EOG Resources Inc. remains optimistic for its potential for economic oil from the northern Barnett shale, while other E&P companies, some industry members and analysts remain skeptical. EOG has worked the Barnett oil window mostly alone, a fact that Ben Dell, senior E&P analyst for Bernstein Research, says makes it “extremely difficult to corroborate costs and volume expectations.”

The company holds 194,000 net acres in Cooke and Montague counties in northeastern Texas, including the 25,000 net it added just this past year for $134 million in cash and stock.

In November, the company reported its Christian A #1H had initial production of 1,000 barrels of oil per day and its Christian B #1H made 600 per day, both in Cooke County and horizontal. Its vertical Fitzgerald #1 had an IP of 1,100 barrels a day and its vertical Stephenson #1 made 450.

Earlier in 2009, its horizontal Bowen A#1H, Bowen A#2H and Bowen B#1H went into sales at between 150 and 400 barrels per day. Seibold Unit #3H was completed at 500 per day and Seibold Unit #4H was completed at 550. Its Tunnicliff B#1H and Tunnicliff B#2H went into sales at 400 barrels per day each.

Initial gas production from each of the 11 wells ranged from 1.2 million cubic feet per day to 3 million.

EOG had four rigs working its “Barnett Combo” play in 2009 and expected to increase that to seven rigs by year-end. While its fourth-quarter report is due February 10, it estimated in November that its results from eastern Montague and western Cooke counties suggest reserves of more than 280,000 barrels of oil equivalent per well, up 80% from 2008 expectations.

“There is more experimenting to be done,” says Ramona Hovey, senior vice president, product management, for DrillingInfo, in a recent OilandGasInvestor.com webinar. “We are looking at pretty steep declines in the oil window, so the maximum production rate may not be the best indicator of estimated ultimate recovery. We feel there is still potential there, but more work is needed.”

Using examples of three 2008 EOG Barnett Combo wells in Palo Pinto County and one in Montague County in fourth-quarter 2007, initial decline is about 90% on oil production and about 60% on gas production, she says.

Dell says the Barnett Combo play is controversial. “The debate about producing oil from unconventional reservoirs is simple. Proponents such as EOG argue that properly used fracturing technology and proppants will create large enough temporary porosity that the larger oil molecules can flow through them for a sustained period of time. On the other hand, skeptics argue this is not the case and that only in limited reservoir situations will fracs remain open long enough to allow economic flow rates.”

Investors may want to apply the North Dakota Bakken play’s results to Barnett oil potential, but Dell notes that the Bakken is the only North American unconventional-oil play that is economic so far and that the Bakken is not really a shale; instead, “it is a carbonate sandwiched between two shales.” In the Barnett Combo, “EOG is trying to produce oil directly from a shale, a technique that to date hasn't been employed to produce commercial volumes.”

Of EOG’s 32 Barnett Combo wells, five are useful for examining unconstrained decline curve, he adds. “Given this, it is extremely challenging to confirm or deny company guidance. If indeed the five wells are repeatable, then the guidance of initial production rates of 200 to 500 barrels per day is not unreasonable.”

He adds that EOG recently began to call the play a “combo,” suggesting “an increasing share of the economic value being derived from gas and gas liquids, rather than just oil.”

EOG has a conservative record of providing guidance, playing its potential close to the vest and is well known for “under-hype.” That EOG is including the Barnett Combo at all in its guidance suggests the company is only giving fair notice.

For more details on the Barnett oil play, see the webinar “The Barnett Bottom Line: Leasing, Gas-Well Results, Oil-Well Results.” For details on more North American oil-prone shales, see senior exploration editor Peggy Williams’ January cover story, “Oil-Prone Shales.”

–Nissa Darbonne (ndarbonne@hartenergy.com), E-Editor, Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, OilandGasInvestor.com Today, OilandGasInvestor.com, A-Dcenter.com, UGcenter.com.