Friday, October 16, 2009

Chesapeake: Bossier Shale

Chesapeake Energy held its annual investment analyst meeting on Wednesday, and I’m going to report on it in segments because there was lots of great information and I don’t want it to be overwhelming to the reader (also, it is taking me several days to go through the seven hour, 192 page presentation).

Much of the presentation updated existing information, but the new data relevant to the Haynesville Shale was the update on the Bossier Shale. There is some confusion about the nomenclature. In this context, Chesapeake is talking about the Mid-Bossier Shale, the formation directly above the Haynesville Shale. For simplicity, I’ll just refer to it as the Bossier Shale today.
As the map below illustrates, the Bossier Shale overlays the southern portion of the Haynesville Shale. In Texas, it covers east Nacogdoches, north San Augustine and south Shelby Counties, while in Louisiana it covers south DeSoto, south Red River, north Sabine and northwest Natchitoches Parishes. The two slides below illustrate the overlap of the two plays and Chesapeake’s acreage (yellow is leased acreage, blue is now held by production).

Chesapeake leases approximately 175,000 net acres in the Haynesville/Bossier overlap and recently completed its first well, the Blackstone 26 H-1, which had peak 24 hour production of 9.4 MMcf/day. For the first thirty days, it produced 8.1 MMcf/day. The company’s second well, Muench 10-1 is expected to be better than the Blackstone. Most companies are not in a hurry to develop Bossier wells because the formation is closer to the surface than the Haynesville formation. Once they produce from the Haynesville Shale, they will hold the Bossier Shale by production (HBP).

In terms of geology, the Bossier Shale came about 140 million years ago, 10 million years after the Haynesville Shale. It is a smaller region because the same factors that led to the deposit of organic material that formed the Haynesville Shale were in place to a lesser degree in a more southerly location.

In terms of petrophysical characteristics (see table below), the Haynesville and Bossier Shales are very similar. The main difference is that there is a higher clay content and therefore higher water content in the Bossier Shale. This means that the gas in place is slightly lower and that the estimated ultimate recovery (EUR) amount is lower. Chesapeake currently estimates the Bossier Shale EUR to be 5.5 Bcfe (range: 3.5 - 7.5 Bcfe), which is lower than the Haynesville EUR of 6.5 Bcfe (range: 4.5 - 8.5 Bcfe). Because of the lack of production data, it is probably too early to hang your hat on the Bossier EUR.

I’ve noted several news articles focusing with disappointment on the revelation that the Bossier EUR will be lower than the Haynesville EUR, but I don’t think a lot of companies are going to shed tears over a 5.5 EUR play that is mostly HBP.

I’ll report later on the rest of Chesapeake’s presentation.


Anonymous said...

Does this mean there would be up to 8 Haynesville wells and 8 Bossier Shale wells, and you would receive royalties on each in your unit? Assuming you have a lease without a pugh clause? If your lease does not specify a formation, you are entitled to royalty for any formation right? Would they drill one well for both?
How long do you think it would take to fully develop 8 Haynesville wells (assumption) per section?
How long do you think it would take to fully develop 8 Bossier wells (assumption) per section?
It is all so interesting to speculate on.
It would be so fun to work in the NG exploration industry, right now.

Robert Hutchinson said...

That’s a lot of questions. I’m not a lawyer, so I will skirt a legal answer, but I can tell you that a mineral lease without a Pugh clause should entitle you to any minerals taken from below your land no matter what the depth. The Pugh clause makes the earth +/-100’-300’below the deepest penetration off limits to future exploration efforts beyond the term of the lease without a new lease.

The reason companies are drilling Haynesville first and Mid-Bossier second is that the Bossier formation is above the Haynesville. If a company produces from a Haynesville lease, they hold lease by production and they hold the earth above deepest penetration (unless there is a higher lease, i.e. Cotton Valley), so they are in no hurry to drill the Bossier. But they do want to drill enough to be able to quantify the gas in the Bossier Shale to boost their resource reserve estimates.

Same goes for drilling multiple wells in a section. Once a company holds a section with a well, they are going to spend their resources holding the rest of their leasehold. The infill drilling will occur over the years outside the primary term of your lease. It should be many years before the wells for Haynesville and Bossier stop being drilled. And that’s a good thing.

Companies are approaching this in a very methodical manner. It looks a little helter-skelter at this point but there’s a method to the madness.