Oil-Drilling Boom Under Way

The Wall Street Journal

Rig Count Doubles in U.S. as Companies, Landowners Tap New Crude Sources

Oil-drilling activity in the U.S. has accelerated to a pace not seen in a generation as energy companies, oilfield contractors and landowners rush to exploit newly profitable sources of crude.

The number of rigs aiming for oil in the U.S. is the highest since at least 1987, according to Baker Hughes Inc. The 818 rigs tallied by the oilfield-service company last week are nearly double last year's count and about 10 times the number that were drilling for oil in the late 1990s.

While the drilling surge is unlikely to yield enough crude to alter the global oil-supply picture, analysts say the new activity, centered on so-called unconventional reservoirs, could greatly boost domestic oil production and help offset declining output in Alaska and the Gulf of Mexico.

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These reservoirs, trapped in tight shale-rock formations, were deemed too hard to crack a decade ago. But in the past two years, breakthroughs in drilling technology, combined with the resilience of high oil prices, have led companies like Chesapeake Energy Corp. (NYSE: CHK - News) and Petrohawk Energy Corp. (NYSE: HK - News) to switch rigs formerly devoted to drilling for natural gas to emerging oilfields like the Eagle Ford shale formation, which stretches from the outskirts of Houston and San Antonio, Texas, south into Mexico.

In this sun-scorched cattle country, prolonged drought and financial strain gave way to prosperity when the oil-patch leasing agents began pouring into town three years ago. For struggling ranchers the proceeds from the subsequent land deals and royalties from the intense oil drilling that is now under way are "pennies from heaven," says real-estate broker and oil-and-gas producer David Phillip. "All these new trucks you see ranchers driving," he says, "it wasn't from cattle."

Land prices in the area have risen exponentially, and ranchers such as Mike Green, who owns about 70 acres along the Guadalupe River in the heart of the Eagle Ford's oily swath just outside Cuero, are holding out for higher offers. Three years ago ConocoPhillips's Burlington Resources unit offered Mr. Green $400 an acre to lease the land, Mr. Green says. He declined: "That's like beach-front property."

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His belief that prices would rise appears to have been validated. Last fall, Petrohawk paid the state $12,012 an acre for mineral rights in the river's bed.

The Eagle Ford experienced a more-than-tenfold increase in the number of wells drilled last year over the 94 completed in 2009 and is slated for even more development this year. And the trend is playing out nationally, in formations such as the Bakken Shale in North Dakota and the Monterey Shale in California.

Oil production from these sources is expected to reach 1.5 million barrels a day by 2015 from fewer than 500,000 barrels a day now, according to energy consultancy Wood Mackenzie. That is similar to the amount of crude produced in the offshore Gulf of Mexico, and the equivalent of nearly 30% of current U.S. production. That extra million barrels per day could help replace some expensive oil imports as conventional oilfields in the rest of the country decline.

To extract the rock-bound crude, explorers and producers will boost spending this year by an estimated 8.1% to $93.6 billion, according to a Barclays Capital survey of 210 companies.

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In recent months large natural-gas producers Devon Energy Corp. (NYSE: DVN - News), Chesapeake and Petrohawk have outlined major transitions to oil exploration. Even Chinese state oil giant Cnooc Ltd. is also embracing unconventional oil: its first major investment in the U.S. consisted of an Eagle Ford joint venture with Chesapeake. Large, oil-focused companies such as Anadarko Petroleum Corp. (NYSE: APC - News), Occidental Petroleum Corp. (NYSE: OXY - News) and ConocoPhillips are also ramping up their drilling programs from California to North Dakota to Texas.

These companies are applying to oil shales the same horizontal-drilling and hydraulic-fracturing techniques that they developed to coax natural gas out of tight, deeply buried rock formations. So successful were producers in that pursuit that they created a glut of natural gas and pushed prices into a protracted slump. Despite high heating demand during this winter's unusually frigid temperatures, natural-gas futures are on track for their lowest winter peak since 2001-02.

Oil, on the other hand, is a more profitable commodity; its prices are approximately $90 a barrel, about twice the level seen in the immediate aftermath of the financial collapse of 2008.

Analysts say that the oil frenzy is unlikely to result in a similar slump. Unlike domestically traded natural gas, however, oil is priced mainly on world-wide demand. And no matter how much crude comes out of North America's unconventional reservoirs, the global appetite for oil—which the International Energy Agency predicts will rise to 89.1 million barrels a day this year—won't be sated. Nor is the production likely to significantly affect prices, says Wood Mackenzie's Matthew Jurecky.

Mr. Phillip, the real-estate broker, is also taking note. He says the South Texas countryside glows at night as small producers flare gas that they cannot sell because pipelines are bloated. As a result, Mr. Phillip, who operates seven traditional vertical gas wells, will begin drilling his first horizontal oil well into the Eagle Ford this week.

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