Topping a rise on Highway 181 just north of Karnes City, Texas, four Helmerich & Payne rigs stand erect in single file like exclamation points celebrating the economic boom the oil and gas industry has brought to this region south of San Antonio. The rigs are drilling into the gas- and liquids-saturated Eagle Ford shale for Marathon Oil Corp., a new neighbor that is gearing up activity in this core area following a recent major acquisition.

Marathon is flexing its muscle here after becoming an independent E&P following last summer's spin-off of its downstream sister, Marathon Petroleum.

Following a 28-year stint with Marathon in its Wyoming operations, Keith Mingus, Marathon Eagle Ford production superintendent, says the activity and production levels, as well as the excitement exhibited by people wanting to work in the play, are unprecedented in his career. "This is a very good play. This is the most exciting thing I've done in my life."

“As far as the economics in the core of the play, it competes with any project we have in our portfolio around the world.” — Kirk Spilman, asset manager for the Eagle Ford, Marathon Oil Corp.

In just three short years, the Eagle Ford has gone from being a nascent shale gas discovery, when natural gas prices were robust, to a full-fledged oil boom. Unlike its predecessor, the Haynesville shale, a prolific resource play where the drilling pace faltered with sinking gas prices, the Eagle Ford contains zones rich with wet gas, condensate and crude oil, more profitable commodities in today's environment. Operators simply shifted leasing northward into these so-called liquids-rich bands paralleling the Texas Gulf Coast. Here, they found some of the best economic returns in the onshore U.S.

"It is truly the premiere oil shale play in the U.S.," says Kirk Spilman, Marathon asset manager for the Eagle Ford. "As far as the economics in the core of the play, it competes with any project we have in our portfolio around the world."

Well permitting tells the tale: As of June 2011, some 2,371 permits had been issued targeting the Eagle Ford. That compares to 26 in 2008; 94 in 2009; 1,010 in 2010; and 1,241 in first-half 2011. The play has the industry's attention.

For three straight quarters, the Eagle Ford has led the charge as the fastest growing unconventional play, as measured by rigs. In fourth-quarter 2011, the Eagle Ford saw an increase of a net 17 rigs, adding 27 oil-directed rigs to offset a 10 gas-directed-rig decline, according to a Global Hunter Securities analysis. As of year-end 2011, 220 rigs were plying the Eagle Ford shale, with 149 of those seeking oil.

Notably, the Eagle Ford accounted for a full 44% of the total U.S. rig count growth in 2011, doubling rigs running from 107 to 214.

Yet not all acreage in the Eagle Ford is created equal, notes Wood Mackenzie in a recent study. "Production data indicate the emergence of a sweet spot in liquids-rich DeWitt, northern Live Oak and Karnes counties." Operators in these counties are well-positioned to outperform peers, the firm notes.

“If we get too far east or too far west, it thins out and we don’t like it. And it’s not a very wide trough to begin with.” —Gary Evans, chairman and chief executive, Magnum Hunter Resources Corp.

Overall, the outlook for the Eagle Ford remains strong, according to WoodMac, which backs Spilman's assertion of dominance. "We expect the play to rival the Bakken by 2015 for position as North America's leading tight-oil producer."

Breakout performance

H&P Flex Rig #430, drilling the Salge Kinkler #1H for Marathon Oil in Karnes County, is tripping pipe to reach its target: volatile Eagle Ford oil and condensate 11,000 feet below surface. Well economics here provide a 50% to 100%-plus internal rate of return. Most industry observers, and certainly participants here, would say this is one of the Eagle Ford shale sweet spots. Marathon's Spilman does. "The well results speak for themselves. The reserves we see coming out of that portion of the play are far superior."

Magnum Hunter Resources Corp. chairman and chief executive Gary Evans acknowledges that some companies are doing extremely well in the condensate window, but to him the Eagle Ford shale is all about the crude oil.

The Houston-based company holds more than 25,000 net acres in the play, all within the up-dip oil window where wells flow 95% crude. Of that, about 19,000 acres are in Gonzales and Lavaca counties, considered by analysts and the company to be one of the growing number of sweet spots, with another 3,500 in Fayette and Lee counties, and 3,300 in Atascosa. The company targets a narrow geologic graben, or trough between parallel faults, in this region with multiple natural fractures, increasing the ability to effectively stimulate the shale.

“Oil is the name of the game for us.” — David Wood, president and chief executive, Murphy Oil Corp.

"We made a decision to stay in this trough," Evans says. "If we get too far east or too far west, it thins out and we don't like it. And it's not a very wide trough to begin with."

The strategy has paid off. Estimated recoveries from 13 wells on production have grown from the high-200,000 barrel of oil equivalent (BOE) per well range in early tests up to 500,000 BOE per well at present. "The more we drill, the better we get," says Evans. "And those results will undoubtedly continue to improve."

Arkansas-based Murphy Oil Corp. is an international exploration company with vast offshore drilling projects around the globe. So with a world of opportunity awaiting it, why did it set up operations in South Texas?

"Oil is the name of the game for us," says David Wood, Murphy president and chief executive. The Eagle Ford represents a balance of opportunity with risk and reward. Combining onshore resource opportunities such as the Eagle Ford and its Canadian positions in the Montney, Seal heavy oil and Alberta Bakken that have virtually zero risk below ground, with offshore opportunities that entail some risk, is the best of both worlds, he says. "If you invest wisely on a parallel path, you will be much more predictable."

He points to the situation in the Gulf of Mexico, where Murphy holds substantial interests. The company had fortuitously stepped onshore South Texas in advance of the Macondo oil-spill disaster in April 2010.

"If we had not been in the Eagle Ford, then our U.S. business would be deteriorating quite rapidly," he says. "Today, we are investing substantially more money in the Eagle Ford than the Gulf of Mexico." Within two years he expects the Eagle Ford project to outsize its Gulf of Mexico on a net-production basis.

Running room

Pioneer Natural Resources Co. is entrenched in the vertical Permian Spraberry trend as the largest acreage holder and producer there with a growing opportunity in the horizontal Wolfberry play. But the Eagle Ford shale is gaining similar stature for the Dallas-based independent as a prime liquids growth asset.

“We’re spending a large sum of money on infrastructure and will probably drill more than 100 wells in 2012.” — Tim Dove, president and chief operating officer, Pioneer Natural Resources Co.

"We're spending a large sum of money on infrastructure and will probably drill more than 100 wells" in 2012, says Tim Dove, Pioneer president and chief operating officer.

In June 2010, Reliance Industries of India bought a 45% interest of Pioneer's then 212,000 net Eagle Ford acres, excluding other zones. Reliance paid $1.15 billion. Pioneer holds some 130,000 net acres, with activity concentrated in the condensate and wet-gas zones of DeWitt, Karnes and Live Oak counties. Rigs are focused on lease preservation, with two-thirds presently held by production. Thirteen wells drilled during the third quarter averaged 2,270 BOE per day of initial production and yielded 65% liquids, including oil, condensate and natural gas liquids.

"The areas where we're drilling are some of the best in the overall Eagle Ford shale play," Dove says, "specifically in DeWitt County."

A legacy player in the dry-gas Edwards trend underlying much of its Eagle Ford position, Pioneer recognized early the lack of infrastructure in the region to handle associated liquids production from the wet-gas stream and is proactively beginning to build out processing capacity. It now has eight central-gathering facilities in place with about 500 million cubic feet (MMcf) per day of processing capacity with plans for 13 total central gathering facilities within two years.

Condensate and crude are still trucked while awaiting a new Enterprise Products Partners' pipeline coming online the middle of this year. "That will move all of our liquids and handle increased production needs. With our trucking and pipeline contracts in place, we've had essentially no infrastructure-related issues."

The company sees plenty more running room in the play. Dove adds, "This shale play has proven to be prolific. You'll see a substantial ramp-up as we accelerate in this field."

Elsewhere, the 26,500-acre Gates Ranch, spanning Webb and Dimmit counties in far South Texas between Carrizo Springs and Laredo, is known as a white-tail deer hunter's paradise, but to Houston independent Rosetta Resources Inc., it is paradise for different reasons.

"Gates Ranch is our crown jewel," says John Clayton, Rosetta senior vice president of asset development. Rosetta has drilled and completed 62 wells here and has not missed on a single one. Rich in condensate, these wells pay out in just eight to 10 months, and 300 drilling locations remain. Clayton estimates some 12 trillion cubic feet equivalent of hydrocarbons underlie the position, about 300 billion cubic feet equivalent per section.

“As far as repeatability, dependability and commerciality, I can’t see any that have a higher rate of return and a lower cost structure than what we’re seeing in the Eagle Ford.” — John, Clayton, senior vice president of asset development, Rosetta Resources Inc.

Beyond the ranch, Rosetta also holds 23,500 acres in the oil window, and another 15,000 dry-gas acres, amounting to a 65,000-acre Eagle Ford position overall.

"We believe we have fully delineated 50,000 net acres in the condensate and oil windows." Clayton estimates the capital investment to develop the delineated acreage to be $5 billion. "Keep in mind that's coming from a company with a market cap of half that. This is going to generate significant cash flow for many decades."

The company's well spacing has doubled the prize. Early on at Gates Ranch, Rosetta began testing well spacing from 400 feet apart to 850 feet. After two years of online production he does not believe he is seeing any drawdown greater than 200 feet from the wellbore. "We feel comfortable that a good balance between commerciality and reservoir drainage makes sense at roughly 65-acre spacing," says Clayton.

Rosetta decided to tackle the spacing question early in the life of the field to be able to maximize pad-drilling efficiencies. The strategy of infill drilling later didn't appeal to the company for other reasons. "We don't believe it's the optimal way to do it. We believe operators will experience operational problems when they try to drill in between two producing wells and then stimulate those wells."

Beyond Gates Ranch, Rosetta likes its oil-window prospects. Three recent well results look promising. One well in DeWitt County tested at 3,000 BOE per day (89% liquids) on a seven-day initial production rate. Two others in Dimmit County produced at 1,990 BOE (67% liquids) and 680 BOE (89% liquids) per day.

"Our oil-window areas have exceeded our pre-drill expectations, and that includes declines," he says. "We've yet to see large declines."

For dry gas, Rosetta has successfully renegotiated leases to extend an additional three years, and plans no drilling activity in its current budget.

In late fourth-quarter 2011, the company added a fourth rig and plans to hold steady at that level this year with a 60-well development pace. That amounts to an 11-year inventory with 650 locations. Two rigs will plow Gates Ranch, with the others developing the oil-window properties. Production at year-end 2011 was 175 MMcf equivalent per day from the Eagle Ford, up from less than 10 MMcf equivalent per day two years ago.

Now past a bump in third-quarter take-away capacity, the company assures it is moving all produced volumes with no constraints. Current firm capacity is 216 MMcf equivalent per day, going to 331 million by early 2013.

For 2012, Rosetta will spend about $595 million in the play, up from $400 million in 2011. Its Eagle Ford program should be self-funding by year-end, the company predicts.

How does Clayton rate the Eagle Ford? "I would stack it up against any play in the Lower 48," he says. "As far as repeatability, dependability and commerciality, I can't see any that have a higher rate of return and a lower cost structure than what we're seeing in the Eagle Ford. We wish we had about five of these."