Where Will Eagle Ford Shale Oil Go To?

When Petrohawk Energy (recently acquired by BHP Billition), began drilling the first exploratory horizontal Eagle Ford shale wells in 2008, the talk was all about natural gas, and how this might be the “next Haynesville shale”. As the scope of the play grew, and more wells were drilled, it was recognized that the shallower zones in the central and northern part of the play held massive amounts of crude oil and condensate. With natural gas prices depressed due to oversupply, focus soon shifted to acquiring more lease acreage in the “liquids rich” parts of the Eagle Ford shale. Shifting focus away from natural gas toward oil and natural gas liquids has paid off in a major way for companies such as EOG Resources, who swiftly and silently grabbed up tens of thousands of acres in the “oil and condensate windows”. EOG Resources and a dozen other energy companies now have scores of prolific wells, some churning out well over 1000 barrels per day. Efforts are now underway all across the Eagle Ford shale to build infrastructure to handle the unprecedented amount of crude oil and natural gas liquids that will come online in the coming weeks and months. A spiderweb of oil and natural gas pipelines is forming across the 400 mile length and 50 mile width of the play as crews work day and night to complete them.

Below, new pipeline originating at crude gathering terminal in Gardendale, near Cotulla, TX.

Ultimate Recovery Potential Of Eagle Ford Shale

Already being called the sixth largest oil discovery in U.S. history, the true picture of how much oil will be recovered from the Eagle Ford shale is still evolving. EOG Resources analysts see well over a billion barrels recoverable from their 600,000 acre leasehold area. Enterprise Products Partners, one of the major pipeline companies in the play, estimates over 3 billion barrels of crude recoverable in the Southwestern part of the Eagle Ford shale alone.  Figures of between 3 and 7 billions barrels of recoverable liquids have been tossed about, and the numbers seem to be changing every week to the upside. By the way, the Tiber oilfield, BP’s discovery where the Deepwater Horizon tragedy struck, is estimated to hold 250 million barrels of oil, a small fraction of what the Eagle Ford contains.  Will the Eagle Ford shale eliminate foreign oil imports? According to the EIA, we use about 6.99 billion barrels of oil per year, so that’s not likely. Still, what’s been discovered in South Texas is a heck of a lot of easy to extract oil, all in one continuous field. Eagle Ford shale production, as well as what is coming online from similar shale discoveries, such as the Niobrara and Bakken shales, are helping to reverse the decline in U.S. oil production for the first time since the 1970′s.

Price Differential

One problem that is plaguing oil producers in the Eagle Ford shale, Permian Basin and other landlocked areas, is the price differential between WTI (West Texas Intermediate) and other valuations such as LLS (Light Louisiana Sweet). LLS is a waterborne, premium quality Gulf Coast crude that has been priced as high as $20 over WTI in the past year. New pipelines and rail facilities may help to reduce this price differential.

WTI vs. LLS spread in dollars. (West Texas Intermediate vs. Light Louisiana Sweet crude)  Courtesy of Bloomberg.

Where Will Eagle Ford Shale Oil Go?

Once all of these pipelines are completed, where will all of that Eagle Ford shale oil go?

As of July, 2011, Eagle Ford shale oil production (including condensate) stands at around 100,000 barrels a day. That figure is expected to rise to over half a million barrels a day by 2012.  Enterprise Products Partners is currently building a 350,000 b/d pipeline network which will transport oil to Gulf Coast refiners as well as into larger pipeline networks which will send it on to the Cushing hub in Oklahoma. At Three Rivers, Valero is ramping up their refining capacity to be able to handle 60,000 barrels per day by the end of 2011. Corpus Christi refiners such as Flint Hills Resources are building pipelines from the Eagle Ford shale to Corpus Christi. (A 250,000 b/d pipeline by Flint Hills, 120,000 b/d line by Koch Pipeline, and 100,000 b/d pipeline by Nustar Logistics -Velocity Midstream Partners are all in the works to deliver Eagle Ford shale to Corpus Christi Refineries.

In addition to Corpus Christi refiners, a large amount of Eagle Ford shale oil will be heading to Houston refiners via Enterprise Products Partners 350,000 b/d pipeline.  The question is, can Texas refineries handle it all? I came across an interesting article, Eagle Ford Shale Crude Destined For Export?,  which suggests that because Gulf Coast refiners are set up to handle heavier, higher sulfur content crude, a portion of Eagle Ford shale production may end up getting shipped to overseas refiners.  Eagle Ford shale crude averages between 42 – 60 API (gravity). Gulf Coast refiners are set up to make the most of heavier oil, from 29-30 API with high sulfur content, and turn it into products ranging from gasoline to asphalt. Eagle Ford shale crude can be blended into the mix of foreign oil, but only to a certain point, after which refiners will either need to modify existing equipment to handle lighter crude or turn it away.  Why not ship it via tanker to East Coast  refiners, who are better able process light sweet crude? It seems that a law called the “Jones Act”, may stand in the way of shipping domestic crude via U.S. flagged vessels. Because of the current wide spread between Brent crude and WTI, which has been as high as $20 or more a barrel, we could see ports such as Corpus Christi begin to ship oil abroad instead of receiving it.  Go figure, we find the biggest oilfield in over forty years, and we end up shipping its production overseas.

Updates: 08/05/2011-08/26/2011

Subsidiaries of EOG Resources have entered into an an agreement with Nustar Logistics to build a 70,000 barrel a day train offloading facility in St. James, LA. The new facility is part of NuStar’s 8 million barrel crude oil terminal at the St. James hub. The facility will be able to offload one 70,000 barrel train per day. The facility will handle EOG Resources crude shipments from the Eagle Ford, Bakken and other shale plays in the U.S.

U.S. Development Corp. announced in August that it will begin construction of 5 new rail facilities for handling crude from the Eagle Ford shale, Bakken shale and other areas. The terminals will be capable of handling 65,000 barrels each and will be located in South Texas, the East Coast, West coast and other locations.

Update 08/09/2011 (Reuters)  Shell is considering reversing the the Houma to Houston pipeline to bring Eagle Ford shale crude from the Houston and Port Arthur areas to Louisiana. The line has so far been bringing Louisiana crude to Texas, but with the huge amount of Eagle Ford crude entering the system it now makes sense to reverse the flow in the opposite direction.  The reversed “Ho Ho” line, as it is nicknamed, may be carrying 300,000 barrels of crude by early 2013.

Article by Nolan Hart, 7/22/2011