Tuesday, June 30, 2009

Exxon's Weapons of Gas Destruction?

Friday's Wall Street Journal "Heard on the Street" section had a provocatively titled article, "Exxon Mobil's Weapons of Gas Destruction" about how the lumbering giant is scheduled to start up three new LNG projects in Quatar. The article notes that the world market is currently oversupplied for current demand and that the development of most of the LNG capacity was begun under very different circumstances. It notes that much of the excess LNG likely will end up on U.S. shores if not purchased by Asia and Europe. The article didn't specifically describe the Kuwaiti projects, so it's not possible to know from the article if the "start up" of three projects means that they are opening after construction or they are moving from the design to construction phase. In any case, it would strike fear in the heart of anyone interested in domestic gas production.

At the end of the article, the author wonders why a cash rich giant like Exxon hasn't purchased a few of the gas rich but cash poor independents sitting on lots of gas resources. He implies that flooding the U.S. market with LNG will continue to drive the price of natgas down and make for better pickin' in terms of M&A. I wouldn't put this beyond a monolithic corporation like Exxon, but I doubt they are that smart.

I've been reading Robert A. Hefner, III's book The Grand Energy Transition (I'm reading the self published version available at the-get.com; at the end of the summer it will be available through the publisher Wiley and hopefully be better edited). The book explains Mr. Hefner's theory that society needs to transition away from solid and liquid fuels to gas-based fuels. It is also something of a memoir of a successful life spent in the natural gas industry. Mr. Hefner notes several instances of how Exxon made very public and very erroneous statements over the past 30 plus years about the worldwide decline of natural gas supplies. Exxon has been proven dead wrong on each occasion.

I compare these stories to Exxon's current actions in the natural gas industry and wonder what Exxon really thinks about the gas market.

Louisiana Sets Urban Drilling Rules

Last week, the Louisiana Office of Conservation issued rules concerning drilling and production for the Haynesville Zone of North Louisiana (Article; Rules). The rules include well setbacks from buildings; drilling operation concerns such as fencing, dust, noise and work hours; water use; and upkeep of drill sites.

The rules don't go as far as those proposed by local entities, which looked at rules created in the Fort Worth area as a guide. The goal of the Louisiana rules was to balance drillers' desire to efficiently access resources and the best interests of the local residents.

Monday, June 29, 2009

Cubic in a Jam

Cubic Energy, a small participant in the Haynesville Shale and partner of Chesapeake Energy in some acreage, released information this evening that the company has been notified by its chief lender Wells Fargo Energy Capital that it has reduced its borrowing base from $20 million to $7.5 million. The company was fully drawn on its line and therefore owes Wells $12.5 million. They have until September 1, 2009 and can pay it back in five installments, but it's not good news for Cubic. Obviously they are working on a debt restructuring, but that's an unenviable place to be in this market environment.

Additionally, Cubic was notified Friday by NYSE Amex, LLC that it is out of compliance with its exchange and faces possible de-listing (the company is traded on the American Stock Exchange). Cubic will submit a plan to regain compliance in a month and has until December 28, 2009 to prove that it is worthy of its AMEX listing.

A bad day all around for Cubic.

Plains Exploration: Hey Big Spender!

Around the Haynesville Shale, Plains Exploration is best known as Chesapeake Energy's sugar daddy. A joint venture arrangement has Plains paying a large portion of the development costs for wells on Chesapeake's property. It's certainly not a one-way deal. Plains bought into one of the largest leaseholds in the market that was ready to be drilled. The deal combined Chesapeake's technical abilities and tenacity with Plains' muscle to create a formidable venture.

Plains' muscle is no better displayed than in its capital budget for the Haynesville Play. Its 2009 Haynesville budget is $452 million, which represents 43% of Plains' capital budget.

The map below shows where the action is. The company had a flurry of drilling activity around the DeSoto/Caddo Parish line a few months back that is either producing or awaiting completion. Plains' 26 drilling wells mostly have relocated to southern DeSoto, operating on a near 45 degree line stretching from Shelby Co., TX to western Bienville Parish, LA. These guys have clearly been busy beavers.

The chart below shows the expected ramp in the number of wells and production by the end of 2009, when Plains expects to have drilled more than 150 wells with estimated production of approximately 70 MMcf per day.

The chart below is particularly interesting because it shows projections for capex, number of wells and production for the next five years. Plains expects to have nearly 1,200 wells producing more than 200 net MMcf per day of gas by the end of 2014. Keep in mind that the production numbers are net, and Plains owns a 20% working interest in the project, so the table implies more than 1 Bcf/day from these wells by 2014. Over six years, including 2009, Plains expects to spend $2.9 billion in capital on the Haynesville Shale. In terms of well economics, Plains is assuming a 6.5 Bcfe estimated ultimate reserves (EUR) and a $7 million well cost.

Regency Production Map: Updated

I published this map last month with information current through April 30. The map below is current through May 28, 2009. It's hard to notice, but there are some new wells.

Regency's Haynesville Expansion is on track to be in service by the end of 2009.

Friday, June 26, 2009

Rig Counts (Up and Down) and Gas Prices

The weekly Baker Hughes rig count showed a second consecutive week of increased rigs in the U.S., rising by 18 to 917. In the Haynesville Shale region (which includes some other fields), the rig count decreased by four (-2 N.LA, -2 E.TX) to 124.

This week's increase came in oil rigs (+23), while gas rigs were down by five. Since September 1, 2008, the number of oil rigs has decreased to 219 (-197 rigs, -47%) and the number of gas rigs has decreased to 687 (-919, -58%).

I recently read a presentation by Range Resources, a big name in the Barnett and Marcellus Shales, that spends a fair amount of time talking about natgas prices. Range thinks the rig count might drop as low as 600. They believe that the rig count won't rebound until natgas prices hit $7 to $8 per MMcf, which they consider the "marginal cost of development." But once the rigs go back to work, it will still take a year for production to stop declining because the base decline in the U.S. is about 30% per year, or 15 Bcf.

I think this is an interesting analysis, but I'm not sure it takes into account the wells that have been drilled relatively recently but choked back to reduce flow or shut-in until prices increase. I have to believe there will be a surge of gas on the market once prices return to a palatable level, which will probably bump prices down again, at least for a short time. It likely will be a rocky road toward that equilibrium.

On the subject of natgas prices, I saw an article on cnbc.com yesterday that noted that the ratio of prices between oil and natural gas reached 18.55 yesterday, the highest it has been since July 1991. The average ratio since June 1990 is 9.26, but as the chart below shows, it is a very volatile relationship. Many people are counting on gas prices to rise to correct this ratio, but looking at this chart one can tell that the 9x ratio is simply an arithmetic mean and not a hard rule. We should expect that ratio to run all over the place. I have to believe that natgas prices will change (rebound?) based on fundamentals associated with gas, not directly because the ratio to the price of oil.

El Paso: Update

El Paso, with approximately 42,500 acres, mostly in Louisiana, has quietly completed seven wells in the Haynesville Shale and is currently producing about 50MMcfe per day of natgas. The initial production (IP) rates for the seven wells are as follows in descending order:
  • Blake 10H #1 20.3 MMcfe/day
  • JR Gamble 11H #1: 17.8 MMcfe/day
  • Annette Green 22H #1: 16.2 MMcfe/day
  • Travis Lynch GU #4-H: 8.0 MMcfe/day
  • Hamilton 12H #1: 14.1 MMcfe/day
  • RF Gamble 24H #1: 14.6 MMcfe/day
  • Miller Land Co 10H #1: 4.5 MMcfe/day
Decline curves are shown below:

El Paso also touts its cycle time speed in getting from spud to completion, with four of the six fastest wells in Louisiana.

Thursday, June 25, 2009

Alberta Feels the Heat

In a move to counter the declining economics of drilling in Alberta, the provincial government extended a program of natural gas drilling incentives to make drilling north of the border more competitive with the shale plays in the U.S. The incentives had been set to expire in March 2010 but were extended to March 2011.

The incentives include charging producers a flat rate of 5 percent during the first year of output from new wells and giving a royalty credit of C$200 ($172.64) for each meter of new well depth drilled. There had been some criticism last summer of Alberta jacking its royalty rates. I guess the decline of gas prices caused reality to sink in quickly.

This news comes as EnCana, Canada's largest gas producer, announced that it will shut in wells in Canada and the U.S. while natgas prices remain low.

Marathon Oil: Not in a Rush

I haven't mentioned Marathon Oil's presence in the Haynesville Shale before because the company has been very quiet. It leases 25,000 net acres (70% operated acreage), mostly on the Texas side, but it also has some leases in DeSoto Parish, LA. The acreage is mostly held by production, so the company is not in a big hurry to drill.

Marathon is a big integrated company that participates throughout the oil and gas value chain, from exploration to retail sales. It has projects all over the world, and the gas shales are a pretty minor part of the big picture.

Marathon clearly is an oil company first. It characterizes its resource potential for the gas in the Haynesville Shale in MMBOE, or millions of barrels of oil equivalent. Marathon has only participated in one well so far and doesn't expect to have a rig in the play before 2010. It expects to have three to four rigs by 2013. Definitely not in a rush.

Updated Gas Price Charts

Back in April I posted some charts compiled by Southwestern Energy that showed the dynamics between oil prices and gas prices as well as between gas prices and gas rig counts. Now with a couple more months of data, the charts are even more interesting.

First, in terms of the relationship between oil and natgas prices, the dynamic is way off. Usually, they move in the same direction. Historically, oil/barrel is about 8x the price of natgas/MMBtu. Yesterday in terms of spot prices, that ratio stood at 16.7x. The right tail of the image shows the divergence graphically.

The second chart shows the relationship between natgas prices and natgas rig counts. The trend of decline continues, but the rigs have maintained a steeper fall than the gas price. With last week's increase in rigs nationally, I imagine the rig curve is going to follow the price curve, at least for a little while.

Wednesday, June 24, 2009

Cows Killed by Bad "Stuff"

According to an article in today's Shreveport Times, the mystery of the seventeen dead cows in southern Caddo Parish has more or less been solved. As suspected, the cows drank from pooled chemicals that had been spilled from a drilling rig that was undergoing completion. While there was not a rigorous "CSI:" style investigation, Caddo Parish Sheriff Steve Prator gathered relevant oversight parties together and came to the conclusion, "the stuff killed the cows."

I don't mean to make light of the situation. While it was cows this time, who knows what else can happen if drillers are careless. Don't make it easy by giving people a symbol to express their frustration. Not to be overly dramatic, but look at Neda in Iran.

The companies set to profit from the Haynesville Shale need to get in front of oversight issues and prove that they can be truly vigilant in policing themselves. There are regulations on drilling activities being considered at the local, state and federal levels. It's all rather unprecedented to see this kind of activity. Instead of entrenching themselves against regulation, drilling companies need to prove they are responsible and that safety really is a high priority. Unfortunately, it may be too late at this point.

Exco: More Wells Planned by End of Year

In all my pooping on EXCO Resources' poor choice of words in a press release earlier this week, I neglected to mention the good news. The company said that it plans to complete 21 more horizontal wells in the Haynesville Shale before year end. This is up from the sixteen they said they intended to complete back in May. The company has already completed nine horizontal wells and eight vertical wells.

In addition, EXCO has committed two-thirds of its 2009 drilling and completion capital budget to the Haynesville Play and will spend over $100 million in 2009 on their midstream assets to add treating capability and increase throughput capacity to more than 500 MMcf per day by early 2010.

Clearly EXCO is excited about its acreage in the Haynesville Shale.

Arctic Gas to Remain Stranded Indefinitely?

Everyone knows that there is lots of gas in the Arctic region, both in Alaska and Canada. The big question with all of these resources has long been, "when are we going to get the pipeline capacity to move this stuff south?" With the emergence of the Haynesville Shale and other shale plays in the Lower 48 as well as shale plays in Canada, the question becomes, "does anyone need our gas?"

Here is an interesting article from the Canadian National Post that puts the issue of the stranded arctic gas in perspective. The story discusses the Canadian situation as well as the proposed Alaskan AGIA pipeline. These are truly interesting times in which we live.

Goodrich: Quick Update

Goodrich has been making the rounds lately at the investor conferences. It doesn't have a whole lot of new information to tout, but it's still excited about the Haynesville Shale. I posted a fair amount of detail earlier this month, but below are three of the company's maps that have updated data (there was no new data for the Longwood/Greenwood-Waskom fields in Caddo Parish, LA).

Cubic Energy Type Curves

Since decline curves are a hot topic of conversation in the Haynesville Shale, I thought I'd throw a couple more out there. In its annual presentation, Cubic Energy presented some detail on what it sees in terms of type curves. Cubic is a small Haynesville Shale producer with four vertical wells, and is partnered with Chesapeake Energy on some horizontal wells. Cubic's land position is in the Johnson Branch and Behtany Longstreet fields where it is squeezed in among positions leased by Goodrich and Chesapeake. Looking at the map below with results from neighboring wells, Cubic is sitting on pretty good property.

Cubic presented two scenarios for type curves (I am not a geologist, so I somewhat ignorantly refer to them as "declne curves"), a base case using 5.5 EUR (estimated ultimate reserves) and a likely case using 7.5 EUR. Below are sketches of the curves and the related assumptions.

Likely Case:
Reservoir Assumptions:
- First month average production of 8,700 MMCFPD
- Initial decline rate of 77%
- Hyperbolic ‘b’ factor of 1.65
- Terminal decline of 5%
- EUR = 7.5 BCF

Economic Assumptions:
- Capital costs of $7.3 MM/well
- LOE of $6,600/well/month
- Strip gas pricing scenario as of 1-5-(‘09 - $5.79, ‘10 - $6.86, ’11 - $7.44, aft - $7.13)

Economic Results:
- 58.8% IRR
- 4.7 : 1 ROI
- 2.2 yrs payout
- $9.4 MM PV10

Base Case:
Reservoir Assumptions:
- First month average production of 6,500 MCFPD
- Initial decline rate of 77%
- Hyperbolic ‘b’ factor of 1.65
- Terminal decline of 5%
- EUR = 5.5 BCF

Economic Assumptions:
- Capital costs of $7.3 MM/well
- LOE of $6,600/well/month
- Strip gas pricing scenario as of 1-05-09 (‘09 - $5.79, ‘10 - $6.86, ’11 - $7.44, aft - $7.13)

Economic Results:
- 35.6% IRR
- 3.3 : 1 ROI
- 3.3 yr Payout
- $5 MM PV10

The two curves side by side (I think they messed up the arrows):

Tuesday, June 23, 2009

Mainland Acquires Mississippi Land: Haynesville Prospect?

Mainland Resources announced today that it has entered into a LOI to acquire 8,000 acres in Mississippi that it believes shows prospective Bossier/Haynesville Shale and Hosston formations. This assumption is based on seismic and log data from an old well drilled and abandoned by a major in the 1980's. Unfortunately, the release is not very specific as to the exact location in Mississippi.

From the release:
"According to available well logs from drilling, the identified Bossier/Haynesville Shale is demonstrated to be over 2500 feet thick with extremely large pressures up to or exceeding 20,000 psi. The well was still in the Bossier/Haynesville Shale when drilling operations were discontinued due to high pressures, etc. The Bossier/Haynesville Shale is possibly much thicker than 2500 feet, which is several times thicker than the Bossier/Haynesville Shale encountered in NW Louisiana. The density neutron log from the previous drilling also shows good average porosity from 12% to 15%."

Berry Petroleum: Quick Update

Berry Petroleum is another company that's been relatively silent in the Haynesville Shale. A couple of months ago I posted some information, and today I've got an update of the company's own summary, showing more detail of its Darko (TX) field.

Not a lot to report, but the latest update is that after four vertical wells, Berry is planning its first horizontal well in the second half of 2009 in the Darko field. The map above shows results from neighboring competitors, most notably GMX, PennVirginia and XTO.

Anadarko Strategy: Watch and Learn

There hasn't been a whole lot to say about Anadarko in the Haynesville Shale. They are one of the biggest producers in the world and they have 80,000 acres in the Haynesville Play, but they haven't done much there to date. The big reason is that most of the company's acreage is held by production (HBP), so they are not on the clock to produce before the lease runs. Their strategy has been to watch and learn. The map below shows the company's acreage, most of which is located in East Texas.

Anadarko has completed three vertical wells, as noted above, and scheduled a horizontal well for Q1 2009. I'm guessing the company clearly sees it as a long term play that will require a great deal of technical expertise. If they aren't in a hurry to drill, it behooves them to sit on the sideline to watch and learn, especially with such low gas prices.

Monday, June 22, 2009

More on European NatGas

I noted last week that Chesapeake Energy and StatoilHydro of Norway entered into an agreement to seek out shale gas in other parts of the world. Today I noticed a brief but interesting article on some European unconventional gas resources.

On top of that, I read an article in the Wall Street Journal that noted Royal Dutch Shell's discovery of a large natural gas discovery called Gro in the Norwegian Sea.

I think this is just the beginning. We are going to see new sources of natural gas emerge all over the world, closer to the ultimate users of the resource. As that happens, I believe the level of investment in infrastructure to support the use of natural gas, especially in transportation, will develop at a quicker pace and we will begin to see the point of inflection where natural gas takes over for oil as the key transportation fuel in the world. I think natural gas will continue to take market share from coal in electricity generation, but I don't see it gaining as much worldwide, especially in developing countries with ample coal resources. At least not yet.

A Poor Choice of Words?

On Friday, EXCO Resources will celebrate the opening of a new gathering and treating facility in DeSoto Parish, LA for its Haynesville Shale assets. Exco is understandably proud of its success in the Haynesville Play, with a number of wells in the top twenty in terms of initial production. With the opening of a new office, Fort Worth-based EXCO can trumpet its economic development credentials.

This is definitely a good thing, but the first thing I noticed when reading the press release was the title, "EXCO Resources, Inc. to Unveil Facilities for Haynesville Shale Exploitation." Is it just me who cringes at the word "exploitation?" All I think about is the colonial powers of several centuries ago using slave labor to plunder the natural resources of under-developed nations all over the world. Not exactly the image one wants to conjure up when dealing with a quickly developing natural resources play.

While the Haynesville Shale is a definite boon to the regional economy and many land owners' pocket books, it is definitely a double-edged sword. The ancillary impacts of traffic, strain to water resources, fears from the impacts of hydraulic fracturing, etc. have many local residents on edge.

If the Haynesville Shale is truly going to be a world class play, it can't be rammed down the throats of the locals. I know the word "exploitation" is technically correct, but, geez, couldn't the PR and marketing department have come up with something a little better?

Not Feeling So Bad for West Virginia

It's no secret I'm a big fan of natural gas - I believe it is the fuel of tomorrow - but I've been feeling a little bad lately because I've been pooping on coal so much. The coal industry in this country has a long and proud history and many of the places where it is mined, especially on the east coast, have seen more than their fair share of economic distress over the past quarter century. I worry most about West Virginia. I guess it symbolizes the coal industry to me.

My worries were lessened recently when reviewing GMX Resources's recent presentation. The presentation discussed the geology of the Marcellus Shale. I haven't spent much time looking at the Marcellus. I know that it covers a gigantic region, from West Virginia into Canada, and that it is estimated to surpass the Haynesville Shale in recoverable gas in the next decade, but I never thought about where the recoverable gas is located. The map below shows that much of the Marcellus's recoverable gas is located in a band that runs through West Virginia into western Pennsylvania. It seems to sit below the largest area of east coast coal reserves (second image below).

Seeing this map makes me feel better. I hope the eastern coal states can build a natural gas production industry - they are well behind other gas producing regions in terms of natural gas infrastructure - and hire people now in the coal industry. But most importantly it relieves my guilty feelings towards West Virginia.

Sunday, June 21, 2009

Canadian Auction and an Interesting Week

Last week was very exciting for the natural gas industry. The big news was the Potential Gas Committee's assessment that the natural gas resource in the U.S. is larger than previously stated, largely because of our greater ability to access shale gas formations. Also last week, the government of British Columbia, Canada sold eight drilling licenses to the Horn River Basin in NE BC for C$173 million. Many geologists see the Canadian shale formations as similar geologically to the Haynesville Shale. I haven't studied this, but I'll take their word for this.

On the surface, the prospect of such an ample natural gas supply is a little frightening, especially when you add the proposed Alaskan Pipeline to the Lower 48 and LNG imports to the mix. Gas prices are getting killed this year because of the combination of high supply levels and diminished demand.

While supply is hurting price right now, it is important to look at the expanded future supply as an opportunity. There is greater proof now that natural gas is abundant in North America. We already knew it is far cleaner than coal and oil. These reports should give policy makers greater confidence in endorsing initiatives to incorporate natural gas in transportation and power generation.

Price spikes that have given gas a bad reputation often came from supply shocks. I believe that if the natural gas industry can demonstrate economically feasible access to vast quantities of gas in North America, the price of gas should be less volatile in the future. There will always be some volatility in a natural resource commodity, but dependable supply should improve price stability for natural gas and help make it the fuel of the future.

Friday, June 19, 2009

Rig Count: +23 U.S., +5 Haynesville Region

Baker Hughes came out with its weekly rig counts today, and it showed an increase for the first time in a long time. The number of rigs in the U.S. increased by 23, or 2.6%, to 899. The count is still down 1,007 from this time last year.

This increase in rigs is definitely notable. This is only the second time this year that the rig count increased, and the previous increase was a four rig bump sandwiched between a couple of large drops a few months ago. The last time the rig count increased by this much was nearly a year ago in August 2008. Does this represent a change in sentiment for the industry? An indication of bottom? A statistical anomaly? I guess we'll know more in a few weeks.

Of the rigs working nationally, 77% are drilling for gas, 22% are drilling for oil and 1% are classified as miscellaneous. Most of the rigs (43%) are horizontal rigs, while 37% are vertical and 19% are directional. Interestingly, over the course of one year, the percentage of horizontal wells has increased 15 percentage points from 28.5% of all rigs to the current 43.5%. Not surprisingly the percentage of vertical wells has dropped by 14 percentage points over that same period.

In the Haynesville Shale region of East Texas and North Louisiana (which includes other fields), the rig count increased by five, all in Louisiana.

Abundant Natural Gas Resources Documented

In its biennial natural gas supply report, the Potential Gas Committee (PGC) announced, in a report promisingly titled, "Potential Gas Committee Announces Unprecedented Increase in Magnitude of U.S. Natural Gas Resource Base," that the United States possesses a total resource base of 1,836 trillion cubic feet (Tcf). Adding tot that number 238 Tcf of proved gas reserves (as reported by DOE and EIA), the report states that the U.S. has a total available future natural gas supply of 2,074 Tcf. This represents an increase of 542 Tcf, or 35.4%, over the previous evaluation in 2006. (New York Times article)

This is big because the PGC, which is headquartered at the Colorado School of Mines, is a relatively independent group and is viewed as an impartial arbiter of supply numbers. A report last August by Navigant Consulting was sponsored by natural gas industry groups, so it was not taken as gospel. Interestingly, the "industry" report suggested a gas resource base of 2,247 Tcf, not that far north of PGC's 2,074 Tcf.

At a time when Congress is debating our energy future and initiatives like the Pickens Plan are gaining footing, it is very important for the natural gas industry to demonstrate that the supply of natural gas is large and the continued development of new technology is enabling larger reserves to be delivered economically.

More Geology

In a presentation a couple of weeks ago, GMX Resources provided additional detail on the geology it is seeing in the Haynesville Shale. Although I don't have a background in geology, I was interested in some of the company's images regarding how the Haynesville Shale came to be and how it sits now in the larger geological context.

GMX also included an isopach map in the presentation showing the thickness of the Haynesville Play across most of its span. The clear spin from GMX's perspective is that they are in the thickest part of the shale. While that is good, there are other factors, such as pressure, porosity and completion techniques, that determine the quantities of gas produced. Thicker is good, but there's more to it.

The presentation also summarized some of the key geological differences between the Haynesville, Marcellus and Barnett Shales. Some of these differences have been quantified elsewhere, but I thought this was a very good summary. Not that it's a competition, but I was pleased to see that of the three shales the Haynesville has the highest per well estimated ultimate reserves (EUR).

Fracture Visualization

Also from the recent GMX presentation was an image from the company's Bosh 11H well that gives a visualization of the impact of fracturing. The image shows a cross section of the horizontal well and the location of the fractures from the eight different fracture stimulation stages. The drawing shows that fracturing impacts an area between 600 and 800 feet in height.

Thursday, June 18, 2009

More on Enbridge's LaCrosse Pipeline

I recently read an interesting interview in the Calgary Herald with Steve Letwin, Managing Director of Enbridge Energy Co. Inc. discussing the company's proposed LaCrosse pipeline in the Haynesville Shale area. The article is pretty short, but it gives good insight on Enbridge's strategy and some of the obstacles faced by the project (and any pipeline project in the region).

One of the biggest concerns is the unknown potential of the Haynesville Shale and the high shale gas depletion rates relative to conventional production. Another issue specific to Enbridge, which is better known as a long haul pipeline company, is the decision to build a short route pipeline in an already crowded field.

Enbridge has an interesting strategy to cope with the issues. First, the decision to build a smaller, shorter pipeline somewhat lessens the risk of the depletion rate and the crowded field. Relative to other Enbridge projects, the shorter pipe requires a lower investment and therefore has lower risk to the company. Additionally, since the pipeline will interconnect at Carthage, which handles gas from East Texas and the Barnett Shale, the Haynesville concentration issue is lessened. Interestingly, the company decided to aim the pipeline towards Florida, which has shown strong demand, rather than move the gas to the north, where Enbridge feels it might face future competition from the Marcellus Shale.

Louisiana HB 110: Increased Tax Credit for Natural Gas Cars

Finally, some leadership from Louisiana politicians! Credit Rep. Jane Smith of Shreveport for introducing HB 110 in the current legislative session to increase the individual and corporate income tax credit from 20% to 50% for the purchase of a qualified clean-burning motor vehicle, the purchase and installation of equipment to convert a gasoline or diesel engine to burn natural gas and to develop a dispensing location (Monroe News Star article).

As of Tuesday night, the bill passed the Senate Revenue and Fiscal Affairs Committee. It's hardly a done deal, but I'm glad to see Louisiana finally taking a leadership role in supporting the adoption natural gas vehicles. Who knows if the NAT GAS Act will get anywhere in Congress or if the Pickens Plan will make headway nationwide. I'm just glad to see Louisiana actually in front of a big national issue (that will also benefit the state).

Shreveport has already taken a step in the right direction by moving towards natural gas buses. I'm chagrined that New Orleans recently purchased biodiesel buses, but there might still be hope there.

Wednesday, June 17, 2009

Chesapeake-StatoilHydro Go International

In a minimally reported bit from the Chesapeake Energy annual meeting, CEO Aubrey McClendon mentioned that Chesapeake and StatoilHydro of Norway (CHK's partner in the Marcellus Shale) have struck a joint venture agreement to search for shale gas internationally. No other details were given.

It was hard to find reporting on this (current article, older article with background info), but I think this is a big deal. To me it represents a sea change in the energy world. Shale gas is nearly everywhere on the planet. The difficulty has always been getting to it in a cost effective manner with existing technology. Chesapeake is one of several U.S. independent gas-focused companies that has developed technology to access this stuff in a relatively affordable manner. It's not big oil advancing the ball, it's U.S. independents.

With the basic knowledge that shale gas is located all over the world and not just in the Middle East and Russia I will venture to say that natural gas can put nearly every country in the world on the path towards energy independence. I cannot over-emphasize the importance of this realization.

I think you are going to see the big boys all over the world beating a path to Oklahoma, Texas, Louisiana, Arkansas and Pennsylvania to learn about horizontal drilling for shale gas and other "unconventional" techniques. It is a readily exportable technology and a potential growth industry on its own.

I see no better way to free the world from the despotic clutches of OPEC and the zany leaders of oil rich countries than by democratizing shale gas. Gas has always been an unloved stepchild to oil, burned as an unwanted byproduct and its prices tightly controlled by governments all over the world. But to rip off the famous line, "give a man a tank of gas and he will drive for a day, teach a man to extract his own natural gas and he will achieve true independence." Or something like that. I know I'm being a little dramatic, but I really think natural gas is the future.

[6/23/09 - Update: Here is the exact statement by Chesapeake CEO Aubrey McClendon from the company's annual shareholder's meeting:

"In addition, on all of these plays going forward we have the opportunity for our partners to carry us in some additional leasehold acquisitions. And also, I think, we have upgraded the company reputationally. We've never had a partnership with a major company like today we have with BP, and also with Statoil. I'd like to mention that Statoil and Chesapeake today have the first worldwide joint venture on a 50/50 basis that is scheduled to look for new shale gas reserves around the world.

"We think that they have the commercial skills to operate -- to put us in various countries around the world. And, we think we have the technological skills -- the petro-physical skills, to look for shales around the world. And I think this is one of the most encouraging things in the world today."]

Tuesday, June 16, 2009

GMX: New Haynesville Results

Today, GMX Resources, which I lovingly refer to as a "Suicide Haynesville Play" because of its high Haynesville acreage concentration, announced results from two new wells from its Texas properties:
  • Blocker Ware 19H: initial production (IP) rate of 8.9 Mmcf/day; 4,446 foot lateral with 12 fracture treatment stages; 22/64 choke and 4,470 pounds of flowing casing pressure ("FCP") into the sales line.
  • Blocker Heirs 12H: IP rate of 9.4 Mmcf/day; 4,934 foot lateral and 14 fracture treatment stages; 23/64 choke and 5,344 pounds of FCP into the sales line.
GMX is still working on the following two wells:
  • TJT Simpson 1H: 4,606 foot lateral, scheduled for fracture treatment in late June 2009.
  • K 5H: Currently drilling, expected completion in July 2009.
The last five Haynesville horizontal wells the Company has completed have an average IP rate greater than 8.9 MMcfd, and the first three Haynesville wells with lateral lines greater than 4,000 feet have collectively averaged more than 5.8 MMcfd in the first 30-day period.

Gas Price Hedging

I haven't spent too much time on the topic of hedging in this forum because I wanted to focus on leasing deals and initial results as our understanding of the Haynesville Shale was growing. Now that we are leaving the leasing phase and moving into the drilling phase, it is wise to shift some of the discussion to production issues. One of the biggest and often confusing of these is commodity price hedging.

Chesapeake Energy made news last summer when gas prices soared but the company showed a huge accounting loss. While head scratching at first glance, this was the result of the accounting rule that requires companies to book any unrecognized gains or losses on financial instruments like hedges (called "mark to market" accounting, a concept that got financial institutions in a wee bit of trouble this past year). Chesapeake did a great job of locking in prices for future gas sales as prices rose through the first half of 2008. Unfortunately, at least from an accounting perspective, as gas prices continued to spike it made the hedges look "underwater" and the company had to show big losses. When prices sank in the fourth quarter, the company was able to show a fairly sizable paper profit, but since the world was going to hell at that time it didn't seem to matter.

EnCana released news on Monday that it had hedged 35% of its 2010 production at an average price of $6.21/Mcf (US dollars, even though EnCana is Canadian). Given the fact that spot prices are hovering around $3.50, that sounds pretty good. Hedging has greatly benefited EnCana in 2009. The company has hedged 2.6 Bcf/day of gas through October 2009 at an average price of $9.13/Mcf. Through the first five months of 2009, this hedging program has yielded $2 billion in incremental cash flow over spot prices. This has enabled the company to "double down" on its Haynesville drilling program while others are forced to cut back. Below is a summary of EnCana's 2009 hedging program.

Hedging is important for many reasons. Natural gas can be very volatile in price, subject to supply and demand issues, the weather and the strategies of commodities traders. Hedging is an essential tool for producers to have some certainty about future profitability and most importantly cash flow. Cash is king for producers - it allows them to fund capital investment, which drives future production. If you are entirely dependent on the capital markets to raise funds, you are S.O.L. when another 2008 financial calamity occurs. Now that producers have found so many new sources of gas, they are out-spending their self-generated cash flow (see chart below) and are being forced to borrow or sell equity. Every penny of cash they can squeeze out of operations is vital to their growth and viability.

Monday, June 15, 2009

Mid-Bossier: The Stacked Play

The Mid-Bossier Play is starting to creep into the news. This is the formation immediately above the Haynesville Shale but below the Cotton Valley and neighboring formations. There has been little discussion about it because the Haynesville Shale has sucked up most of the oxygen in the room. After the frenzy of drilling Haynesville wells for the next few years, you are going to start hearing more about the Mid-Bossier.

Mid-Bossier is not to be confused with Deep Bossier, which is more or less the same thing as the Haynesville Shale as the trend moves west in Texas. The Mid-Bossier Play is in the strata directly above the Haynesville formations. The Haynesville Shale gets all the attention, especially in Louisiana, because leases state that you can only hold the minerals in a lease 100' to 300' (depending on the lease) below the deepest productive penetration. That way, producers can drill Haynesville wells and hold the land by production (HBP) until they later drill Mid-Bossier wells.

The juxtaposition of the two formations creates what is known as a "stacked play." The two images from GMX Resources give some graphic representation of the play:

EnCana seems to be doing most of the talking about the Mid-Bossier Play. It was discussed in a recent conference call, and Jeff Wojahn, President of EnCana's U.S. division, was recently quoted saying about Mid-Bossier, "The thickness and aerial extent are similar to the Haynesville, and we think the gas in place could rival - or is right there with - Haynesville." Thems strong words!

EnCana is not the first company to reference the Mid-Bossier, but they seem to be taking a Chesapeake-like leadership stance on discussing it. There are not too many data points on the Mid-Bossier Play, but every Haynesville penetration (in the right area) goes through the Mid-Bossier. Until geologists know more, it is premature to call the play a big winner.

EnCana has drilled a vertical well to the Mid-Bossier (Colbert #1H in Martin Field, Red River Parish, LA) and is planning another three to four this year. The Mid-Bossier might also have played into EnCana's recent decision to trim the amount of acreage for disposal in the southern part of its leasehold. Also playing in Mid-Bossier are Cabot (Trawick and Minden Fields, TX), Goodrich (Surprise Prospect in Nacogdoches Co., TX) and Petrohawk (Shelby Co., TX).

Petrohawk, for one, is not getting too excited about the Mid-Bossier Play in public and has said that the Mid-Bossier may not be as large as the Haynesville Shale. A spokesperson said, "it's not present where we do most of our drilling," and Petrohawk leases about 300,000 acres.

Clearly it's too early to get lathered up about the Mid-Bossier Play, but its presence could imply an even larger supply of gas in the Haynesville leases and greater longevity for the industry in the region.

Saturday, June 13, 2009

Exxon Joins TransCanada in Alaskan Pipeline

I've noted in previous posts that the emergence of giant shale plays in the Lower 48 states has caused some cold feet in Alaska about the proposed $26 billion gas pipeline from the North Slope to the vicinity of Chicago. TransCanada won the bid for the pipeline, which is officially supported by the state of Alaska through a $500 million incentive called the Alaska Gasline Inducement Act (AGIA). The AGIA is a huge part of Gov. Sarah Palin's agenda, so it's being pushed hard. A second proposed pipeline by BP and ConocoPhillips would do the same thing, but without the explicit support of the state government.

News comes Friday that Exxon Mobil has joined the TransCanada project, giving it greater heft and bringing it closer to the finish line (WSJ print page; PDF copy). Exxon's presence does not change the viability of the project - it simply gives it greater financial stability - but since Exxon controls the largest share of natural gas on the North Slope it's a natural fit.

[6/16/09 - Update: Here is a good article from the Fairbanks News Miner about the Exxon/TransCanada deal that suggests that Exxon might not be as committed to the project as implied and offers a glimpse at some intrigue behind the scenes of the gigantic pipeline project.]

Texas Temblors: Fracking's Fault?

Yesterday's Wall Street Journal had an interesting article about a recent flurry of earthquakes in the Dallas-Ft. Worth area (link to WSJ print version; link to PDF copy). Eighteen low grade tremors have been felt in the DFW metro area, most notably around Cleburne and Euless, in two bunches, one last Halloween and another in mid-May 2009. There is some speculation that fracking of the Barnett Shale could be the culprit, but there is no proof.

This comes at a particularly bad time for the hydraulic fracking industry. With Congress looking at legislation that might impose restrictions on the practice, the industry doesn't need any bad press. It is important to note that the link between the small earthquakes and the Barnett is merely speculation, but it is a convenient conclusion for some to draw.

Friday, June 12, 2009

Steep Contango Implies Higher Gas Prices By Year-End

There was a good article on MarketWatch.com this week about the steep contango that continues to exist in the natural gas commodities market. Contango is a state where the price of a commodity for future delivery is higher than that for nearby contracts. Right now, near-term contracts sell at $3.85/MMBtu (as of 2 PM CDT today), while contracts for delivery at the end of 2009 and into 2010 are selling for more than $6/MMBtu. That difference is considered a steep contango - about a 60% higher price. This situation implies that natural gas prices are expected to increase by the end of the year, roughly to the $6-$7 range.

That's good news. The bad news is that the continued high supply level and the threat from imported LNG, which is putting downward pressure on near-term gas prices. Many analysts expect the price to drop below $3/MMBtu (yesterday's Henry Hub spot price was $3.51/MMBtu).

For companies that have strongly curtailed drilling efforts waiting for higher prices, their performance will lag the (expected) increase in prices as they will have to ramp-up their drilling efforts in a hurry along with lots of other people. This should lead to delays, while companies that kept spending during the slide will be in a much better position, assuming they can hold out until prices rise.

Rig Counts: Down 11 US, Unchanged in Haynesville Area

Baker Hughes released this week's rig counts, and there are no big surprises. Rig counts dropped nationally by eleven to 876. This represents a drop of 1,025 from last year. In the Haynesville Shale geographic area, the rig count stayed at 123 for the week. It was up two in North Louisiana to 74 and down two in East Texas to 49. Pretty much what you'd expect this week.

SandRidge: Haynesville Returns Improve

I read through a recent presentation by SandRidge Energy and spent some time comparing the summary of well economics (below) with a similar chart presented a couple of months ago.

I was interested to see that SandRidge sees economic returns improving in the Haynesville Shale (ROR increasing from 21% to 25%), but I suspect these results have much to do with a decrease in costs. Notably, the well costs have decreased from $8.5 million to $7.5 million and finding costs have decreased from $1.74 to $1.54/Mcf. What is also interesting to note is that the decline curve for the Haynesville Shale has improved (at least graphically) in the out years, surpassing the Pinedale curve. Since it's a logarithmic curve, it's hard to tell the magnitude of the change by eyeballing it, but compared to the curve from a couple of months ago, it's a definite improvement.

Thursday, June 11, 2009

Supply and Confusion

I just couldn't stop staring at the two slides below from a recent Devon Energy presentation:

What it tells me is that since 1995 natural gas production has been basically flat but the number of wells drilled has tripled. With decline rates and the like, I guess that makes some sense. But the second slide shows that for the past three years gas producers have outspent their cash flow by about 30%, where in the previous six years they had been spending between 62% and 84% of cash flow. Clearly this is an unsustainable pace, but I believe the trend will continue into 2009. But according to this data the huge spending hasn't led to significant increases in supply. (Note: this data does not reflect 2009 and the impact of the precipitous drop in rig count since fall 2008.)

The second chart doesn't surprise me given the fact that the Barnett Shale probably played a big part of the big spending between 2006 and 2008. With the big new shale wells, the decline rates are so much steeper than conventional wells, so the aggregate decline rates will increase with the addition of new shale wells. But I have some difficulty reconciling the relatively flat production with the great and unsustainable increases in spending (and drilling).

It makes me think of a chart that Chesapeake likes to use to prove that the steep decline in rig count will soon lead to a sharp drop in gas supply and an increase in the price of natural gas. When half of the U.S. gas production comes from wells less than three years old, the first Devon slide starts to make sense.

But then I think of comments by Petrohawk CEO Floyd Wilson, who recently said, "(w)e are growing production almost without trying." The big wells his company has hit in the Haynesville Shale has led to production increases even though they have cut back on drilling. Will that soften the impact to supply from the sharply lower rig counts?

All of this makes me wonder if we will see a big supply drop-off and commodity price increase in the next six months.

Wednesday, June 10, 2009

KKR Invests in Marcellus Shale; Thoughts on Taking Private Equity Money

Yesterday's Wall Street Journal featured an article about legendary private equity investment firm Kohlberg Kravis & Roberts (KKR) investing $350 million in East Resources, Inc., a major leaseholder in the Marcellus Shale with 1.2 million acres (PDF of article; print version at WSJ). The article also noted other private equity investments in the Marcellus, including Morgan Stanley Private Equity's recent investment in Triana Energy Investments, LLC and a joint venture between Avista Capital Partners and Carrizo Oil & Gas, Inc. where each company invested $150 million to acquire and develop Marcellus acreage.

This is a very interesting trend and is telling both of the market for private equity investments and how the market for new capital has changed over the past year since the Haynesville Shale land rush.

The three investments noted above came after the collapse of the lending markets, upon which private equity ("PE") companies depend mightily to do deals. PE companies (most known in previous years as leveraged buyout, or LBO, companies) are sitting on tons of cash and they have few good opportunities to invest. Unlike venture capital firms that invest equity in growth companies, PE companies make large equity investments alongside significantly larger debt investments made by other financial institutions. Without the debt providers, deals don't look so good. But it hasn't slowed the flow of investor money into PE funds, thus increasing the pressure to invest.

At the same time, the collapse of the financial markets has all but shut off access to both debt and equity capital for exploration companies, which crave capital to lease property and drill. When the Haynesville Shale was going wild in the spring and summer of last year, the financial markets were still wide open. Companies like Chesapeake and Petrohawk floated huge amounts of debt and equity in the market. When the markets shut down and the price of natural gas plummeted, capital hungry exploration companies were S.O.L. Chesapeake continued to engage in creative partnership agreements to generate cash, but other companies that depended on the markets had to wait out the freeze.

PE investments are an interesting solution to the capital problem. PE companies bring lots of potential equity, but their investments can be more expensive to companies than traditional debt and equity offerings. The PE company usually demands a healthy slice of ownership and the promise of a lucrative exit. The clock starts ticking when a PE firm invests in a company. They will want out in +/- five years and the only way to get them out is to sell the company or go public. It's not like debt where you pay it off and go along your merry way. The PE investors remain on the board of directors and can continue to agitate until they get their "liquidity event." I don't intend to portray PE companies as dark lords of evil or anything like that, but the decision to bring in a PE investor is a company changing one.

At this point, however, it seems like a workable solution for both parties to combine gas explorers and PE money...at least for now.

Report From Congressional Hearing on Fracking

I read an interesting summary of the recent Congressional hearing that questioned the 2005 exemption of hydraulic fracturing ("fracking") from federal regulation. Based on this report, the hearing was fairly benign, but who knows what will happen going forward. I get the impression that Reps. Diana DeGette of Colorado and Maurice Hinchey of New York still will introduce a bill under the Safe Drinking Water Act to regulate the process.

Tuesday, June 9, 2009

Chesapeake-Indigo Deal: Divergent Strategies

Indigo Minerals, LLC has announced the purchase of certain conventional gas assets from Chesapeake Energy in North Louisiana, Arkansas and East Texas for $218 million. The acquisition includes 519 producing wells (219 operated/300 non-operated) in 60 fields representing approximately 82,000 acres as well as 40,000 acres of undeveloped land. As part of the deal, Chesapeake retained drilling rights to the deep (Haynesville Shale) wells. This deal has been in the works for a while and is scheduled to close June 30, 2009.

This is an interesting transaction that should be a win-win for both parties. Indigo acquired “conventional” assets, leaving Chesapeake with the “unconventional” assets. This plays into Chesapeake’s strategy of The Big Play. The company invests heavily in unconventional resources with the belief that big risk equals big payoff. In the short life of the Haynesville Shale, Chesapeake has become its poster child by acting boldly, which has poised the company to reap significant rewards. Conventional fields just don’t play to that big risk, big reward strategy.

Indigo, on the other hand, is a well capitalized and newly formed independent. The firm was organized in 2006 by Yorktown Partners, the Martin Companies (a Louisiana timber family), Bank of America Capital Investments and the company’s management. Last year, the company sold Haynesville Shale land to EnCana and netted $457 million, so it was sitting on a pile of money. By selling Haynesville land during the land rush, it made a premium on its land and is now reinvesting in good (but not sexy) revenue producing properties. Capex is lower but returns are predictable and steady, all effectively bought at a discount.

Each company has a different strategy that will likely work for each. Chesapeake often talks about the shale “haves” and “have nots.” It tends to disparage the “have nots,” but I think not being part of the shale rush can still be a good strategy if done right.

Peak Coal

The Wall Street Journal had a front page article in yesterday's paper discussing the waning supply of coal in the U.S. that is economically viable to retrieve (article; print version at WSJ site; or email me for a copy). The key concept here is "economically viable to retrieve." The U.S. has been called the Saudi Arabia of coal. While there is little doubt we have lots and lots of coal, the question now raised is how economically feasible is the extraction of this coal? This has stoked the "peak coal" conversation.

The article is a broad story on a detailed study conducted by the U.S. Geological Survey on the Gillette coal field in the Powder River Basin in Wyoming. In the past, U.S. coal reserves have been calculated very crudely: in 1974, the Bureau of Mines established a baseline reserve level and each year the Department of Energy has subtracted from that number the sum of annual coal production and mine waste. Seriously. The Gillette Field study, an exhaustive three-year endeavor, added an economic component in calculating reserves for the first time. It asked how much coal is economically feasible to mine at different price levels.

The study found that with coal selling at $10.50/ton (short ton) less than 6% of the coal would be extracted profitably (leaving an 8% rate of return for miner). If Powder River prices were $60/ton, 47% could be extracted profitably. The current price for Powder River coal is $8.75/ton. Yikes!

It is worth mentioning that coal in the U.S. is of different grades. Most western coal is lignite and sub-bituminous coal, which hasn't been subject to as much heat and pressure as bituminous and anthracite coal. Bituminous and anthracite coal burn at higher temperatures and also have a higher carbon content. They also trade in the low $40's. Western coal has the additional burden of higher transportation costs because of the distance between the mines and the end users. Here is a link to the Energy Information Administration page on coal production and prices for more information.

Coal Prices, June 2006 - June 2009:

What is interesting about this study is that this is the first time coal has been treated like oil and gas in that determining the true reserves is a function of commodity price and costs to extract. If this methodology is applied across the nation's coal resource, it might send shivers down the spines of coal users. Since electric utilities are the biggest users of coal and most coal burning plants, which have lives of 50 to 60 years, are fine tuned towards coal from a particular deposit, builders of new coal plants have to be pretty worried. Add to that the costs of "clean coal" technology and coal plants don't look so cheap any more.

There is an emerging voice suggesting that coal production peaked in the 1990's. For the coal to be economically feasible, coal prices need to rise. If coal prices rise, especially relative to natural gas, demand will drop. It looks like the low hanging fruit has been picked and the industry is counting on as-of-yet-developed technology to be its savior.

If you are interested in the peak coal subject, here is a link to a lengthy February 2009 study that has lots of supporting data. It's hard to read because it has funky margins, but it's still interesting. Here is a link to the government study on the Gillette Field. The link takes you to an abstract with a link to the report. The report is very dry, but the 68 images in the appendix are actually interesting and pretty much tell the story.

Monday, June 8, 2009

Forbes Article

Forbes Magazine printed an article this week on the Haynesville Shale. There is not a whole lot of new information, but it does give a decent 10,000 foot overview of the play, noting the pluses and minuses.

On the negative side, Forbes did spill some ink on the now famous dead cows in north Louisiana. Apparently, a report on the incident noted that Schlumberger, which was completing the well, spilled approximately 600 gallons of some sort of fluid, supposedly mostly water. The sixteen cows died after a strong rainstorm. The spill was not reported because it was below the threshold for reporting. That kind of incident makes the actions of Bossier City to increase regulation of gas drilling seem even more reasonable.

Jindal and Palin Wasting Their Time

I've been following the events around the proposed gas pipeline from the northern slope of Alaska to Alberta (to connect to US pipelines), the rights to which have been given to TransCanada Corp. It's getting a little testy in Alaska. Maybe it's the midnight sun - June 21 is coming quickly - but there is lots of back and forth about the Alaskan Gasline Inducement Act (AGIA), which was supposed to incentivize a private company to build a huge international pipeline to offload Alaskan gas to the Lower 48.

Lately, Sen. Mark Begich and former Gov. Frank Murkowski have criticized the lack of progress on the project (another article from Anchorage and yet another from Fairbanks with more explanation). Gov. Sarah Palin has defended the project with odd comments saying things like, she’s "proud of her gas line team, which works hard without seeing publicity or grandstanding." The project is her baby, replacing a lengthy negotiated solution to bring the stranded gas on the Northern Slope to market (that coincidentally was proposed by Murkowski, whom Palin beat for the job a couple of years ago), but as noted here before a new Alaskan pipeline would face lots of competition in the Lower 48 from shale plays like the Haynesville Shale and LNG imports.

What Gov. Palin should be doing is beating the drum for the use of natural gas in this country. Clearly she has intentions on national office in 2012 and the AGIA is one of her cornerstone projects. If she truly wants to see it succeed and create a political track record around something other than her wardrobe or her experience as to why teaching teens abstinence only is a joke, she should get behind the Pickens Plan and other promoters of natural gas. Alaska can build all the pipelines it wants, but there is no point to it if the market for natural gas in the Lower 48 is not nurtured and grown. She should be driving a CNG car and inviting T. Boone Pickens for elk burgers cooked with Alaskan natural gas. That way she could bring home the moose bacon for the state and promote a better energy solution for the nation. That's a success that would shine on her resume and make everyone forget the debacle in 2008.

That brings me to Gov. Bobby Jindal of Louisiana. He's so busy running for president in 2012 that he forgot he has a state to run. While he is grandstanding about inconsequential crap and traveling all over the country for fundraisers, he is missing a huge opportunity to promote natural gas on the national stage. If he wants to be president in 2012 he needs to stop spouting talking points and start spewing forth on the benefits of natural gas. The Haynesville Shale could be the biggest energy boost to the state in more than a generation, but where is the governor in promoting it?

The bottom line is that both Palin and Jindal come from two of the country's largest natural gas producing states but neither is doing much to stimulate the market for its use. This is the time for them to get behind the NAT GAS Act (HR 1835) and get involved in the discussions regarding carbon legislation. If they want to prove their mettle for the highest job in the land they need to do something real and both have the opportunity sitting in front of them.

Friday, June 5, 2009

Chesapeake Gets Red River Water Permit

Yesterday, Chesapeake Energy received a permit from the Corps of Engineers to pump water from the Red River for use in its hydraulic fracturing process in the Caspiana (LA) field. As noted before, water is becoming an important issue in the greater Shreveport area as Haynesville Shale drilling, agricultural and urban uses have combined to cause great strain on the Corrizo-Wilcox Aquifer.

One solution that will benefit drillers in the vicinity of the Red River is to pump water directly from the river. Chesapeake's temporary setup calls for an 8-inch hose held by a buoy and extended about 5 to 10 feet into the water. The hose leads to a portable pumping device, and from there a 10-inch aluminum pipe is extended to well locations or water transfer station.

Chesapeake's line will benefit drilling operations in the Caspiana Field north of Lock and Dam No. 5. Petrohawk officials are looking in the same area. Questar has three applications pending, including one in south Caddo and two in Red River Parish. Several companies are working together to coordinate withdrawal sites.

One wrinkle is that once permission is granted, the Corps cannot stop any of the companies from pumping. The situation is complicated by the fact that multiple entities have jurisdiction over the river for different purposes. The good news is that the quantities of water drawn would not likely be large compared to the Red's natural flow.

[6/9/09 - Update: Good editorial from the Shreveport Times on water use.]

Rig Counts as of June 5

Nationwide, the Baker Hughes rig count was down by 12 to 887 this week. That represents a drop of 999 from last year. Maybe there will be a balloon drop somewhere when the number crosses an even 1,000.

In the Haynesville Shale area of N. LA and E. TX, the count stood at 123, which is down seven from last week. The number of rigs in E. Texas dropped by one to 51, but in north Louisiana, the count was down significantly (seven rigs) to 72. Remember that this is my informal count and the region also covers rigs drilling into the Cotton Valley, James Lime and other formations, so don't draw any specific conclusions about drilling in the Haynesville Play from this data snippet.

Questar: Quick Update

Questar provided an update to some of its Haynesville Shale activities in a recent presentation. Their 31,000 acres are concentrated in the Caddo/Bossier/DeSoto/Red River junction, where they have drilled some pretty good wells. Not a ton of new information, but some good results.

Thursday, June 4, 2009

Hydraulic Fracturing to be Regulated?

Earlier this week I complained about some of the aspects of President Obama's energy policy that I felt harmed domestic natural gas production. Another issue of importance to the gas drilling industry that has been added to the national agenda is regulation of hydraulic fracturing, or "fracking."

Reps. Diana DeGette of Colorado and Maurice Hinchey of New York plan to reintroduce a bill that would repeal an exemption on regulating fracking under the federal Safe Drinking Water Act. (another article from the Houston Chronicle) The ban on fracking regulation was part of the 2005 energy bill and was based on an EPA conclusion that fracking did little to harm groundwater. That bill was infamously written by the energy industry, so it's no surprise that it is facing a high level of scrutiny. As unconventional drilling has surged in the U.S. in recent years, fracking is used in an estimated 90% of new wells drilled. A few recent unflattering news stories haven't helped to increase its popularity.

The gas industry is understandably reluctant to have fracking be regulated. Right now, much of the conversation in Washington is about disclosing the exact contents of liquids injected in the process. I recently read a list of chemicals used for one well (although not the exact proportions) and it's a gnarly witch's brew that likely will cause some people to freak out. The contents and proportions are basically trade secrets for the operator and the contractor, which is another reason the gas industry is reluctant to share too many details.

I look at the Haynesville Shale and see that the wells are drilled deeper than 10,000 feet and are well below the aquifers. The holes are cemented the entire way, so I don't see lots of potential damage to the water supplies in the Haynesville Play. Most other unconventional plays are located closer to the surface, so I imagine there are greater ground water fears - whether or not they may be realistic - and water is a huge issue, especially in the western U.S.

My position generally is that the gas industry needs to get in front of these kinds of situations and be a good citizen. I realize that is a somewhat naive position, but the energy expended in stonewalling and preventing regulation should be spent in a proactive fashion working towards a compromise. The ultimate goal should be to drill and produce! It is a complicated situation, but some level of disclosure is better than trying to keep stiff-arming and pushing it off. If the public had a better understanding of how the drilling process works and the safety measures that are taken, it might feel a little better about the icky chemicals that are necessary to the process. Cooperation at some level is the key to future success.

But the most important issue is that Congress shouldn't diddle around with a process that is so important to our nation's energy independence.

Goodrich: Update

This week, Goodrich Petroleum announced results from a recent Haynesville Shale well in the Beckville/Minden field in Panola County, Texas. The Lutheran Church 5HR well tested at an initial production rate of 9.0 MMcf per day on a 26/64 inch choke with 4,375 psi. The well was completed with approximately 3,100 feet of lateral length and ten stages. These are some pretty strong results for the Texas side of the Haynesville Play. Given the bump in Goodrich's stock on Tuesday, the day this news came out, the market seems to agree that this is good news. The well is located to the east on the map below of Goodrich's progress in its Texas fields.

The maps below give an update on other Goodrich wells (and a few competitors). The first map is the larger map to give context and the following two show results from specific fields in Louisiana.

Wednesday, June 3, 2009

More on Matt Simmons and Shale

I'm spending the week at my in-laws (with terrible internet access) so I'm catching up on a few months of magazines. I came across a February 2009 interview in Forbes with Matt Simmons, entitled "Crude Cassandra." The article was mostly background stuff about peak oil and the man himself.

Towards the end of the article he was asked about the technology that enables shale gas exploration. His quote: "Technology is fabulous, but it does exactly the opposite of what people thought it was going to do--it accelerates decline rates...The simple analogy is you're having a Slurpee-slugging contest. You have a normal vertical straw and someone comes along with a multilateral straw. You're not getting more out, just getting it out faster."

He is dismissive of shale-enabling technology, but I think he is missing the point. True, the new technology does expedite the removal of the gas and lead to steeper decline rates. It’s not going to change the total amount of gas in the reservoir. But what Mr. Simmons fails to acknowledge is that the technology has made accessing vast amounts of shale gas economical feasible. That’s the game changer. The technology also makes more of the gas in the reservoir accessible.

Mr. Simmons’s basic thesis is that the overall fossil fuel resource supply is limited and man has accessed most available supplies in the world. But the new shale enabling technology changes some of the supply fundamentals. It creates new potential supply that was inaccessible just a few years ago. It doesn’t change the fact that fossil fuels are finite resources. Geologists have known about shale gas for years, but without the technology it might have well been located on the moon.

I’m not sure if Mr. Simmons is dismissive of the technology because he is pessimistic or if he is drawing the conclusion to fit his thesis. I’m not a zealot about peak oil, but I believe that production using existing technology has peaked, but I think he might be trying to squeeze a square peg in a round hole.

Penn Virginia Announces New Well

Penn Virginia announced its best East Texas Haynesville Shale well to date, the Steele #2-H. The well tested at an initial production rate of approximately 11.4 MMcf/day.The flowing casing pressure was approximately 4,600 pounds per square inch. The well had an approximate 4,000-foot lateral and was stimulated with approximately 2.5 million pounds of sand and bauxite over ten stages.

Tuesday, June 2, 2009

Basis Fault Line and Pipelines

In its recent Haynesville Shale presentation, EnCana made a very interesting point about the pipeline boom underway around the Haynesville Play. I've discussed many of these projects, including the Tiger Pipeline, Gulf South Extension, LaCrosse, etc. What they generally have in common is that they originate at the Carthage, TX pipeline junction and move east.

What is interesting about these Haynesville projects and a few more to the south and north is that they cross what is referred to as the Basis Fault Line (BFL) with approximately 15 Bcf/day of new capacity. The BFL is an imaginary north-south line, pretty much along the Mississippi River, that separates the eastern and western gas markets and is a determinant in pricing.

Henry Hub in south Louisiana (on the east side of the BFL) is the pricing point for natural gas futures contract traded on the New York Mercantile Exchange (NYMEX) and is also where spot trading prices are determined. Gas sold to the west of the BFL generally is sold at a discount to Henry Hub prices, while gas sold to the east of the BFL is sold at a premium to (or at) Henry Hub. Since most gas is used east of the Mississippi, there is less transportation involved with eastern gas.

On the map below, gas at Carthage is sold at 95% of Henry Hub prices, Katy, TX (Houston) is 95% of Henry Hub and Perryville, LA is 99%.

Clearly, the motivation is to get your gas from west to east, which is what these pipeline projects do. It is important to note that the new capacity also will allow other east Texas gas, not just Haynesville gas, to flow east. How will this increase of supply east of the BFL impact prices? I don't know.

Monday, June 1, 2009

Mr. Obama's Energy Policy

I’ve got very mixed feelings about the Obama Administration’s approach to energy. First, I am very encouraged that he is taking on our problems head-on. We are facing a national emergency between our dependence on foreign oil (and oil in general) and our negative impacts on our planet, and I appreciate his bold and gutsy approach. But I’m concerned that his (and Congress’s) approach is throwing the proverbial baby out with the bath water.

Much has been written about the failings of the various draft energy policies, so I won’t go into much in this forum. I’m certainly not going to argue global warming or carbon cap and trade. My greatest concern is that he is trying to make too big of a step right out of the blocks and is forgetting the long-term nature of his quest. He has a grand vision but has to recognize that there will be many interim steps along the way.

My two greatest concerns are 1) some of his proposals are hostile to the domestic oil and gas drilling industries, and 2) the carbon legislation is too generous to coal-fired power generators at the expense of natural gas.

First, in his campaign, he vilified the ExxonMobils of the world because of the extraordinary profits they generate when commodity prices are high. Given the fact that oil and gas is a cyclical industry, I knew there would never be a fruitful discussion of a windfall profits tax. But we need these companies, big and small, to drill at home in our existing drilling basins. I’m not necessarily in favor of drilling in the Arctic National Wildlife Refuge or off the coast of California or Florida, but there are numerous basins across North America that are available for drilling.

Two of the proposals that have been floated are eliminating the tax deduction for depletion and eliminating the deduction for intangible drilling costs. Anyone who receives royalties knows about the depletion deduction, currently 15% of net royalties. An oil or gas reservoir is similar to any other asset in the fact that it is a declining asset. As oil and gas is pulled from the reservoir, the reservoir is inherently less valuable. Accounting has formal rules and mechanisms to allow for this, either depreciation or amortization of goodwill. Fifteen percent might not be the right number, but looking at the steep decline rates of Haynesville Shale wells, the right number might be higher! Treating an oil reservoir differently from another long-lived asset is not fair. That proposal doesn’t hurt ExxonMobil as much as it hurts individual land owners.

The other proposal, to eliminate the deduction for intangible drilling costs, will have several impacts. It will make more of a producer’s income taxable, but at the same time it will change the economics of individual drilling projects. A venture that was marginally profitable might be unprofitable if some of the drilling costs are not deductible. The “tax shield” of intangible drilling costs is a real number that directly impacts the bottom line. This is an especially big deal in the Haynesville Shale because the wells are so capital intensive on the front end. Anything that tilts the economics to the negative will result in fewer drilling projects.

Second, as a resident of planet earth I was encouraged by the Administration’s bold step to take a stand against carbon. I know the argument that China opens a new coal-fired plant every week, but the United States is a world leader, actually THE world leader. We need to lead by example. It’s a silly playground argument to say that I’m going to keep polluting because that kid is too. Lead by example – don’t wait for someone else to pick up the flag from the battlefield. We are a nation of ideals. We can’t be selective in their application.

It was my hope that the carbon legislation would encourage the use of natural gas rather than coal in power plants. Natural gas is a significantly cleaner fuel, but the legislation as it is currently written gives coal plants a huge pile of freebie carbon credits, while natural gas-fired power producers get a pittance. I believe this was done to “level the playing field” and not unduly harm coal producers in the very short term. This is admirable and it avoids too heavy of a legislative hand, but does it also allow the coal-fired guys to maintain the status quo? The opportunity to fix the coal polluting situation is now. It’s hardly a bold action to give coal-fired plants a pass.

What does encourage me is that Mr. Obama seems willing to listen and incorporate reasonable differing opinions. My observation of Mr. Obama’s Administration is that they come out of the gates with a policy that is fairly extreme with the thought that they will move towards the center as the issue is debated. To me it’s a typical negotiating move. At this point, I’m concerned, not absolutely scared.

What is clear to me is that the government simultaneously needs to encourage domestic industries and cleaner fuel. Alternative power sources might be the future, but that future is decades from being realized on the grand scale. The bridge to our energy future is natural gas. It is poised to be a huge industry that employs hundreds of thousands, it is relatively clean and it comes from underneath our own feet. This is what Washington needs to keep in consideration.