The Most Important U.S. Oil Discovery in 40 Years
Commodities / Crude Oil Apr 20, 2010 - 08:44 AM GMTBy: DailyWealth
"They've ringed fenced me," Cactus said.
I am not an oil and gas analyst.
I know very little – nothing, really – about the engineering or the geology of hydrocarbon discovery and extraction. Fortunately, my good friend Cactus Schroeder has been discovering oilfields and pumping them dry for more than 30 years. His father was a wildcat Texas oilman, too. If I didn't know better, I'd wager the liquid in Cactus' veins was light crude instead of blood.
I recently spent the better part of a week with Cactus, fishing for giant blue and black marlin off the coast of the Darien jungle in Panama. With very little else to do on the boat (neither of us caught a big marlin), we had plenty of time to talk. And Cactus had a lot to say – far more than usual...
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He told me he has found what he expects will be the largest oil discovery of his entire career. It lies in the middle of a huge new oil and gas discovery called Eagle Ford. It is a field so large, Cactus says he believes it will become the largest oilfield in the history of the United States.
Still... I had no idea what a "ringed fence" was. Or why it mattered. Cactus explained:
They've been drilling all around my land – on all sides. And every well they drill is a well I don't have to drill to prove the value of my land. I've got working rigs surrounding my property now. And they're producing a lot more than just gas. They're full of condensate...
Slowly, over four or five days, I came to understand what Cactus was talking about and why it is so important. You need to understand one critical thing about the Eagle Ford play in South Texas: It holds liquid hydrocarbons, not just gas. And there's a lot of liquid in it, not just a little.
So-called "condensate" is the holy grail of the natural gas business. It refers to the amount of liquid (think butane) that's mixed in with the gas that's trapped in "tight" shales.
Shale gas plays have been the driving force in the onshore oil and gas business for the last decade. You might even have heard of some of the big fields by now: Barnett, Fayetteville, Haynesville, and Marcellus.
Shale plays are big, rich resources... but they normally hold only a little condensate. Eagle Ford is proving to be a notable exception – it is rich in condensate. More information about the size of the field and the volumes of condensate and gas is coming out almost every day now, and the numbers get better and better. A year ago, only a dozen drilling rigs were working across the entire play, which stretches across more than 30 counties. Today, more than 50 rigs are drilling well after well.
Judging by the pace of the drilling and the production rates of each new well, these 50 drilling rigs should allow production to grow to nearly 40,000 barrels of oil per day within the next 24 months. That's roughly $1 billion worth of oil per year at current prices.
Keep in mind... this is just from the handful of rigs working Eagle Ford in 2009. Those estimates don't include the value of the gas that will also be produced. And those estimates don't take into account the hundreds of additional rigs that will be put to work. Oil production is going to ramp up quickly.
I expect Eagle Ford to yield more than $2 billion in oil and gas by 2013 and to increase steadily for at least 20 years. These numbers mean Eagle Ford will probably produce hundreds of billions worth of oil and gas over the next 30-40 years.
I know these numbers must sound like pie in the sky. After all, U.S. oil production fell every year from 1991 until 2009. The decline led some pretty smart folks to declare we'd reached "peak oil." They believed onshore oil production would continue to decline until there was literally no oil left. I never believed any of that nonsense. I knew eventually prices would rise enough to support the development of new technologies for finding more oil and extracting it more efficiently. Not surprisingly, that's exactly what has happened.
New seismic technologies allowed prospectors to find liquid hydrocarbons in shales, even though the plays are deep and narrow – 12,000 feet down and usually only a few hundred feet thick. To efficiently drill these finds requires so-called "horizontal drilling," where rigs first must bore down to the oilfield and then veer sideways through it. The combination of these new technologies is releasing huge amounts of liquid hydrocarbons in the Eagle Ford.
Consider just one company's recent results. On April 7, EOG Resources announced drilling results from 16 test wells drilled across a 120-mile trend. Yes, that's right – a 120-mile trend. Based on the initial results and a core analysis, EOG believes it will produce 900 million barrels of crude from these wells over the next decade.
Mark Papa, EOG's CEO, says of the discovery: "We believe the South Texas Eagle Ford horizontal crude oil play will prove to one of the most significant United States oil discoveries in the past 40 years."
After talking to Cactus, I think he's right. And in tomorrow's essay, I'm going to show you how such a large oilfield went untapped for decades... exactly how big it is... and a list of publicly traded companies involved in the Eagle Ford.
Good investing,
Porter
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