H2S, Labor & Pipeline Shortages, Higher Service Costs Headline 2011

Eagle Ford Shale oil & gas was the talk of the town in San Antonio today. The oil and gas conference goes through tomorrow and will continue with both operators and service providers presenting. For everyone who wasn't able to attend, here are a few things we're hearing around the conference:

• H2S is a much bigger issue than reported in early Eagle Ford wells. No one was able to describe why, but wells are producing various amounts of H2S throughout the play. H2S can be treated, but wells aren't consistent either. In some cases, adjacent leases are producing vastly different amounts of the corrosive gas
• A lot of liquids are being produced, but we don't have enough pipelines to move the crude effectively. That will change over the next few years, but we'll experience a period of larger price differentials before it corrects itself
• Higher service costs have hit the operators hard in 2011. We've heard examples of well costs going up 50%+ year over year. A lot of it is service costs inflation, but a lot of it is longer laterals, larger completions, and wide spread use of more expensive proppants
• The labor shortage is a big issue. I won't guess a number, but there would be a lot more rigs active if there were people to provide all of the needed services
• If you've missed it, there's also a housing shortage across South Texas. As you move closer to the border, we've heard companies might build large scale man camps and move to a two weeks on, two weeks off schedule

Gulf Coast Refineries Supported by Eagle Ford Crude

Gulf Coast refineries are increasing margins as they absorb more domestic crude from the Eagle Ford Shale. Lighter crudes and condensates produced in the Eagle Ford directly offset imports to the Gulf Coast Region. For those counting, that means more jobs in the U.S. Light crude can be refined into products more easily than many of the heavy crudes imported from South America. Easier means cheaper, which in turn makes Gulf Coast refineries more competitive on a global basis. If you've missed the past few years, owning a refinery hasn't been the best of the business world. Production expectations from shales and a lighter crude slate look to be shifting the winds for refineries. 

The booming Eagle Ford shale deposits in southeast Texas offer regional refiners the opportunity to whip up a crude cocktail cheaper than imported and domestic offshore competition.

The cost benefits will get even better when new pipelines enter service that will bypass current bottlenecks and give refiners access to surging supplies of cheap crude from North Dakota and Canada.

Shale oil from the Eagle Ford deposit in southeast Texas has come on strong this year, rising to 272,000 barrels per day (bpd) in June from 70,000 bpd in April, according to energy consultancy Bentek. Some experts say it could top 400,000 bpd by 2013, enough to virtually back out all the region's imports from Nigeria.

Read the entire news release at reuters.com

Swift Energy - Webb County Pipeline Failure Halts Production

Straight from the press release: Swift Energy Company (NYSE: SFY) announced today that due to the failure of a third party operated gathering line earlier this week, Swift Energy has been required to halt dry natural gas sales from its Fasken field in Webb County, TX. Gross natural gas sales volumes in the Fasken field were averaging approximately 40 million gross cubic feet per day before the failure occurred. Continued well productivity above initial expectations in this area led the Company to recently raise its expected well recovery estimates to 10 billion cubic feet per well. While the Company expects pipeline services to resume in the near future, the estimation of a service restoration date by the pipeline operator requires it to complete a full review of the damages and determine a specific repair timeline.

This incident will result in third quarter production being slightly below the low end of previous guidance of 2.56 – 2.76 million barrels of oil equivalent ("MMBoe"). While this recent pipeline failure brings third quarter production below guidance, the quarter was also negatively impacted by previously announced shut-ins along the Louisiana coast during Tropical Storm Lee, delays in the commissioning of dedicated transportation and processing through a newly constructed third party pipeline handling natural gas production in McMullen County, TX and periodic transportation and processing curtailments under the Company's existing interruptible natural gas agreements, also in McMullen County.

Finally, the Company has obtained the additional planned rig for its South Texas area to drill Olmos and Eagle Ford horizontal wells. However, another rig currently under contract recently experienced a major mechanical problem and is expected to be out of service for much of the rest of the year. This will impact the Company's drilling schedule until planned activity can be resumed or the rig is replaced. The impact on fourth quarter production of this rig's absence combined with the pipeline service outage in Webb County cannot be fully determined at this time. The Company currently expects to have additional information regarding these third party related constraints when it next reports financial and operational results on November 3, 2011.

Addressing Roads and Pipeline Easements in South Texas

South Texas roads and pipeline easements become a source of contention when an industry moves in as quick as we've seen in the Eagle Ford. Operators end up negotiating 95% of pipeline right-of-ways, but approximately 5% have to be condemned. That doesn't make for a happy landowner. In addressing road needs, one operator is donating $8,000 per well to a road fund in Dewitt County. Creative solutions will be needed. You can't add heavy trucks to roads without more frequent maintenance. Road funds and increased tax payments will come and in a couple of years it will all equal out. In the mean time, a compliment should go to operators who are acting early in addressing the needs of the communities.

Along with oil and gas prosperity, tricky problems come with the Eagle Ford shale boom.

Roads in small communities are taking a beating from oilfield truck traffic. There's a housing shortage.

And billions of dollars in new pipeline will crisscross the oil and gas play, an eminent domain issue that inevitably will make some private landowners unhappy.

The issues are nothing new in a state with a long history of oil and gas production. But the speed at which drilling activity has ramped up across the Eagle Ford has taken many by surprise.

Read the full news release at mysanantonio.com

Sasol Gas-to-Liquids Facility Converting Eagle Ford Gas?

Sasol announced a feasibility study on a gas-to-liquids facility in Calcasieu Parish, La, on September 13, 2011. The company will spend the next 18 months determining the the economic viability of the plant. The plant will add jobs in Louisiana, but don't plan on it converting much Louisiana onshore gas. The Haynesville is further downstream in terms of pipeline flows, so the plant will process gas sourced from offshore fields and you guessed it - Texas. More specifically, South Texas. The project will be a win for the Eagle Ford as it will increase demand in the supply region. With natural gas prices below $4 and oil prices about $80, there is a lot of room for an economic margin. That's 20 times the value of natural gas for a barrel of oil, which is only 6 times the energy.

South African energy and chemicals group Sasol today announced that it has chosen the southwestern region of the State of Louisiana as the site for a planned gas-to-liquids (GTL) facility. The project is slated to be the first plant in the U.S. to produce GTL transportation fuels and other products.

In a press conference today with Louisiana Governor Bobby Jindal, Sasol Managing Director: New Business Development Ernst Oberholster said, "We believe Sasol's proprietary GTL technology can help unlock the potential of Louisiana's clean and abundant natural gas resources and contribute to an affordable, reliable and high quality fuel supply for the United States."

"GTL fuels are an important part of the energy mix because they can advance energy independence in a way that is both cost-efficient and environmentally friendly", said Oberholster. In addition, unlike other proposed alternatives to conventional petroleum-based fuels, GTL fuel is used in existing vehicles and fuel delivery infrastructure without modifications.