Paul Bordovsky, left, and John Braudaway talk last week by the well on Mr. Bordovsky’s 642-acre ranch.
With Natural-Gas Prices Low, Drillers Set Sights on Crude Locked in Shale; Estate-Planning in a South Texas Town
KARNES CITY, Texas—A surge in oil drilling is transforming this rural south Texas community—and with it, American energy production.
A similar wave is beginning to visit parts of North Dakota, Colorado and west Texas. The surge in onshore oil exploration is helping reverse the decades-long decline of domestic oil production, which increased slightly in 2009 for the first time in more than 20 years.
For much of this decade, energy companies pioneered new drilling technologies that allowed them to recover natural gas from a subterranean rock called shale. By drilling down and then out laterally, companies were able to exploit greater areas of the shale. And by injecting massive doses of water, sand and chemicals into the ground, they could crack open the gas-bearing rocks, allowing gas to flow to the surface.
The twin processes unlocked such vast gas deposits that it has led to a glut, depressing the price of natural gas by 21% in the last year.
Victims of their own success, energy companies began eyeing the more attractive price of oil, which, at $84.88 a barrel after Friday’s price drop, is still up more than 11% in the past year. Now they are deploying the same drilling technology to shale formations containing oil.
Hot Spots in Hunt for Domestic Oil
States with significant onshore rig activity in shale formations, ranked by increase from Oct. 2009
- Shales: Barnett, Eagle Ford, Haynesville, Permian
- Rig count Oct. 2010: 711
- Increase: 300
- Shales: Bakken
- Rig count Oct. 2010: 138
- Increase: 83
- Shales: Niobrara
- Rig count Oct. 2010: 69
- Increase: 39
- Shales: Haynesville
- Rig count Oct. 2010: 131
- Increase: 24
- Shales: Permian
- Rig count Oct. 2010: 68
- Increase: 20
The shale boom won’t begin to end American dependence on imported oil, but industry experts say it is driving a significant and potentially enduring shift in the way oil is produced domestically.
“It’s a game-changer for U.S. oil production,” said Bill Durbin, head of global markets research at Wood Mackenzie. “The U.S. has always been perceived to be a very mature oil province with relatively little prospect for growth. Now we’re seeing the declines in production being arrested by the increase in unconventional oil.”
Nationally, the balance between oil and gas exploration onshore has tilted heavily toward oil. The number of oil-seeking rigs has nearly tripled since June 2009, and now makes up 42% of all rigs in use, a prevalence not seen since 1997, according to data compiled by oilfield-services company Baker Hughes Inc.
Among states, Texas has seen the greatest increase of rigs in the past year, adding 300, a 73% increase. North Dakota added 83 rigs in the last year, Oklahoma gained 71, and Colorado picked up 30. Analysts at IHS Cambridge Energy Research Associates have identified 20 significant shale prospects across North America.
Industry executives and analysts say the growth is likely to continue, at least as long as oil prices remain over $70 a barrel.
“It allows us, during a time when natural-gas prices are somewhat suppressed, to focus our efforts on areas where we can bring in a lot of crude oil,” said Floyd Wilson, chief executive of Petrohawk Energy Corp., which has been drilling for oil in south Texas.
Karnes County lies at the heart of the Eagle Ford Shale, a thick layer of dense, oil-and-gas-bearing rock that sits between 5,000 and 11,500 feet beneath the surface. The formation stretches across more than nine counties, but Karnes, population 15,000, has the most rigs drilling for oil: 13 in October, according to RigData, a company that publishes land rig counts.
In town, where the predominant livelihood has been farming and ranching, the rigs’ presence is unmistakable.
“Oil & Gas Boom!” reads a flyer advertising an estate-planning session, taped to the door of the county courthouse in Karnes City. The message is apparently intended for people like Paul Bordovsky, a retired druggist who netted a sum “well into the six figures” after a well on his 642-acre ranch produced nearly 34,000 barrels of oil in its first 40 days before it was temporarily capped—far more than he ever made raising purebred Charolais.
The courthouse itself teems with scores of industry hands researching land titles. Their arrival—along with rig workers—is swelling demand for lodging. Telia Diaz, the enterprising owner of the “New Wave” hair salon in town, converted an empty lot into an RV Park three months ago. The campers now provide more income than her salon clients, Ms. Diaz said, and she is planning to open a second park.
The fossil fuels contained within the shale in Karnes County were not unknown. In 1966, John Braudaway was working as a roughneck trying to kill an out-of-control well spewing oil and gas. It was, he thought, a sign of a productive well. But Mr. Braudaway, now 70 years old, remembers being told, “That’s the Eagle Ford. It will only last a week or so and quit producing.” New technologies have changed that.
In 2006, Mark Papa, chief executive of Houston-based EOG Resources, steered the company toward expanding its acreage in shale formations with large oil deposits. The industry dogma at the time, Mr. Papa said in an interview, was that oil would not flow out of the shale like gas, because the molecules are bigger. “We said, ‘We think that’s incorrect, but let’s let the industry continue to believe that,’ ” Mr. Papa said.
The rest of the industry wasn’t far behind. More than 10 companies are now drilling for oil in the Eagle Ford, including companies like EOG and Chesapeake Energy Corp. that used to focus almost exclusively on natural gas, and industry giants like ConocoPhillips and BP PLC that are better known for drilling in far-flung fields overseas or in deep water. Indian conglomerate Reliance Industries Ltd. recently bought a $1.3 billion stake in the field.
Shale formations like the Eagle Ford are attractive even to big international companies because they are faster and cheaper to drill than deep-water fields, and involve less regulation, said David Demshur, chief executive of Houston-based Core Laboratories.
The Deepwater Horizon drilling rig disaster in the Gulf of Mexico, which set off a massive oil spill on April 20, could spur even greater interest in onshore oil fields, as companies fear stricter rules and increased liability, said Bob Williams, director of news and analysis for the Land Rig Newsletter.
To be sure, natural-gas drilling in shale formations has increasingly drawn opposition from some environmental groups, who fear the process will pollute the air and contaminate drinking-water supplies—and that backlash could extend to shale-oil drilling. If state or federal regulators crack down on drilling operations, it could drive up costs for companies.
But here in south Texas, there has been little opposition, and the unexpected rise in economic activity has been welcomed.
Mr. Bordovsky, for one, couldn’t be happier with ConocoPhillips, the company that drilled the well on his ranch. “They’ve been very, very super-good to me.”