Friday, May 29, 2009

Rig Counts: As of May 29

Decent news in the Baker Hughes rig count. Nationally, rig counts were only down one, but the Haynesville rig count (area broadly defined as N. LA and E. TX, which includes a few other fields) showed a net increase of one rig. North LA saw the rig count increase by three to 78, while East TX saw the count drop by two to 52.

I've been mining the heck out of the recent EnCana Haynesville call, but I thought one slide was particularly interesting in terms of rig counts. The chart below shows how well the Haynesville Play has thrived in the face of plunging rig counts and gas prices. This is a testament to the strength of the field and the operators' need to drill the wells before their expensive leases expire. "Lease expiry" is an expression you are going to hear a lot of, especially if prices stay low past the end of the year. Even if they have to lose money at it, many of the Haynesville Shale producers will continue to drill new wells.

Canadian Gas Face Threat From U.S. Shale

I read an interesting article in the Calgary Herald about the Canadian reaction to the increased supply from U.S. shale plays. The Canadian gas industry, which is largely located in the Alberta province, has been watching from a distance as production grows from new plays like the Haynesville Shale.

Canada has loads of oil and gas and has its own fertile shale plays, including the Western Canadian sedimentary basin (WCSB), Montney (in British Columbia), Horn River Valley (in WCSB), Utica Shales (Quebec) and the Colorado Shales (Saskatchewan). The map below, from the recent EnCana presentation, shows the key locations of shale gas in North America.

Canada's problem is that these formations are located far from their end markets, which increases transportation costs. Also, because of the weather, exploration can be a seasonal venture, which can increase costs. The Canadian gas industry is not as technologically developed as its U.S. counterparts in terms of developing unconventional resources. EnCana is probably the technological leader based on its experience in the Haynesville Shale.

Because the economic environment has become hostile to new gas drilling projects, Canadian gas projects face numerous hurdles. Gas prices simultaneously were shocked by changes to supply and demand. The economic downturn cut North American demand by about 3 Bcfe/day, while increases in supply, mainly from U.S. shales, increased supply by about 3 Bcfe/day.

It will be interesting to see if any Canadian drillers other than EnCana get involved in U.S. shale projects, either as learning tools or ways to boost their own revenues.

Thursday, May 28, 2009

EnCana: Geology, Well Ops and Type Curves

In its recent investors call, EnCana got into a fair amount of detail about the geology of the Haynesville Shale. The company has numerous positions along the Gulf Coast Jurassic Trend, which includes the Deep Bossier and Haynesville Shales (but not the Barnett Shale) and stretches into Mississippi.

EnCana loves the Haynesville Play because of its high porosity, which leads to very high “gas in place” figures. Like the Deep Bossier Shale, the Haynesville is a highly pressurized, high temperature environment, which requires a greater degree of care and necessitates higher drilling costs. In the presentation, they included some log data and a core sample, below.

As with other companies, the Haynesville learning curve has been steep, but as EnCana has gained experience in the play, it has been able to perfect its methods as well as reduce costs and time. Perhaps the biggest advance in understanding EnCana has made is that a higher amount of proppant in the various frac stages is highly correlated to better results. As EnCana learns more, the typical well now has more frac stages, longer laterals and larger amounts of proppant.

Climbing the learning curve and putting the lessons learned to work is part of EnCana’s Gas Factory strategy. 1) Get to know the geology, 2) engineer the process to near perfection and 3) replicate the successful drilling operations again and again – that’s the Gas Factory approach. You’ll see the same strategy from other companies like Petrohawk and Chesapeake, but they don’t seem to use the same unfortunate “gas factory” branding.
EnCana has drilled 16 horizontal wells and over that period it has decreased well costs by 30% to about $9 million per well, increased IPs, Decreased cycle time from 60 days to 50 with the most recent wells in the 40's.

The next big challenge for EnCana is trying to nail down the type curve and estimated ultimate recoveries (EUR) to achieve standardization across the zone. EnCana safely believes that most of its acreage in the Haynesville Shale will have a 6 EUR type curve, but a type curve as high as 9 EUR is possible. They are seeing that the wells with the higher initial production (IP) figures tend to be the ones with the higher EURs. Right now, most of EnCana’s wells are choked back for technical (and economic) reasons, so it may be hard to estimate the appropriate curve. This restricted situation might have a bright side: EnCana’s engineers believe that by being more gentile in the beginning might lead to higher recovery numbers in the end. Remember the story of the tortoise and the hare…

Wednesday, May 27, 2009

EnCana: Haynesville Conference Call

EnCana operating executives held a very interesting investor conference call regarding the Haynesville and Deep Bossier Shales this morning. It covered a lot, so I'll discuss it in a few different posts. The call didn't focus on results from specific wells but provided lots of information about the future of the Haynesville Shale, about which EnCana is very excited.

In the big picture, EnCana (and others) sees conventional natural gas production in North America in "irreversible decline" but at the same time sees unconventional gas plays as more than replacing production from the conventional plays. As a result, the company has tailored its business strategy around exploiting unconventional gas. The chart below says a lot about the future and the importance of plays like Haynesville.

They see that success in unconventional plays stems from big leasing operations and the best and most efficient use of technology. The subtext to me is that bigger is better. The little guy is S.O.L. in a future that is so capital and technology-based.

The executives focused much of their attention on the Louisiana side of the play. While they have an interest in approximately 435,000 net acres, they view the sweet spot as northern DeSoto and Red River Parishes, coincidentally where EnCana has a big chunk of leases, as shown on the map of "the fairway" (sort of like GMX's "de-risked acreage" map) below.

I'll talk more about geology in a later post, but they see higher potential for the land in the eastern part of the play because of the higher porosity of the shale. They also mentioned that the Company sees the sweet spot moving south in the play (at least they what they identify as the sweet spot is farther south than previously expected).

EnCana also talked about the business strategy for their operations in Haynesville. While it is still an emerging play, operators are in the second phase of their business strategies, having left the land rush phase. Now they are in the "Land Retention Strategy" phase, which means that they are going to judiciously select drill sites based on maintaining the best lease acreage. To realize the land retention strategy, EnCana is allocating an additional $290 million of capital to the Haynesville Shale. At the same time, EnCana is looking for partners to drill areas that might be less productive so the company can focus on the bigger payday. Not to say that the other leased areas are worthless - it's just that EnCana doesn't estimate them to be as valuable as leases in their sweet spot. But as the interpretation of the location of that sweet spot changes, the amount of land it is willing to offload is becoming smaller. Where it once intended to offload 134,000 acres, the number now seems to be about 30,000 acres. The slide below summarizes the land retention strategy.

Next phase in the strategy is the "Multi-Well Pad Gas Factory Operations." Sort of a mouthful, but it basically means that they will incorporate all that they have learned in drilling in both the Haynesville and Deep Bossier Shales and replicate it across their leasehold. It's been a steep learning curve, but based on the call, EnCana has learned a great deal. More on this later.

Other Pollutants in Coal

I was looking through the web site of the American Clean Skies Foundation and came across an interesting table. Much has been made about the release of carbon from burning fossil fuels, especially in regards to power generation. What's most telling about the chart (below) is the difference between natural gas and coal in other, really nasty pollutants.

Carbon is getting the press now, but mercury and sulfur have been long-standing environmental culprits. For years the EPA has been working on legislation to limit the emission of these chemicals from coal smokestacks. Carbon is the newcomer to the conversation. Much of the mythology of "clean coal" is to counter mercury and sulfur. Of course "clean coal" is more of a marketing platform than a real technology.

I don't make it a habit to cruise industry-sponsored public service group web sites (in this case, Chesapeake Energy is a big ACSF supporter), but the numbers did come from the Energy Information Administration.

Tuesday, May 26, 2009

Europeans Investigate Shale Technology

I am a believer that the Haynesville Shale represents a "tipping point" for natural gas in today's world. It shows that through the application of new technology we can access vast resources that were previously unavailable. I don't think the Haynesville Play is the last great shale discovery - in fact it might be the beginning of many more.

I spent a rainy Memorial Day morning reflecting on the impact of new shale drilling technology and expertise on the world. Remember several months ago when a dispute between the Russians and Ukrainians left many Europeans without gas for a couple of cold January weeks? Potentially hostile foreign providers hold more than just the U.S. as energy hostages. What if Europe could become more energy independent by tapping the shales that might be below that continent? Shale covers the earth in various locations, so its not just the U.S. that could see a big shale gas bonanza.

The joint venture deals that Chesapeake struck with England's BP in the Fayetteville Shale and Norway's StatoilHydro in the Marcellus Shale make a lot of sense for the partners when viewed through the lens of exporting similar technology to Europe. Also, French company Total is a partner in an oil shale joint venture in Colorado. I came across an interesting article from a few months ago that discusses the concept of exporting our technology to the world. Europeans are way behind us in terms of having the technology and expertise to exploit shale resources and just like a big tech company in Silicon Valley, they seem willing to purchase it.

Wouldn't it be funny to see a big drilling rush in continental Europe? The great colonial powers of the past 500 years would be exploiting resources in their own backyards rather than ravaging other countries.

Monday, May 25, 2009

Chesapeake at it Again

No, not killing cows; monetizing its natural gas assets. While it's no surprise given the company's track record and earlier statements, Chesapeake has indicated that it is close to a deal for a volumetric production payment ("VPP") in the neighborhood of $500 million for its Barnett Shale assets. Chesapeake is silent on the potential partner until the deal closes.

This is a different kind of arrangement than the deal Chesapeake struck with Plains Exploration in the Haynesville Shale. With a VPP, a partner pays a fixed price for a certain quantity of product. The deals with Plains in the Haynesville Shale and StatoilHydro in the Marcellus Shale are joint ventures designed for the partner to front drilling costs for a share of the future cash flow. Because the Barnett Shale is a more mature field and Chesapeake has approximately 1,350 producing wells there, the company was able to leverage its past risk to raise outside capital.

Chesapeake has also indicated that it intends to put about $1 billion worth of midstream assets into a joint venture to raise approximately $550 million. Again, not new news, but the company seems to have made some progress towards a deal, which had been tabled as of late last year.

Chesapeake has proven to be a pro at using unconventional methods to raise cash. You can bet that when the recession starts to clear and gas prices start to creep back up Chesapeake is going to attack the Haynesville Play with a cash-fueled fury.

Saturday, May 23, 2009

Good Commentary on Natural Gas Future

In a recent commentary, Michael Newport, CEO of Mainland Resources, made an articulate argument for the adoption of a natural gas standard for vehicles in the United States. While, as a gas producer, he has a bias, his argument is simple and I believe correct.

Natural gas is a cleaner, domestic product than oil and would provide independence from not so benign foreign powers. I was reading an interesting article in the March issue of Harper's Magazine about international oil "fixers" (read it if you have time - fascinating, but lengthy). In talking to the journalist, the fixer subject says "Oil is not a commodity. It is a political weapon." So true. Why involve ourselves in a situation we cannot possibly win when we have the resources at home to achieve at least some measure of independence?

He also touches on an argument that does not get made very often: the advances in horizontal drilling and hydrofracing come from the "ingenuity and technical prowess" of American workers. We shine such a bright light on technology that is developed in Silicon Valley, but what about the technology associated with exploration and drilling? Sure, Twitter and Facebook are interesting (for now), but they won't fuel your car or heat your home.

Friday, May 22, 2009

Rig Counts Mixed; Gas Price DOWN

U.S. rig counts are down by 18 to 900 this week. Baker Hughes reports that the number is down 989 from last year. In the Haynesville region of North Louisiana and East Texas, the number of rigs was down by three (down four in N. LA, up one in E. TX). The drop in LA brought the number down to 75, which is where it had been for the previous two weeks before last week's increase, so it's not all bad.

What is bad is the plummeting price of natural gas. Gas had been on the rise for a couple of weeks. Yesterday, futures got crushed, down 9.2%, and they were down another 2.6% today. The spot price was down 9% to $3.42, a price I had hoped was firmly in our rear view mirror. Apparently an increase in demand has not materialized as expected.

I read an article in the Wall Street Journal about futures prices and it noted that even though rig count has dropped "producers have struggled to rein in production." Companies like XTO and Petrohawk had drilled some serious gushers, so their production figures haven't dropped alongside rig counts. In other words, these companies and the natural gas industry are getting punished for success! Crazy world.

Conservation Public Hearing and the Big Question

While I don't intend this forum to be a news source for local events, I think it's important to note a public hearing that took place last night in Shreveport. Staffers from the Office of Conservation, part of the State Department of Natural Resources, which regulates oil and gas activities in Louisiana, held a hearing to listen to comments to its recent order to establish operating standards for the Haynesville Zone.

Underlying the specific issues is the big picture question of control. Who has the right to create and enforce the rules for drilling? It's the state versus the local governments. The state, though the Office of Conservation, has proposed regulations that would target drilling and ancillary activities to help balance the impact on the surrounding uses. The Caddo Parish Commission has come up with its own set of rules that are somewhat more stringent than the state's and are based largely on rules enacted in the Fort Worth area based on that community's experience with the Barnett Shale. Here are a couple of good articles about the situation (Shreveport Times, KSLA).

Already a state appellate court has ruled that the city of Shreveport can't prohibit drilling around Cross Lake, its drinking water source, because it infringes on the Commissioner of Conservation's authority, so it appears that the state starts with the upper hand. But what about regulating drilling-related debris on the highways? Seems like the local government should be able to regulate this.

In the end, the hearing was just that, a venue for listening. The head of the commission, James Welch, didn't make the trip, citing the fact that the Legislature is in session and he was needed in Baton Rouge (good point because the Legislature does need to be tightly supervised), so it was just staffers listening. It is unfortunate, however, that he wasn't there because he is the one who makes the final decision. His decision is about a month off, but the big picture control issue won't go away any time soon.

More on Water Issues in North LA

I've been thinking a lot about the water issues facing North Louisiana with the high level of water use by operators drilling Haynesville Shale wells. Water is a key component in the process of fracing the well. Right now, most companies drill water wells to tap into one of the several aquifers that run below most of the Haynesville Play. One, the inconsistent Carrizo-Wilcox Aquifer, has become so strained that operators have been asked by local officials not to use it. But as demand increases and the aquifers become even more stretched, water is going to be one of the big external issues facing the Haynesville Shale in North Louisiana.

While local officials can't specifically prohibit operators from drilling for water, the operators understand it is in their best interest to come up with a workable solution that keeps costs down for them but doesn't disingratiate them with the local communities. One of the possible solutions is the Red River Alluvial Watershed, which is fed by the Red River. Unfortunately, it is narrow and only runs along the course of the Red River. Pumping from surface sources has been used where available by most users. Local officials are studying pumping from Red River and other large bodies of water.

I recently posted an article in the Shreveport Times about some of the bills floating around in the state Legislature about control of state water resources (the link expired, but here is a copy from the Louisiana Oil and Gas Association). In looking back, I've found a couple of other interesting articles from a few months ago that are of interest. Both are from the Shreveport Times but are reprinted on the LOGA web site:
There is no easy answer to this question. Issues of water resources have been plaguing this country for centuries. Heck, it even makes good cinema. Remember that the drama in Chinatown was wrapped around the question of water rights and the devaluation of land by depriving it of water. While the issues in North LA might not be quite as treacherous or interesting, it will be an important subject going forward.

Thursday, May 21, 2009

Enbridge to Move Forward with LaCrosse Pipeline

Today, Enbridge, Inc. announced that it had received enough commitments during its open season for the LaCrosse Pipeline to go forward with further development of the project. As a refresher, the LaCrosse project will serve the Haynesville Shale and stretch for 300 miles from Carthage, TX to Washington Parish, LA and interconnect with twelve other pipelines.

In summary: new pipelines = good.

LNG in Retreat?

I noticed a couple of interesting pieces this week about LNG. LNG is supposed to be the Big Shale Killer in the next couple of years. Lots of analysts believe that the price of natural gas will remain very low because the U.S. will become a dumping ground for unwanted LNG. Several countries (i.e. Qatar), produce gas at such a low price and they need the money so badly (not Qatar) that they don't blink at paying to ship it across the ocean and sell into low U.S. gas prices. In the past couple of years there have been some technical difficulties with a couple of major exporters that has suppressed the LNG supply, but these problems supposedly have been remedied.

But I'm starting to wonder if LNG will in fact be the big killer after all. This week, Freeport LNG, operator of a major LNG port off Texas, asked the federal government for approval to convert the port into a re-exporter of LNG. In other words, the port would receive the gas then turn around and ship it back out to markets that pay more for gas. It sounds like a good way to get rid of a product that they will have trouble selling, but it seems odd and somewhat desperate. The port has not received an LNG shipment since last May, so it's not like they've got anything better to do.

But clearly not such a bad idea since Cheniere Energy, operator of a big LNG port at Sabine Pass (and a minority owner of Freeport LNG), has asked for similar approval. Sabine Pass has also gone many months without a shipment. Cheniere, which is entirely focused on the LNG import business, has lots of problems, as noted in a piece in Barron's that suggests the company might default on payments for its $3.1 billion of debt (Barron's article - requires subscription; commentary on article - no subscription).

As long as gas prices stay higher in Europe, I doubt we are going to see a bunch of ships filled with LNG plying ocean waters to get to our shores. The biggest concern is storage capacity overseas. If the gas can't be physically stored, the U.S. is the natural place to send it. Clearly there is lots of unused capacity at LNG ports.

Wednesday, May 20, 2009

Haynesville Shale to Impact Alaskan Pipeline?

There has got to be some hand wringing going on in Alaska right now as they watch the development of the Haynesville Shale, as well as that of the Marcellus and Barnett. Several years ago, Alaska approved a package of incentives to lure a pipeline company to build a massive natural gas pipeline from Prudhoe Bay to the Lower 48 States through Canada. The incentive package is called AGIA, or the Alaska Gasline Inducement Act.

The only qualified bidder so far is TransCanada Corp. This is a massive project: 1,715 miles of 48" pipeline with initial capacity of 4.5 Bcf/day and up to 5.9 Bcf/day with enhancements. Total estimated cost is $25 billion, and the completion date is November 2017. The project and the potential selection of TransCanada is still working their way toward the end of a lengthy process. (Project website)

I'm sure Alaskan officials and TransCanada are closely watching the sudden surge of gas supply projected to come from the new shale plays in the Lower 48. I read an opinion article from the Alaska Journal of Commerce last week suggesting that the project is as good as dead and that the state should be looking for a way to ship the gas to Valdez and go into the LNG business. I don't know if that will happen, but these folks are probably also secretly rooting for adoption of the Pickens Plan, which will create numerous opportunities to sell gas in the Lower 48.

Tuesday, May 19, 2009

Acreage List

In reading through the economic impact study commissioned by the Louisiana Department of Natural Resources, I came upon a good list of the biggest leaseholders in the Haynesville Play. This is definitely not new information and it's not the freshest (vintage 2008). I've reported most of these numbers, but the nature of a blog is that information is scattered. I thought I'd just reproduce the table here. I can't take credit for it, and neither can Loren C. Scott & Associates, since they lifted it from a Jefferies & Company report. Attribution aside, here's the list:

It's a good list, but it leaves off a few active players with small lease positions, including Questar, as well as a few smaller players like Southern Star, Cubic and Mainland Resources. At the same time, some of the biggest lease holders have been less active in terms of drilling, like Devon and Cabot.

Note also that it represents net acres, so Plains Exploration gets credit for 110,000 net acres because they are a minority joint venture partner with Chesapeake. Same with Shell and EnCana.

Monday, May 18, 2009

Goodrich: Three Wells Announced

Today, Goodrich Petroleum announced results from three horizontal Haynesville wells:
  • J.K. Williams 7H: 7.0 MMcf/day initial production on a 34/64 inch choke with 2,800 psi, Beckville/Minden area of Panola Co., TX.
  • Branch 2H-1: 14.3 MMcf/day on an 18/64 inch choke with 6,750 psi, Bethany-Longstreet Field, Caddo Parish, LA
  • ROTC 1H-1: 14.1 MMcf/day on an 18/64 inch choke with 7,150 psi, Bethany-Longstreet Field, DeSoto Parish, LA
The second and third wells above are owned 50/50 by Goodrich and Chesapeake Energy.

Haynesville Units in Louisiana

Last week someone asked me a question about where their property falls within the so-called "De-Risked Acreage Boundary." It got me thinking about new ways to look at the Haynesville Shale. Now that drilling is taking place across the play, drilling units are beginning to be formed. In Louisiana, the process goes through the Department of Natural Resources. I took a look at the Haynesville units that have been formed, and while it didn't reveal anything earth shattering, it gives more evidence of where the drilling and production activity is. I generated the maps below using the DNR SONRIS GIS Viewer. It's a cool and pretty flexible mapping tool. There is a pretty good little tutorial, so beginners can use it.

I created the same map in two different views, one with main roads and parish line and the other with that same information but a topographic overlay. This information is just for Louisiana because I haven't had time to check out the resources at the Texas Railroad Commission, which regulates oil and gas production in Texas.

The maps are a little hard to read, but you can rather quickly get the gist of where drilling is occurring. The violet dots are permitted wells, either in production or at some stage of drilling, while the light blue squares are drilling units that have been approved by the DNR. Unfortunately the parish lines are difficult to see behind the map points, but the patterns are clear.

Sunday, May 17, 2009

Top 20 Haynesville Wells

Below is a great list of the top 20 producing wells from the Haynesville Shale (based on initial production). It was compiled in early May 2009 by a member of, a Haynesville Shale-based community site. Here is the link to the article (you might have to register as a member to access the site) and a copy of the list:
  1. 28,200 MMcf/d - Petrohawk, Sample 9 #H1 Well, Serial #238116, S9-T14N-R11W
  2. 26,100 MMcf/d - Exco, Moran 27 #H6 Well, Serial #238915, S27-T14N-R13W
  3. 25,125 MMcf/d - Petrohawk, Roos #H32 Well, Serial #238585, S17-T16N-R11W
  4. 24,900 MMcf/d - Exco, Cook 28 #H1 Well, Serial #239292, S28-T14N-R12W
  5. 24,200 MMcf/d - Exco, Lattin 24 #H4 Well, Serial #238995, S24-T14N-R14W
  6. 23,900 MMcf/d - Petrohawk, Sample 4 #H2 Well, Serial #238828, S4-T14N-R11W
  7. 23,700 MMcf/d - Petrohawk, EGP 30 #H13 Well, Serial #238450, S30-T16N-R11W
  8. 23,500 MMcf/d - Questar, Golson 32 #H1 Well, Serial #238729, S32-T15N-R9W
  9. 23,400 MMcf/d - Petrohawk, Brown 17 #H4 Well, Serial #238222, S17-T16N-R11W
  10. 23,300 MMcf/d - Petrohawk, Griffith 11 #H1 Well, Serial #238281, S11-T13N-R14W
  11. 22,953 MMcf/d - Petrohawk, Albritton Cattle 15 #H1 Well, Ser #238770, S15-T13N-R11W
  12. 22,900 MMcf/d - Exco, Oden Heirs 30 #H6 Well, Serial #238245, S30-T14N-R13W
  13. 22,506 MMcf/d - Petrohawk, Glass_ock 34 #H1 Well, Serial #238928, S34-T16N-R11W
  14. 22,400 MMcf/d - Petrohawk, Powers 21 #H1 Well, Serial #239358, S21-T16N-R11W
  15. 22,000 MMcf/d - Chesapeake, Blount Farms 2 #H1 Well, Serial #237716, S2-T14N-R12W
  16. 21,700 MMcf/d - Questar, Shelby Interests 31 #H1 Well, Serial #238616, S31-T15N-R9W
  17. 21,400 MMcf/d - Exco, Sammo Partnership 18 #H5 Well, Serial #239107, S18-T14N-R12W
  18. 21,179 MMcf/d - Petrohawk, Albritton Cattle 9 #H1 Well, Serial #238610, S9-T13N-R11W
  19. 21,100 MMcf/d - Petrohawk, Goodwin 9 #H5 Well, Serial #238382, S9-T16N-R11W
  20. 20,300 MMcf/d - El Paso, Blake 10 #H1 Well, Serial #238976, S10-T13N-R14W

It's an interesting list and it shows that there have been some big winners. Although high IP is not the ultimate gauge of success, it is an interesting metric, and it also creates something of a game. What's interesting to note is that Exco, which has not drilled a lot of Haynesville wells, has hit some big 'uns, while Chesapeake, which is shouting loudest about its stake, is only on the list twice. Petrohawk, which has a lot of land and is drilling many wells, has 11 of the top 20.

Again, IP is not the ultimate arbiter of success, but as Americans we always love a race!

Friday, May 15, 2009

Rig Counts: Down in US but Up in Haynesville

The Baker Hughes rig count was announced today, and it continued to show a decrease in working rigs in the U.S. This week the count was down by ten to 918. That figure is 51% below where it was last year.

The Haynesville Shale region saw the opposite effect. In north Louisiana, four rigs were added, and in east Texas two rigs were taken away, for a net add of two rigs. This is not an absolute Haynesville number because it does contain rigs working in the Cotton Valley and neighboring formations, but it does show that activity in the region continues to be strong. This reflects comments by many of the Haynesville operators stating that they are either increasing capital spending in the Haynesville Play or keeping it steady.

Haynesville Shale Economic Impact Study Released

A long-awaited economic impact study on the Haynesville Shale was released yesterday by Loren C. Scott & Associates (link to report, Shreveport Times article). The report was prepared for the Louisiana Department of Natural Resources, so it only focuses on the impact to Louisiana.
The study assesses the impact of seven of the seventeen main companies (the seven represent 72% of the leased acreage), so it is somewhat incomplete, but the numbers it offers are pretty gaudy. Some of the figures regarding the impact of the Haynesville Shale:
  • $2.4 billion in new business sales
  • $3.9 billion in household earnings (including $3.2 billion in lease bonuses and royalties)
  • 32,724 new jobs (greater than the statewide employment at banks and credit unions)
  • $153.3 million of new state and local sales tax revenue
Perhaps the greatest impact of the play is that it has helped insulate the north Louisiana region from the national economic downturn.

This glowing report is all well and good, but I don't put a lot of stock in economic impact studies. I used to perform these studies, so I know exactly how squishy they can be. It's more art than science at times. The accuracy of the report depends entirely on the quality of the inputs. If your inputs are not all locally derived spending figures, the results will be skewed to the positive. I do, however, believe in the multiplier effect of spending. There can be no disagreement that putting hundreds of millions of dollars into a community, be it through royalties/lease bonuses, employment, and the sales of goods and services, will yield a significant multiplier effect. The recipients of the cash then spend money for food, housing, gas and a myriad of other services. All of this spending tax revenues for the local and state government. There is a fine line, however, between new dollars and those that might have been spent anyway.

These issues aside, the bottom line is that the Haynesville Shale is a huge economic driver for North Louisiana and ultimately the state of Louisiana. Gauging the economic impact of the play is still preliminary because many companies are still in the early stages of their drilling programs and very little of the royalty money has begun to flow. The ultimate impact of hiring, spending, paying royalties, etc. will take years to assess.

The release of the report has also stoked the discussion of the negative impacts of drilling (and leasing, for that matter). While companies like Chesapeake are loudly touting the report, the economic impact is but one factor in the overall impact of the Haynesville Shale.

Penn Virginia: Update

Penn Virginia was one of the first companies to announce a successful well in the Haynesville Shale last year, but they have been relatively quiet this year. The company has 59,000 acres under lease, with a focus on East Texas, specifically Harrison County.

To date PV has drilled six wells, but one of them (Agnor #6H) was unsuccessful, a rare miss in the Haynesville Play. PV is seeing 4 to 6 MMcf/day initial production on wells, but it notes that it has restricted flows on the wells. Unfortunately they don't provide much juicy well detail.

The company has definitely been learning as it goes along and is seeing improved economics and efficiencies. PV's most recent well, Gail Furrh #8-H, was completed in 60 days, compared to the previous average of 81, and it came in around $7 million, down from an $8.4 million average.

Little Gypsy Officially Shelved

I've had trouble hiding my distaste for Entergy Corp.'s Little Gypsy power plant coal retrofit. Luckily it was tabled last month and now the Louisiana Public Service Commission has officially approved putting the project on hold for three years. The Commission also made the wise suggestion that Entergy start hedging the low price of gas and make some long-term purchases of gas to lock in low gas prices rather than waiting to buy it on the spot market and passing inflated costs on to its rate payers.

Since the Commission checked the box for smart ideas, it left the door wide open for stupidity. As part of a discussion of carbon emissions, new PSC member and global warming doubter Eric Skrmetta invited a so-called expert to bash the concept that man is contributing to global warming.

Instead of using the PSC meetings to argue the existence of and/or man's role in global warming, our PSC Commissioners should be looking for ways to reduce Louisiana's use of dirty coal (11% of statewide power generation) while lowering our energy bills. In Louisiana we are sitting on one of the world's largest deposits of natural gas. Hello??? Clean and cheap! Local product! Is anybody listening???

Thursday, May 14, 2009

Devon: Slow and Steady

When I read about Devon Energy's Haynesville Shale activities, I'm reminded of the moral of Aesop's fable The Tortoise and The Hare, "slow and steady wins the race." Devon is probably the largest Haynesville leaseholder with approximately 570,000 acres. Most of it, however, is held by production, so Devon is in no hurry to drill.

Devon has drilled five wells to date in the Carthage, TX area. Unfortunately the first two suffered casing failures and the next three were brought to production very conservatively to avoid similar problems. They still expect to recover between 5 and 8 Bcfe from these wells, but they have been slow starters. On the positive side, the company sees far slower decline rates in these first successful wells (although they didn't publish any curves). Devon plans another five wells in 2009. Well costs have dropped from the $11 million rage to the $9 million range.

Devon seems content to wait out the low natural gas prices and the technological learning curve.

Regency Pipeline: Project Update

Regency Energy Partners is hard at work on expanding its pipeline network to serve the Haynesville Shale. The Haynesville expansion is a joint venture with GE Energy Financial Services. The project is broken into three segments, and the company has broken ground on the first leg (Bienville) already. Here is a quick summary:

- 36" Bienville Line: Permits and right-of-way acquired, construction has begun
- 36" Elm Grove Line: Permits and right-of-way acquired, surveyed, no construction yet
- 42" Winnsboro Line: Permits acquired, 99% of right-of-way acquired, final FERC application upcoming, permits for two compression stations received

Regency expects to have the pipeline complete and in service by the end of 2009.

Wednesday, May 13, 2009

EnCana/Shell Looking to Offload Acreage

I've been mulling over an article I read last week in the Calgary Herald. It says that EnCana (which is in a 50/50 joint venture with Shell in the Haynesville Shale) is "taking bids for as much as a 50 percent interest" in approximately 130,000 of its 435,000 acres in the Haynesville Play. I was surprised by this, especially since the company recently announced that it has increased its focus and capital spending in the Haynesville Shale.

But then I looked closer and read that the acreage is in the southern part of the Louisiana side of the play, specifically in Sabine and Natchitoches Parishes. From all evidence to date, it looks like those areas are not in the heart of the play and are definitely outside the "de-risked" boundary (at least as defined by GMX Resources).

I'm not accusing them of offloading a sucker play, but I imagine they are looking for a company that missed its opportunity to play in the Great Haynesville Land Rush and is looking for an easy in. Letting another company take the drilling risk in this area frees EnCana/Shell to focus on the acreage that has the highest probability for payoff. Since most leases have a "use it or lose it" feature, a.k.a. "held by production," if EnCana/Shell doesn't drill and produce on the land they will have to turn the keys back within three to five years (probably now two to four years). It's better to get a smaller piece of a bigger pie than to have to throw the pie away because you didn't have time to eat it. Or something like that.

Geology, Logs, Mineral Content, etc.

I'm definitely not a geologist, so a page full of log sample results don't mean a whole lot to me. But I do know that there are lots of people out there who know their shale from shinola, so I thought I'd throw out a few images of geology provided by GMX Resources. Just don't ask me to explain them.

GMX: Well Update

In case you missed it, in a minute portion of the graphic in the previous post GMX Resources gave an update on all eight of its Haynesville Shale wells:

- Callison #9H: 7.7 MMcfe/day IP; 2,000’ lateral; 123 MMcfg in first month

- Bosh #11H: 7.6 MMcfe/day IP; 3,100’ lateral; 123 MMcfg in first month

- Baldwin #17H: 8.7 MMcfe/day IP; 4,400’ lateral; 183 MMcfg in first month

- Baldwin #14H: 9.2 MMcfe/day IP; 4,620’ lateral; frac on April 13

- Verhalen “A” #2H: 4,198 lateral; frac on April 22

- Blocker Ware #19H: 4,446’ lateral; frac on May 10

- Blocker Heirs #12H: 4,934 estimated lateral; frac in June

- TJT Simpson #1H: 4,606’ lateral; frac in June

Tuesday, May 12, 2009

"De-Risked" Acreage Boundary

Now that the Haynesville Shale has been in the news for the past 14 months, people have a pretty good idea about the general boundary of the play, or at least what geologists think the boundary is. As time passes, wells are drilled, logs are interpreted and gas starts flowing, the next question is where is the "de-risked" acreage. I love that concept: an investment without risk. Think about it...a sure thing. I think a real wildcatter would walk away from a sure thing. I guess there is no truly de-risked investment if you have to put up $9 million on the front end and employ all manner of technical sophistication to get at the gas.

In any case, below is GMX Resources' estimate of the de-risked acreage (the thin blue line inside the colored area).

Great Haynesville Well Map

Regency Energy Partners published a great map of the Haynesville Shale with well results. It's a little hard to read, but it gets the point across. Look for a later post with an update on the progress of Regency's pipeline upgrades.

Rig Counts: Not All Bad News

GMX Resources had an interesting slide in a recent presentation. It showed the rigs in operation in the major shale plays. What it indicated was that the Haynesville Shale (the yellow ochre line below) has the most activity of the big five U.S. shale plays. In general, with the exception of the Barnett Shale, the rig counts are fairly steady in shale plays.

EXCO: Decline Curves

EXCO published some interesting information about the decline curves it has encountered so far in its Haynesville Shale wells. The slide below shows the Haynesville horizontal type curve by well over the first 120 days. The angle of the curve isn't much different from the original expectations, but the quantities are definitely stronger.

The company is seeing improved economics in its well development costs. Spud to rig release time has decreased from 70 to 75 days to 45 to 50 days. Costs per frac stage have decreased by approximately 25%, but costs are still approximately $9 million per well. The wells are being completed with 9 to 12 frac stages and the laterals are 3,800 to 4,500 feet.

Monday, May 11, 2009

EXCO: Capex Focus on Haynesville

In its quarterly earnings release, EXCO Resources announced that while it is trimming its 2009 capital budget from $582 million to $500 million ($266 million for drilling and completion) it is diverting nearly all of the money to the Haynesville Shale. To say they have been pleased with their initial results is a drastic understatement. They've really got some kick-ass wells. EXCO currently has four rigs, but they are upping the count to seven by mid-year and are on target to drill 34 wells in 2009.

A summary of EXCO's Haynesville six operated wells:
  • Oden 30 H #6 (100% WI) DeSoto Parish, Louisiana - Initial production (IP) 22.9 Mmcf per day, 7,800 psi on 26/64ths choke in December 2008. Produced 1.0 Bcf in first 64 days. Currently flowing 8.9 Mmcf per day with 4,200 psi after 149 days with cumulative production of 1.9 Bcf.

  • Lattin 24 #4 (92.8% WI) DeSoto Parish, Louisiana - IP 24.2 Mmcf per day, 7,350 psi on 26/64ths choke in February 2009. Produced 1.0 Bcf in first 67 days. Currently flowing 10.8 Mmcf per day with 5,200 psi after 82 days with cumulative production of 1.2 Bcf.

  • Sammo Partnership 18 #5 (100% WI) DeSoto Parish, Louisiana - IP 21.4 Mmcf per day, 6,870 psi on 30/64ths choke in February 2009. Currently flowing 9.8 Mmcf per day with 4,800 psi after 63 days with cumulative production of 789 Mmcf.

  • Sharp 1 #1 (74.3% WI) Caddo Parish, Louisiana - IP 8.6 Mmcf per day, 4,100 psi on 30/64ths choke in April 2009. Currently flowing 4.2 Mmcf per day with 4,700 psi after 19 days with cumulative production of 104 Mmcf.

  • Moran 27 #6 (45.0% WI) DeSoto Parish, Louisiana - IP 26.1 Mmcf per day, 7,300 psi on 28/64ths choke in April 2009. Currently flowing 19.0 Mmcf per day with 7,150 psi after 11 days with cumulative production of 233 Mmcf.
  • Cook 28 #1 (69.8% WI) DeSoto Parish, Louisiana - IP 24.9 Mmcf per day, 7,480 psi on 30/64ths choke on May 2, 2009.

GMX: Two New Wells

GMX resources announced announced the completion of a couple of Haynesville Shale wells.

GMX completed "the Verhalen 'A' 2H Haynesville/Bossier horizontal well having a 4,198 foot lateral and 14 fracture treatment stages and an initial 24 hour production ('IP') rate of 8.5 million cubic feet per day ('MMcfd') of gas, on a 14/64 choke and 4,164 pounds of flowing casing pressure ('FCP') into the sales line. The first five Haynesville/Bossier wells have an average IP of greater than 8.3 MMcfd.

"In addition to the first five wells, the Company has drilled Blocker Ware 19H with a 4,446 foot lateral and has completed 9 of 12 fracture treatments, thus far. The Company has also successfully drilled and set casing on the Blocker Heirs 12H with a 4,934 foot lateral and TJT Simpson 1H with a 4,606 foot lateral. Scheduled completion for each of these two H/B Hz wells will follow the Blocker Ware 19H with 12 fracture treatment stages planned for each well. These wells are all expected to begin producing in Q2 2009."

More to come on GMX later this week.

Water in the Shreveport Area

Groundwater looks like it will be a huge issue as the Haynesville Shale continues to develop. A big feature article in the Shreveport Times focused on the issue and concerns in the region.

Groundwater has long been a concern in northwest Louisiana, especially as the population grows. The more urbanized areas of Caddo and Bossier Parishes do draw water from some lakes and rivers, but the Red River, which runs between the two and down into the eastern portion of the Haynesville Shale has not been tapped to its full potential because of past concerns about water quality. Most of the rural areas use wells from increasingly inconsistent aquifers. Caddo seems to have the most pressing concerns, especially from agricultural uses and gas drillers.

Most oil and gas operators usually have the right to drill water wells to support their drilling and exploration activities, but as groundwater supplies become strained, expect to hear lots of push-back. The city of Shreveport sells water to operators, but it is far cheaper to drill a well on site than truck it in from Shreveport. It will be one of the big issues as the Haynesville Shale expands.

Blowout in Naborton

The residents of Naborton, LA in DeSoto Parish got quite a scare when a Chesapeake well, Nabors 10H-1 started spewing natural gas, as reported by the Shreveport Times. It took two days before the company was able to get it back under control and the fifteen families who evacuated could return home. Here is the original reporting from Saturday on the incident.

Friday, May 8, 2009

Weekly Rig Count: Down 17 in U.S.

The Baker Hughes rig count for the U.S. continues to fall. This week (ending May 8), the rig count was down 17 to 928 nationally. It was a mixed bag in the Haynesville Shale area, defined as North LA and East TX. This region includes other fields but has become dominated by the Haynesville Play. In North LA, the rig count was stable at 75, but in East TX, the rig count was down seven (11%) to 55 rigs.

Comstock Results

Comstock Resources reported its quarterly earnings this week and bragged on some of its success in the Haynesville Play, where it has 86,032 gross leased acres. We are following 17 wells, eight of which are producing, four of which are completing and five of which are still being drilled. Most of the activity is in DeSoto Parish, LA, near the Texas state line. As the graphic below shows, wells are coming in with initial production of between 7 and 16 MMcfe/day. I'm sure more results will be coming in soon.

In this quarter, Comstock has successfully completed another six horizontal wells in the Haynesville Play:

  • Bogue A #6H, Waskom Field, Harrison County, TX; vertical depth: 10,858 feet with a 2,600 foot horizontal lateral, 7 frac stages; IP: 7.4 MMcfe/day

  • Hart #1H, Logansport Field, DeSoto Parish, LA; vertical depth: 11,553 feet with a 3,770 foot horizontal lateral, 10 frac stages; IP: 7.2 MMcfe/day

  • Moneyham #1H, Longwood field, Caddo Parish, LA; vertical depth: 10,572 feet with a 3,840 foot horizontal lateral, 10 frac stages with some complications; IP: 6.6 MMcfe/day

  • Headrick #1H, Logansport Field; vertical depth: 11,525 feet with a 4,060 foot horizontal lateral, 10 frac stages; IP: 15.1 MMcfe/day

  • Holmes A #1H, Logansport Field; vertical depth: 11,442 feet with a 4,010 foot horizontal lateral, 10 frac stages; IP: 16.2 MMcfe/day

  • BSMC 12 #1H, Toledo Bend Field, DeSoto Parish, LA; vertical depth: 11,525 feet with a 4,135 foot horizontal lateral; IP 11.6 MMcfe/day

Comstock plans to focus a great deal of energy and capital to complete its 2009 drilling plan. Comstock has budgeted $360 million for 2009 capex, $322 million of which is allocated to E. Texas and N. Louisiana (mostly Haynesville, but some Cotton Valley). The 33 proposed well locations are shown on the graphic below.

The company also provided some interesting technical information about the completions, as shown in the slides below. In the first one, the days to drill each of their wells is shown, varying from 29 to 61 for all horizontal wells.

In another, they present the initial production figures cross-referenced with the lengths of the laterals, the number of stages and the completion design. They seem to have hit on some success with their latest three wells which use a revised completion design of slick gel and a 40/70 proppant. One can't tell if the success of the wells shaded in red on the slide is directly proportional to the completion design, but Comstock believes they have a road map for future completions. Management did admit that part of the success had to do with locating the laterals in a different part of the Haynesville thickness.

EXCO's CNG Fueling Facility

EXCO Resources announced that it has opened a compressed natural gas fueling facility at its Vernon Field site near Chatham, LA. None other that T. Boone Pickens of The Pickens Plan fame helped cut the ribbon.

It is actions like this and the Shreveport decision to purchase CNG powered buses that are an important first step in creating strong and steady demand for natural gas. Face it, right now natural gas is cyclical and seasonal. It is dependent largely on the industrial market and the seasonal heating/cooling market. For this to be a strong, legitimate industry, the cyclicality and seasonality have to be "smoothed." It's impossible to reduce it, but the more uses for natural gas out there, the more stability the industry will have.

A big step in this process is the NAT GAS Act, H.R. 1835. This act supports the use of natural gas vehicles. It is supported by Boone Pickens and is a great first step. With all the attention that Mr. Pickens brings to the table, it has definitely gotten the attention of Congress.

If we are going to move to some kind of Natural Gas Standard in this country, suppliers have to get involved in creating the infrastructure. As much as producers would like to just suck the stuff from the ground, ultimately they are going to have to be more involved on the distribution end. Chesapeake Energy has realized this and has focused on PR efforts, like CNG NOW. It will require more in the end. Just like Shell, Exxon and Chevron have gas stations, it might be incumbent upon natural gas producers to have their own retail delivery system. Are Chesapeake CNG stations in our future?

Thursday, May 7, 2009

Petrohawk Increases Capital Budget by $400 Million

In its quarterly earnings call, Petrohawk announced that it has increased its capital budget for 2009 from $900 million to $1.3 billion. The company feels that it now has better access to cash and it also feels that its opportunity in the Haynesville Shale needs to be exploited. Most of this will be allocated to the Haynesville Shale. The company will increase its rig count in the play from 10 to 16 by the end of the year. Petrohawk expects to do six completions per month and targets 80 to 85 new wells this year. Some of the additional capex may be used for additional lease acquisition.

It's most recent well, Power 21-1H in Bossier Parish, came in the other day at 22.4 MMcfe/day at 75,000 pounds flowing casing pressure. I hope to be able to post more Petrohawk results soon.

Additionally, management discussed well costs on the call, noting that they have been around $9.5 million. They expect these costs to come down but weren't specific how far.

The company is also working to expand its takeaway capacity in the region, getting ready for a big year in 2010.

XTO: Update from Earnings Call

XTO Energy reported earnings this week and gave an update on its progress in the Haynesville Shale. XTO is not a major player in the Haynesville Play, but the company is a big dog in the domestic natural gas industry.

XTO currently has four wells drilling in the Haynesville Shale, up from two. The company has been drilling mostly in Panola County, TX but is moving into Louisiana next month. They have two producing wells, the latest averaging 5.5 MMcfe/day. Four wells are awaiting completion and more information on at least a couple of them should be known next month.

Like other companies, XTO is choking back its Haynesville wells once they start producing. Once gas prices improve, look for them to open the spigot. Management indicated that the choking back should improve the production decline curves for the wells. The company also indicated that it is working on adding to its takeaway capability in the region so it can "run hard" next year. This last statement indicates to me that the company subscribes to the common belief that natural gas prices will recover in 2010. XTO is setting itself up as the crouching tiger by building capacity and drilling wells but holding back until prices improve.

XTO also mentioned a little about well costs. The existing wells have cost between $8 and $9 million, but a recent well came in at $7.5 million. They hope to get costs down to $6.5 million this year.

Cool Pipeline Map

I saw this image in the appendix of a recent Questar presentation. It shows the main pipelines in the U.S. It's interesting to see the patterns and how much pipeline infrastructure surrounds the Haynesville Shale. It's really neat to see it all in context.

Tuesday, May 5, 2009

Questar: Update from Earnings Call

Questar, though not one of the big leaseholders in the Haynesville Shale, has been one of the more successful drillers. It has also partnered with Petrohawk on some other successful wells. In the company's quarterly earnings call, it mentioned that it has brought a new Questar operated well, W.K. Cupples 10H #1 (18 MMcfe/day initial production) to market. It also participates with Petrohawk on three new wells, all of which are doing well:

- Sample 4 #2: 23.9 MMcfe/day initial production
- Hutchinson 9H #6: 19.9 MMcfe/day IP
- EGP #66H: 17.7 MMcfe/day IP

Questar is also struggling with drilling costs, saying that its wells have averaged between $10 and $11 million per site, which is higher than some other companies report. They hope to get that number down to $8 to $9 million in this "buyer's market" for oil field services.

Questar is optimistic that gas prices will recover before too long. Management points to the steep contango (a condition where the forward prices for the commodity are significantly higher than the current and near future prices) in the gas market. The company has been allocating much of its capital expenditures to the Haynesville Shale and Pinedale, where it feels it can operate with the best economics in this price environment.

Management also mentioned that it is curtailing production on its new Haynesville wells after clean up. For example, on its new Cupples well, which had IP of 18 MMcfe/day, Questar "pinched the well back" to 10 MMcfe. It plans to curtail production on all new wells until prices improve. Chesapeake said the same thing back in April.

Monday, May 4, 2009

Rig Counts: Week of May 1

Nationally, the rig count dropped by ten to 945. That's 49% below where it was last year at this time. Things weren't so bad in the Haynesville Shale region. In north Louisiana, it increased by two to 75, where it was two weeks ago. In east Texas, the count stood pat at 62.

Dead Cows and Regulations

The Shreveport Times published an editorial this weekend that generally urged local communities in north Louisiana to be thoughtful in developing and implementing regulations to best mitigate the externalities associated with drilling. The impetus for the editorial was the mysterious death of 17 cows in Caddo Parish. While it's not known at this time if it was related directly to drilling, it is certainly possible.

The Shreveport situation is not nearly as severe as the battle that is brewing in the Marcellus Shale over groundwater. The issue there is contamination rather than depletion. In reading about the Marcellus play, I think back to an earlier post on the mechanics of horizontal drilling and how the process attempts to seal the drilling from the groundwater. Let's hope that works.

But the undeniable fact is that drilling is an industrial process and there are many things that can go wrong, impacting everything from the physical environment (water, animals, landscape, etc.) to the human environment (noise, light, smells, toxins, etc.), all of which can lead to alienated and generally pissed-off surface owners. If the Haynesville Shale is to be the golden goose for the region, it is better to address and minimize the externalities on the front end rather than try clean up the mess later.

Sunday, May 3, 2009

Landmen Move to Pipelines

With the decline of the Great Haynesville Land Grab and Leasing Frenzy, I was interested to see an article in the Fort Worth Business Press about unemployed landmen being trained for right of way acquisition for pipelines. It seems as though the Haynesville Shale is the hot area for pipeline development and there are suddenly lots of out of work landmen. A match made in heaven.

Friday, May 1, 2009

Southwestern Energy: Update

Southwestern Energy is best known for its position in the Fayetteville Shale, but it also has about 41,500 acres in East Texas. In a recent earnings announcement, the company gave some insight on its plans for the Haynesville Shale.

From the release: "In the second quarter of 2008, Southwestern signed a 50/50 joint venture agreement with a private company to drill two wells targeting the Haynesville/Bossier Shale intervals in Shelby and San Augustine Counties, Texas. The first horizontal well, the Red River 877 #1 located in Shelby County, reached total depth in the fourth quarter of 2008, was production tested at 7.2 MMcfe per day in the first quarter of 2009 and is currently producing approximately 3.0 MMcf per day. The second horizontal well, the Red River 164 #1, has reached total depth and it is expected to be completed and tested in the second quarter of 2009. Pending further results from these wells, the company may invest more capital in the Haynesville/Bossier Shale play than previously planned."

It's nice to hear that they find the Haynesville Play attractive, and it's always good to hear about increased spending in the play.