The rush is on to develop wet, oily natural gas

May 21, 2010

BY Brad Smith

April 23—Is there a boom on the horizon for "oily" and "wet" natural gas, and what is the market? Due to the "oily"' nature of the Eagle Ford shale play, there definitely is a rush on in south Texas from north of San Antonio to the Mexican border. The region is especially attractive because the gas released contains high levels of natural gas liquids (NGL) and condensates (ethane, propane and butane), otherwise known as "wet" gas. These liquids can be stripped out, mixed with oil, and sold on an energy equivalent basis to crude with a current profit potential three times that of dry gas. In the Eagle Ford shale play, the pace of drilling is increasing rapidly with reports of only a two-week gap between permit application and drilling. State records show the 22-county region permitted 28 horizontal drilling sites in 2008 and 120 in 2009. In 2010, 95 horizontal permits were issued through March. The arid region, one of the poorest in Texas, is enjoying its new-found wealth and tax base.

Granite Wash, in the Texas panhandle, is also resurging. Production in that field—exploiting traditional oil and gas reservoirs—dates back to 1954. For years, Granite Wash was considered a ‘mature' area with further development borderline or uneconomical. New horizontal drilling techniques in "tight sands" thousands of feet below the originally exploited reservoir have yielded lucrative natural gas liquids and oils. Takeaway and processing capacity exists in various forms, making the profit potential attractive. On April 13, Chesapeake said Granite Wash has the highest rates of return of any play in the company. Similarly, Apache reported drilling a well more than two miles underground containing enough oil and gas production to pay for itself in three months.

With natural gas prices down, it makes sense to drill in areas with more diverse and lucrative recoverables. However, despite crude at 20 times the price of natural gas, NGLs could face near-term price pressures. Demand is relatively soft and processing capability is near capacity. Lake Charles, La., recently commissioned a liquids extraction facility for importing NGLs with liquefied natural gas. While additional processing capacity and transport projects are in the works, increased supply could apply significant downward price pressures on NGLs in the near- and medium-terms.

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