There has been a struggle on the part of Big Oil to catch up with smaller oil companies that have long been drilling in profitable areas such as South Texas and other oil-rich plays throughout the U.S.
The fact is that large companies like Shell (NYSE: RDS-A) and Chevron (NYSE: CVX) have been focusing too much on natural gas and not enough on shale oil – the primary commodity that has been driving the shale boom. It appears these larger companies have been trying to play catch up, but it could be too little too late, as evidenced by Shell’s recent move to sell its Eagle Ford assets in South Texas.
According to the Wall Street Journal, Shell has leases on 106,000 acres in the region. Its 150 wells will remain online until the Anglo-Dutch company can find serious buyers. Well data will be released next month to interested buyers.
But there may not be many buyers on the market, since the acreage Shell is selling is not as productive and developed compared to other areas of South Texas. Other big energy companies like BG Group (LSE: BG) and BHP Billiton (NYSE: BHP) are in the same boat.
In order for Shell to get the best the Eagle Ford has to offer, it would need to have massive drilling operations and exploratory campaigns. But it appears the company does not have the drive to make such heavy commitments.
Shell first got involved in the Eagle Ford in 2010 – the same time when natural gas prices began declining. If you combine that with Shell’s failure to maintain focus on shale oil assets, the selling of land should come as no surprise. There is still plenty of valuable shale land to be had around the country, but when it comes to the Eagle Ford, smaller companies have already taken up the most valuable pieces of the pie.
But some larger companies are still having success.
Exxon Mobil (NYSE: XOM) has been doing quite well in shale oil ventures, and Chesapeake (NYSE: CHK), a company known for domestic production of natural gas, has recently become one of the largest producers of shale oil in South Texas in the face of financial trouble.
Shell should take a lesson from a company like Chesapeake after having made the same mistake of placing an uneven focus on natural gas when prices were too low. Chesapeake’s board members and new CEO Robert Lawler have decided to focus on shale oil, and operations have been successful.
Is the Shale Boom a Bust?
The selling of Shell acreage is by no means a reflection on the state of the shale oil boom, nor is it a sign of any sort of impending failure within the Eagle Ford.
This says more about the failure of large oil companies, many of which have missed the opportunity to jump on the shale oil bandwagon in enough time.
In 2013, Eagle Ford shale oil wells surpassed expectations, and there have been improvements in well completion technologies. The region is also considered one of the largest areas for oil investment in the world because of its plethora of rich commodity resources: natural gas liquids, crude, and natural gas.
Production levels within Eagle Ford have reached over 600,000 bpd – contributing to an overall 2.45 million bpd in the state of Texas. Texas oil production first began the year with 1.76 million bpd.
The Eagle Ford is one of the primary spearheads of the shale oil boom, not only within Texas, but around the country. Aside from the Bakken, the Eagle Ford is still one of the most profitable plays you can place a stake in.
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Where Does Shell Go from Here?
Shell is also selling assets in Mississippi Lime territory in Kansas as part of a $2 billion write-down of its North American assets in response to disappointing results, as well as a stake in oil shale in Colorado.
The oil shale scene is being crowded out by shale oil ventures in Texas and North Dakota, and there is too much capital involved in converting oil shale into a viable energy source.
But the company is still focused on natural gas in a different way, with a planned $12.5 billion facility in Louisiana that would turn natural gas into diesel fuel. It would make sense in this circumstance, since diesel fuel prices are higher than natural gas.
And in terms of shale oil, perhaps a smaller company will be able to come along and do something with Shell’s acreage. The land Shell is offering is not the most valuable, but it could very well yield substantial profits if further developed.
The wells are in place, and would be a shoe-in for any company that decides to take advantage. This is a chance for smaller independent companies to develop these territories or a chance for bigger companies like Chesapeake to grab more shale-liquid wells.
Companies could even easily pull resources together in a joint venture to make Shell’s land more profitable.
But from your point of view, waiting until the data is released would be ideal, since these areas are not the best that South Texas has to offer.
But these plays are worth keeping an eye on, since they are diverse in commodities and still located within South Texas.
For all you know, there could be a gem waiting in one of these areas.
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