The Eagle Ford Bonanza
In May of this year, oil production in Texas exceeded 3 million barrels per day (bpd). This is an increase of nearly 2 million bpd in the last five years, and has pushed Texas ahead of major oil producing countries like Brazil, Nigeria, Algeria, Venezuela and Qatar. In fact, Texas oil production is likely to surpass that of Iraq and Kuwait by the end of the year. This surge of production is being driven primarily by growth in two formations: The Permian Basin in West Texas, and the Eagle Ford Shale.
The Eagle Ford stretches across South Texas, and is an even faster-growing shale play than the Bakken. Since 2010 oil production in the Eagle Ford has grown from nearly nothing to 1.48 million bpd at present. Natural gas production over that time frame has grown from under 2 billion cubic feet per day (Bcf/d) to 6.5 Bcf/d. By comparison, over that same time frame oil production in the Bakken Formation has increased by about 900,000 bpd and gas production is up by about 1 Bcf/d.
Wet Gas, Dry Gas and Condensate Exports
The Eagle Ford has sections that produce predominantly oil (in the north), sections that produce predominantly dry natural gas (the central portion), and, in the south, sections that produce “wet gas,” which is a mixture of hydrocarbons existing in the gaseous phase with natural gas, or in solution with crude oil, that can be removed and sold separately. The liquids that are recovered from natural gas have several names and specifications, depending on where in the process they are recovered. Natural gas liquids (NGL) are composed primarily of ethane, propane, butane, isobutane, and pentane, and are produced via refrigeration and distillation processes in gas plants and refineries.
Lease condensate, or simply “condensate,” on the other hand, refers to hydrocarbons that exist as gases at the high temperature and pressures of natural gas inside the earth, but that condense into liquids at normal temperatures and pressures once lifted. This condensate consists primarily of longer chain molecules such as pentane and higher, and is sometimes called natural gasoline. Further processing of condensate to remove remaining methane and ethane to make it more easily stored and shipped is called stabilization, and the product is called stabilized condensate.
The export of condensate was the subject of a recent ruling by the US Department of Commerce. The US has a ban in place on crude oil exports, but Pioneer Natural Resources (NYSE: PXD) and Enterprise Product Partners (NYSE: EPD) sought clarification of whether condensate exports were restricted under the export ban. The Department of Commerce ruled that stabilized condensate is a refined product rather than crude oil, and refined products may be exported without running afoul of the crude oil export ban. This ruling was positive news for companies that produce condensate in the region.
Upstream Operators in the Eagle Ford
There are more than 200 oil and gas companies in the Eagle Ford. The two largest leaseholders in the play are EOG Resources (NYSE: EOG) with 639,000 net acres and Chesapeake Energy (NYSE: CHK) with 485,000 acres leased. The largest oil producer in the Eagle Ford is EOG at 207,000 barrels of oil equivalent per day (BOE/d), with ConocoPhillips (NYSE: COP) in second place at 160,000 BOE/d.
Other major producers in the formation include Chesapeake, Marathon Oil (NYSE: MRO) and Murphy Oil (NYSE: MUR). If you are searching for a pure play, then Sanchez Energy (NYSE: SN) is one of the few publicly traded pure Eagle Ford operators.
Midstream Operators in the Eagle Ford
The enormous production growth in the Eagle Ford has created significant opportunities for companies and master limited partnerships (MLPs) to move these products to market. The Eagle Ford largely parallels the Texas Gulf Coast, and much of it lies within 100 miles of the refining hubs on the coast. As a result, significant pipeline infrastructure has been built to accommodate Eagle Ford oil and gas production.
Source: Genscape
Enterprise Products Partners (NYSE: EPD) has been one of the largest investors in Eagle Ford infrastructure. To date EPD has spent about $4 billion there, and its gathering system has access to more than 700,000 acres in the Eagle Ford.
Source: Enterprise Products Partners
Enterprise’s system is capable of delivering product to both the Cushing, Oklahoma and the Houston, Texas markets. Its infrastructure serving Eagle Ford production includes:
More than 300 miles of 30” and 36” natural gas pipelines
600 million cubic feet per day (MMcf/d) cryogenic gas processing facility
127 mile NGL pipeline connecting to Mont Belvieu, TX
75,000 bpd NGL fractionator at Mont Belvieu
350,000 bpd, 140-mile 24” pipeline from Karnes County to Sealy, TX
Crude oil terminal in Houston to receive and distribute Eagle Ford crude
In 2012 EPD formed a joint venture with Plains All American Pipeline (NYSE: PAA) to connect additional pipeline gathering systems to EPD’s existing 350,000 bpd South Texas Crude Oil Pipeline, which transports crude oil to Sealy, Texas.
The joint venture included a 140-mile crude oil and condensate line connecting PAA’s Gardendale, Texas facility in LaSalle County to Three Rivers in Live Oak County and continuing on to Corpus Christi, Texas, and a new 35-mile pipeline from Three Rivers to Enterprise’s Lyssy station in Wilson County. The system was announced with a targeted capacity of 350,000 bpd, and also includes a marine terminal facility at Corpus Christi and 1.8 million barrels of operational storage capacity across the system.
In 2013 the joint venture announced that it would expand the capacity of its Eagle Ford crude oil pipeline from 350,000 to 470,000 bpd. The partnerships will also build another 2.3 million barrels of operational storage capacity in Gardendale, Tilden and Corpus Christi.
Plains All American also announced in 2013 that it would build a new NGL fractionator near its Gardendale assets and expand its condensate stabilization facility there. The new fractionator will have a capacity of up to 15,000 barrels per day. The new fractionator, condensate stabilization expansion and related infrastructure enhancements are estimated to cost $120 million and are expected to be in service in the second quarter of 2015.
Kinder Morgan (NYSE: KMI) also has a significant presence in the Eagle Ford. The 250-mile long Kinder Morgan Crude and Condensate pipeline (KMCC) has a capacity of 300,000 bpd, and has origin points in Karnes, DeWitt and Gonzales counties in the Eagle Ford.
KMCC will tie into Kinder Morgan Energy Partners’ (NYSE: KMP) planned $360 million condensate processing facility near the company’s Galena Park terminal on the Houston Ship Channel. The facility will split condensate into its various components, such as light and heavy naphtha, kerosene, diesel and gas oil and will have throughput capacity of 100,000 bpd. The first 50,000 bpd of capacity is expected to be in service in the fourth quarter of 2014, with the rest due to come online during the second quarter of 2015.
Double Eagle pipeline is a 50/50 joint venture between Kinder Morgan Energy Partners and Magellan Midstream Partners (NYSE: MMP) that delivers Eagle Ford condensate to customers in Corpus Christi. The initial capacity of the pipeline is 100,000 bpd but it can be expanded to 150,000 bpd with additional pumps and equipment. Double Eagle is currently building an extension to interconnect with the KMCC pipeline. This interconnection will facilitate movement of western Eagle Ford production to the Houston Ship Channel and is expected to be in service in the first quarter of 2015.
Privately held Koch Pipeline Company (KPL) is one of the largest crude oil transporters in South Texas. Koch owns a 250,000 bpd pipeline that transports Eagle Ford production from the Karnes County area to the Corpus Christi area. KPL has relationships with other crude oil distributors that it has utilized to greatly expand its presence in the Eagle Ford.
One of these relationships is with the San Antonio-based NuStar Energy (NYSE: NS). NuStar has a number of projects in the Eagle Ford, one of which is a venture with KPL that has reactivated NuStar’s idle Pettus South Pipeline, which runs 60 miles from Pettus, Texas, to Corpus Christi. NuStar operates the pipeline, with Koch Pipeline leasing the capacity and combining it with its existing gathering systems to increase the capacity of Koch’s system by 30,000 bpd.
In addition to the reactivation of the Pettus pipeline, in December 2012 NuStar acquired 140 miles of crude oil transmission and gathering lines and five storage terminals for $325 million. The partnership has also completed several internal growth projects in the Eagle Ford, including:
Reversal of the 8-inch Corpus-to-Three Rivers refined products pipeline
Construction of a new 12-inch crude oil pipeline for Valero (NYSE: VLO)
Connection of the 16-inch Corpus-to-Three Rivers crude oil pipeline to the 12-inch TexStar crude oil pipeline system
Pawnee terminal and pipeline connection for ConocoPhillips
Phase 1 expansion of the Choke Canyon Pipeline, adding 35,000 barrels per day of capacity
Another major Eagle Ford crude oil transporter is Harvest Pipeline Company, a subsidiary of privately held Hilcorp Energy. It owns a system of oil and gas gathering and mainline systems across the Eagle Ford with a total capacity of about 350,000 bpd. Significant pipelines in that system include the 250,000 bpd Harvest Gardendale Pipeline that transports oil from Gardendale to Corpus Christi, and the 80,000 bpd Harvest Mainline that runs from Cotulla, Texas, connects with the Harvest Pearsall Pipeline, and terminates in Corpus Christi.
Conclusions
There are more than 60 companies with midstream operations in the Eagle Ford. In this article I focused on the largest transporters of crude oil. Enterprise Products Partners is one of the largest midstream operators in the Eagle Ford, and will be a familiar name to our readers, as it is currently our #6 Best Buy and a mainstay of our Conservative Portfolio.
One of the issues arising from the rapid development in the Eagle Ford is that the natural gas pipeline infrastructure is insufficient, and natural gas flaring has risen in recent years by 400%. In fact, the Eagle Ford region is now responsible for about two-thirds of the gas flaring in Texas. While the crude oil gathering systems and the announced crude oil pipeline projects appear to be sufficient to transport Eagle Ford oil, it appears likely that more natural gas infrastructure projects will need to be built to deal with the flaring issue.
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