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Shale gas vies with oil and liquids for attention

March 3 - Shale gas in the US is becoming increasingly a by-product for the more profitable oil and liquids production, or even being abandoned in favour of outright oil production. In the EU though, the market has not even got that far.

Gas is not the only objective of upstream companies working in shale. US Petrohawk Energy found a higher-than-expected yield of natural gas liquids (NGLs) in the Hawkville Field at Eagle Ford Shale last year, and this is proving advantageous to its bottom line.

The company is now expanding drilling in the South Texas shale, from 24 wells last year to about 60 this year.

The jump in production marks a trend, as energy companies are becoming more interested in natural gas liquids, which fetch a higher price than natural gas.

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Analysts said the shift could significantly increase the supply of natural gas in the long term from Eagle Ford and other shale plays, if the trend continued and became more widespread.

"There is a lot more to come from [Eagle Ford] shale play. There are a lot more wells to be developed and produced. That will mean a lot more gas production and a lot more oil or condensate production," said George Lippman, president of Lippman Consulting.

For Petrohawk and others who are following this trend, the investment could prove lucrative.

NGLs are priced off oil, which is at a roughly 14:1 ratio with natural gas.

The ratio has spread significantly as natural gas prices remain depressed because of a major drop in industrial demand caused by the economic recession.

The resulting storage overhang also drags down gas prices.

Petrohawk said last month that the condensate yield in Hawkville Field made the area "potentially even more economic on a revenue equivalency basis."

As the price of oil continues to show strength compared with the price of gas, condensates can be a good source of revenue for companies, said an analyst at Wood MacKenzie Kendall Fisher. (See related map: Gas price snapshot February 24, 2010).

Although NGLs can sometimes be expensive to produce, many companies have already decided that they are worth the trouble.

Pioneer Natural Resources COO Tim Dove said that if his company's first Eagle Ford well, which flowed 11 million cubic feet/d of equivalent gas, were dry gas only, it would capture about $57,000/d at a gas price of $5/Mcf.

But the gas, plus liquids and condensates, boosts that to $96,000/d, he said.

An upstream analyst at Tudor Pickering Holt, David Heikkinen, said that the trend of companies towards NGLs could hinge on technical difficulties in getting the liquids out of the rock. He also said that EOG Resources was heading the charge.

The Houston-based producer has shifted capital expenditures over the past few years toward crude oil and liquids opportunities.

EOG said on its annual earnings report that its production of NGLs rose 48% in 2009, driven primarily by ongoing exploration and development drilling in the North Dakota Bakken and Fort Worth Barnett Shale plays.

Over the same period, the company's production of gas in the US fell to 1.134 Bcf/d from 1.162 Bcf/d.

Another shale play attracting attention because of its liquids content is the Granite Wash play in the Texas Panhandle.

Forest Oil, a Denver-based company, in January made much of its findings there, with production streams from some of its new wells showing between 57% and 59% liquids.

"These are spectacular rates, each of which is a new play record," RBC Capital Markets analyst Scott Hanold said in a January 14 report.

In Eagle Ford, George Lippman said that the 20 wells in Texas District 1 were producing a total of 46,000 barrels of oil or condensate in October, which is an average rate of 75 b/d per well.

Lippman expects Eagle Ford to eventually develop into a major shale play, driving up supply in the region and having an impact on gas prices.

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