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This Week in Petroleum

Release Date: August 3, 2022 Next Release Date: August 10, 2022


Higher prices in 2022 result in increased estimates of economically recoverable oil resources in the Eagle Ford formation

In response to average oil prices more than doubling between 2020 and the first half of 2022, the estimated economically recoverable oil resources in the Eagle Ford formation increased by more than 15-fold, from 0.5 billion barrels to 8.4 billion barrels, according to EIA analysis. Oil and natural gas prices can be highly volatile and have a significant effect on estimates of economically recoverable resources, which represent a less certain portion of recoverable oil and natural gas resources than proved reserves. Based on the 2020 average West Texas Intermediate (WTI) crude oil price of about $40 per barrel (b) and the Henry Hub natural gas price of about $2 per million British thermal units (MMBtu), we estimate the Eagle Ford formation’s economically recoverable resources are as little as 0.5 billion barrels of oil, based on data from Enverus and Rystad Energy (Figure 1). In contrast, based on a WTI price of about $100/b (approximately the first-half 2022 average WTI price) and a Henry Hub price of $6/MMBtu (approximately the first-half 2022 average Henry Hub price), our estimate of economically recoverable resources increases to 8.4 billion barrels of oil.

Figure 1. Eagle Ford economically recoverable crude oil resource cost curve

The Eagle Ford formation has produced crude oil or natural gas in 30 different counties in Texas since 2008, and its cumulative production to date is approximately 4.2 billion barrels of crude oil and 19.2 trillion cubic feet of natural gas. Virtually all of this production has occurred in 16 of the 30 counties and within a producing subset of that total area of approximately 7.2 million acres. According to our latest Drilling Productivity Report, we forecast that crude oil production in the Eagle Ford region will average 1.2 million barrels per day (b/d) in August 2022, the most since April 2020 but less than the all-time high of 1.7 million b/d in March 2015 (Figure 2).

Figure 2. Eagle Ford region oil production

Producers change their crude oil and natural gas reserve and resource estimates based on:

  • Current and future assumed prices of crude oil and natural gas
  • Changing geologic conditions across a given basin, play, or lease block
  • The level of technology available at the beginning of development versus the present

This analysis of the Eagle Ford formation focuses on proved reserves and economically recoverable resources. Proved reserves are volumes of crude oil and natural gas that geologic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Economically recoverable resources, on the other hand, vary considerably depending on price and cost assumptions and represent a less certain estimate of future crude oil and natural gas volumes and production within a resource base.

One of the main reasons that crude oil and natural gas resources might transition between being classified as a proved yet undeveloped reserve and an economically recoverable resource is price. Without a price capable of providing a return on investment, producers will not invest capital in drilling a well. The Eagle Ford formation produces both crude oil and natural gas, so profitability and any resource classification are not only based on crude oil and natural gas production rates through time, but also on assumed future natural gas and oil prices.

Improvements in technology and productivity have contributed to more average well production, which has increased the estimated ultimate recovery of crude oil resources within the Eagle Ford formation and affects both cost and revenue estimates per well. For example, based on historical well-level production data from Enverus, we estimate that the average well in the Eagle Ford formation produced 8,800 barrels of oil in its first full month of production in 2011, increasing to 15,000 barrels for wells drilled in 2015. In 2021, we estimate the average Eagle Ford formation well continued to produce more oil at 21,900 barrels in its first month (Figure 3).

Figure 3. Average Eagle Ford well monthly crude oil production

We developed these production decline curves for Eagle Ford formation wells from approximately 750 sub-county areas, called grids, which are approximately 14 square miles. Aside from historical production, we can also estimate capital costs per well based on average horizontal lateral length across each grid, as well as provide consistent assumptions for each grid for estimated operating costs, taxes, and water disposal. When determining both the average costs and production profiles of the average well, we can use this information to develop a range of economically recoverable resource estimates depending on different crude oil and natural gas prices.

A substantially larger amount of the area becomes more profitable as a result of higher prices in 2022. Non-profitable areas are those not capable of paying back the original capital expenditure or other associated costs at the assumed price and have an internal rate of return (IRR) of less than 0%. IRR is a measure of determining a prospective investment’s return on capital invested, where future cash flows are estimated from the well’s historic production profile and different price scenarios, minus the initial capital expenditures and future operating costs. We assess marginally profitable areas as those areas with an IRR between 0% and 10%, and those areas capable of delivering an IRR of 10% or greater are profitable areas that could become proved reserves. Only 0.3% of the total area of the Eagle Ford formation had an IRR of greater than 10% using 2020 prices, but with 2022 prices, nearly half of the total grid area in the Eagle Ford formation has an IRR of greater than 10% (Figure 4).

Figure 4. Eagle Ford internal rates of return by crude oil and natural gas price scenario

To develop a complete estimate of the full potential of future development, we need to make assumptions about the hypothetical maximum number of undrilled wells available within each area. This is based on the known number of wells already drilled in a grid, their past decline profile, and developing all future potential well sites. However, not all possible acreage will be developed because of future surface infrastructure considerations or leased acreage that is unavailable for development. In addition, we can apply the grid’s observed decline profile with the estimate of available undrilled wells to determine expected future resource volumes at a given crude oil and natural gas price.

For questions about This Week in Petroleum, contact the Petroleum and Liquid Fuels Markets Team at 202-586-5840.


Tags: crude oil, drilling, Eagle Ford, oil/petroleum, resources

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