop.

if i've read things correctly he differentiates the delaware from the permian. imo, that's interesting.

if i were a betting man i'd put my money on those two plays eventually being larger than either the bakken or the eagle ford.

as my grandfather told me: 'jim, the best place to find oil is where you've found it before.'

That sounds the death nell for the TMS.

I wouldn't go that far.  I think the TMS economics are more dependent on the price of crude and the refinery dynamics of the Gulf Coast than the Bakken or Eagle Ford which have lower F&D costs.  If the price of a barrel of LLS were to go below $85 I'd start getting concerned.  At this time I'm not ready to bet that will happen.

the dollar has been on a roll lately. when it goes up, dollar denominated commodities should go down, all other things being equal.

and, fwiw, the brent/wti spread is only a little over four dollars.

I don't think that EOG has pi$$ed on the fire and called in the dogs just yet. The EOG/Indigo well in Vernon Parish could be a game changer.

I wouldn't bet that EOG is that intelligent. Don't forget they leased a ton of acreage in the "low" resistivity area of the TMS. Devon wasn't that smart either. They got in at the right place, but despite all their alleged shale expertise, they failed to complete a decent well with their unimpressive completion design. Devon then sells it good acreage position to a shale rookie GDP who hasn't drilled a well on the same acreage that is as poor as Devon's best well. Note that the author of this article is an EOG employee. I wouldn't expect him to mention the TMS in his list of relevant shale plays since it would be an admission that EOG may have made a big mistake with the TMS. If oil does drop below $85, the efforts to develop the TMS  and other shale plays may slow or in fact stop temporarily - until supply drops and the price then rises again. A lot of people have been poopooing the TMS and some even predicting its eminent death - for the past 5 years, but, for all their expert analysis the TMS is doing better than ever. The TMS may not ever be commercial but it certainly has come a whole lot further than many ever thought it would and is still in the game. One thing I have learned from reading many TMS posts and articles for the past 5 years is that the fat lady has not sung yet. I have more faith in the Farmer's Almanac and the 10 day weather forecast than the author of this article being accurate about the future of shale development, not because I don't think he is a bright and informed guy but because there are too many unknown variables that can affect the development of shale. The author's conclusions which are based on multiple assumptions that are subject to numerous unknown variables should be read for its amusement value only. No death nell has sounded for the TMS yet and EOG just might have made a big dumb mistake by passing on the TMS. The clock is still ticking on the TMS the last report I heard.   IMO

True. When someone has skin in whatever developing play or concept or business gamble, whether it is as an unsigned landowner, as a mineral owner with a ticking lease or HBP, as an operator with a vast block of acres under lease, or as a cut and run operator that has other fish to fry in other locations, it is always hard to be clear-headed and objective. Money, or the greed-like dream of attaining a nice flow of money, clouds the mind for all involved. Who can be truly objective when there is big money on the table? Isn't it mostly always a subjective frame of mind for all involved? Don't companies have a fiduciary obligation to do what's best for their stockholders? Money does strange things to otherwise logical citizens. Many landowners are also well known for being blind to certain evolving facts, in the same way that noninvolved operators are that may or may not know important pieces of insider geological data that could be, or could not be, being held back from their competitors and the public. So who is objective and who is subjective? Is anyone really ever truly objective?    

One has to ask, if one could somehow know in advance the well status after after one year of production, would anyone in their right mind have drilled the TMS?

Please explain your reasoning cheap shot. What I see is most wells meeting cumulative production estimates and experiencing expected decline curves and some doing so after over 2 years of production, new wells being drilled everywhere, over a hundred new units applied for in the past 3 months and millions of $ being poured into the TMS by at least 5 serious and experienced operators. Are you saying that all the operators Encana, Goodrich, Halcon, Comstock and Sanchez and their investors are all out of their mind? What would be your sound basis for that conclusion? They all may be insane, but I don't see any evidence whatsoever to support that conclusion yet.

Steve one of the few statements Floyd Wilson has made public about the western side of the play was that the rock under the Broadway well was comparable to the better wells drilled in MS. EOG has been silent. EOG hasn't gotten to where they are by being dumb. The western side of the play kinda looks to me like what this article is talking about with the stacked formations.

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