Friday, July 31, 2009

Chesapeake: Update

Yesterday, Chesapeake Energy released an operations report that it headlined with the company's progress in the Haynesville Shale. Interesting facts, in no particular order (the gross/net differences reflect CHK's joint venture deal with Plains Exploration):
  • Chesapeake leased an additional 40,000 acres since March 31, 2009 and now has 623,000 gross/510,000 net acres.
  • Chesapeake wells are currently producing 285 MMcf/day (gross)/175 MMcf/day (net); expected to rise to 575 MMcf/day (gross)/275 MMcf/day (net) by year-end 2009 and 1.025 Bcf/day (gross)/575 MMcf/day (net) by year-end 2010.
  • The company has completed a total of 74 horizontal wells in the Haynesville Play.
  • The company currently operates 29 rigs in the play and will increase rig count to 33 by year end and 36 in 2010.

Chesapeake also provided a revised type curve on which the company is basing projected well economics. They kept the 6.5 estimated ultimate recovery factor (EUR), but because of higher initial production rates have increased the front end of the curve. While the graphic change is slight, the importance of this change is that the present value (upon which investment decisions are based) is enhanced because more cash is realized in the beginning. In a world where time is money, it is far better to get the money on the front end. The type curve below is based on data from 56 horizontal wells that were completed with ten or more fracture stimulation stages. Chesapeake seems to have found its special sauce after much experimentation.

Chesapeake also provided some gaudy details from three of its recent wells:

  • CLD 23 H-1, Caddo Parish, LA, commenced production 6/22/09: 15.3 MMcf/day 30 day average rate of production; achieved a peak rate of 29.1 MMcf/day
  • Frith 29 H-1, De Soto Parish, LA, commenced production 6/27/09: 14.2 MMcf/day 30 day average; achieved pipeline-constrained peak rate of 23.7 MMcf/day
  • Chesapeake Royalty LLC 30 H-1, De Soto Parish, LA, commenced production 2/27/09: 15.2 MMcf/day 30 day rate; achieved a pipeline-constrained peak rate of 22.6 MMcf/day.

The release used the phrase "pipeline-constrained" five times when talking about the above wells. I'm waiting for these companies to bring in extra pressure gauges for completion jobs to continue the "peak rate arms race" over the next year. Who will be the first to boast of a well greater than 30 MMcf/day? Questar joked about it in their conference call earlier this week. Place your bets! Maybe I should set up a pool to guess who and when.

Production Cuts and that OPEC Discipline

I was reading an article today regarding Chesapeake's earnings report that got me thinking (WSJ link should be good for seven days). One of Chesapeake's comments that has been picked up in the media is that the company is rescinding much of the production cuts it previously announced. They haven't been joined by competitors making across the board cuts (although many competitors are selectively choking back wells). It's sort of a "hrrrmpf, if nobody follows me, screw them" approach.

It got me thinking about OPEC, the international oil and gas cartel. OPEC members are notoriously bad about following production cuts called for by its leadership aimed at boosting or stabilizing prices. Perhaps I had too many iced teas at lunch, but I couldn't help think that Chesapeake saw itself as the self-proclaimed King of All Natural Gas and leader of an informal North American gas cartel. I guess things worked out the same for them as it usually does for OPEC leadership.

But public companies in the U.S. are not OPEC nations. We have strict disclosure rules whereby a company can't announce one thing and do something else without public disclosure. But there is a macro problem growing in the U.S as supply venues are filling up. At the same time, producers are drilling expensive wells and they need to get some short-term cash flow to support their operations. Just because Chesapeake can go without for a while doesn't mean a smaller competitor can too.

It's going to be interesting to watch the dynamics during the numerous earning announcements next week to see who is choking back and who is free-flowing, especially since the stock market seems to be responding positively to companies that announce production increases. Investing Rule #1: Never Assume the Market is Always Right. But maybe the collective wisdom of "if you build it they will come" might work out in the near term.

Rig Counts: Up and Even

The Baker Hughes rig count came out today and the national rig count is up by five to 948. That's still 1,003 off this time last year, but it's 72 higher than this year's low a few months ago.

In the Haynesville Shale area (which includes some other fields), the count was even, up two in North Louisiana, down two in East Texas.

In terms of the U.S. split, oil rigs were up four, gas rigs up two and miscellaneous rigs down one. Of the rigs in the U.S., 43.6% are drilling horizontal wells compared to 30.1% this week last year. Looking back five years, only 11% of the rigs were drilling horizontally. Not a huge surprise, but interesting to note.

Questar Update

Questar held its second quarter earnings conference call on Wednesday and got into some detail about the Haynesville Shale. In fact, the company led the conversation with its emphasis on the Haynesville Play and its Pinedale Anticline play in the Rockies, noting that each play will be allocated 40% of Questar's $860 million capital budget. The CEO also referred to Haynesville as "our high margin Haynesville Shale play," which seems pretty positive for a company that's involved in a number of gas plays.

YTD, the company has participated in 12 wells and anticipates partcipating in a total of 35 for 2009. Average well costs are around $9 million. Since the first quarter earnings call, Questar has drilled four wells and participated in another. These five wells are shown in red outlined boxes below. There are some fat initail production (IP) numbers in there!

The IP data was collected on a 24 houractual sales rates and not calculated IPs. The wells noted by Questar are, in declining levels of impressiveness:
  • Rex Young 6H #1: 25.1 MMcf/day IP on 28/64 choke at > 7500 psi (SONRIS reports: completed 5/6/09; GAS, Res. A, 12.61 MMcf/day on 30/64 choke at 3,550 psi - after choking back because of low gas prices)
  • Sustainable Forest 29H #1: 25.0 MMcf/day IP on 28/64 choke at > 7500 psi, Thorn Lake Field
  • Sample 8 #1: 22.2 MMcf/day (50%with Petrohawk)
  • Harper 15H #1: 16.0 MMcf/day; there is some tubing stuck in the well that will be fished out after the pressure declines (SONRIS reports: completed 3/17/09, Res. A, 11.171 MMcf/day on 24/64 choke at 4543 psi)
  • Hutchinson 10H #1: 12.2 MMcf/day; Questar tried a new frac design of smaller frac jobs on this well that "negatively affected the initial rate." The company tried a "less is more" approach and found out that less is unfortunately actually less.

Both the Rex Young and Sustainable Forest wells have been choked back to 10 MMcf/day because of low gas prices. In the Q&A, the company mentioned that the wells "touched 30 million (cubic feet) a day" but the company's flow back equipment can't handle anything greater than 25 MMcf/day. Questar would have to install a second set of flow back equipment to register the higher IP. You know Questar is itchin' to open the spigot! In addition to curtailing some production because of low gas prices, the company is also delaying completion on some wells.

In terms of takeaway capacity, Questar "currently holds about 65 million cubic feet a day of firm capacity with over 300 million cubic feet a day of additional firm capacity under contract to begin deliveries in several tranches beginning in 2010."

Thursday, July 30, 2009

Same Story, Different Verse

It's no secret that gas supplies are increasing. The question has become where do we store it all? Storage venues are nearly full and pipelines are "packing" gas (i.e. parking it temporarily). Bottom line: there's not much more room. On top of that, there is still the looming threat of unwanted LNG showing up on our shores because the U.S. has the largest gas supply network in the world. As noted before, several LNG ports planned to re-tool to turn the gas back around (...I need to check up on the status of that...), so the flood might only be a ripple.

The Wall Street Journal has a short article noting that if storage options run out there will be an involuntary curtailment of production. Hmmm. Hope for a heat wave or an early cold snap. Or best yet an economic turnaround!

Lots of Louisiana Completions!

Lots of information regarding completions from the Louisiana DNR this week (it’s arranged by parish and all wells are horizontal, except where noted):
  • Sherwin 10-001, KCS Resources (Petrohawk): 17.111 MMcf/day on 24/64 choke at 6447 psi; Elm Grove Field, Bossier Parish; Section10/Range16/Township11; completion 6/15/09, Haynesville reservoir A, serial #238555
  • Knox Minerals 6-001, Petrohawk: 11.756 MMcf/day on 24/64 choke at 5305 psi; Elm Grove Field, Bossier Parish; S6/R16/T12; completion 6/5/09, Haynesville res. A, serial #239504
  • Deltic Timber 12-001, Samson Contour Energy: 4.2 MMcf/day on 20/64 choke at 2580 psi; Sligo Field, Bossier Parish; S12/R17/T11; completion 5/19/09, Haynesville res. A, serial #239201
  • Wooworth Foundation 15 H-001, Chesapeake Energy: 10.656 MMcf/day on 22/64 choke at 4379 psi; Bethany Longstreet Field, Caddo Parish; S15/R15/T16; completion 5/30/09, Haynesville res. A, serial #239211
  • Johnson 32 H-001, Chesapeake: 8.318 MMcf/day on 12/64 choke at 7880 psi; Bethany Longstreet Field, Caddo Parish; S/32/R15/T15; completion date 3/12/09, Haynesville res. A, serial #239553 (A well by this name was earlier reported by Goodrich Petroleum in a press release at 12.5 MMcf/day IP with a 18/64 choke.)
  • Hudson ETAL 4 H-001, Chesapeake: 7.632 MMcf/day on 22/64 choke at 5991 psi; Greenwood-Wascom Field, Caddo Parish; S4/R15/T16; completion date 6/5/09, Haynesville res. A, serial #239503
  • Sharp 1-001, Exco Resources: 2.700 MMcf/day on 16/64 choke at 2585 psi; Longwood Field, Caddo Parish; S1/R18/T16; completed 4/10/2009, Haynesville res. A, serial #239351
  • Cook 28-001, Exco Resources: 13.520 MMcf/day on 14/64 choke at 6,903 psi; Caspiana Field, DeSoto Parish; S28/T14/R12, completion date 4/28/2009, no unit, serial #239292
  • Branch Ranch 32-001, Exco Resources: 9.105 MMcf/day on 14/64 choke at 8,645 psi; Caspiana Field, DeSoto Parish; S32/T14/R12; completion date 5/18/2009, no unit, serial #239378
  • Billy Joe Andrews 33-001, Beusa Energy: 0.458 MMcf/day on 12/64 choke at 1,000 psi; North Grand Cane Field, DeSoto Parish; S33/T13/R14; re-completion date 5/20/2009, Haynesville res. A, serial #237677 (a vertical re-completion)
  • Hamilton ETAL 12 H-001, EOG Resources: 14.246 MMcf/day on 18/64 choke at 5,200 psi; Kingston Field, DeSoto Parish; S12/T14/R14; completion date 2/16/2009, Haynesville res. A, serial #239460
  • Moran 27-001, Exco Resources: 13.195 MMcf/day on 20/64 choke at 6,482 psi; Kingston Field, DeSoto Parish; S27/T14/R13; completion date 4/20/2009, no unit, serial #238915
  • Chesapeake Royalty 15H 001, Chesapeake: 3.003 MMcf/day on 16/64 choke at 4,012 psi; Longansport Field, DeSoto Parish; S15/T11/R15; completion date 5/8/2009, Haynesville res. A, serial #239345
  • Nabors 10H 001, Chesapeake: 5.285 MMcf/day on unknown choke at 9,032 psi; Red River-Bull Bayou Field, DeSoto Parish; S10/T12/R12; completion date 5/1/2009, Haynesville res. A, serial #238307 (this is the infamous blowout well)
  • Johnson 6 001, EOG Resources: 8.467 MMcf/day on 25/64 choke at 7,600 psi; Trenton Field, DeSoto Parish; S6/T11/R12, completion date 5/1/2009, Haynesville res. A, serial #239046
  • Allbritton Cattle ETAL 8 001, Petrohawk: 19.460 MMcf/day on 24/64 choke at unknown psi; Red River-Bull Bayou Field, Red River Parish; S8/T13/R11, completion date 6/10/2009, Haynesville res. B, serial #239293
  • Nabors Logan 34 H 001, Chesapeake: 4.116 MMcf/day on 7/64 choke at 8,600 psi; Pleasant Hill Field, Sabine Parish; S34/T10/R12; completion date 4/3/2009, Haynesville res. A, serial #238703

Truck Regs in Bossier Cause a Stir

The Shreveport Times reported yesterday that truckers descended on a meeting of the Bossier Parish Police Jury meeting to voice their displeasure with new regulations that most notably impact weight. Interestingly, these regulations are virtually the same as the state's. It sounds like the issue might be that if a truck wants to drive overweight in the parish it will have to obtain a permit at a cost of $1,500.

Seeing that the parish has "lost more than $8 million, four bridges and countless hours trying to repair damage in only the past three or four years from overweight trucks" I can see why it would want to enact a permit and enforcement system. The biggest offenders appear to be the influx of trucks to haul waste water from Haynesville drilling sites, some of which are estimated to be twice the legal weight limit.

From the sound of the article, the surprised Police Jurors spent most of the meeting acting like politicians and soothing the truckers rather than trying to figure out a workable solution. This might be just the tip of the iceberg in terms of drilling. The state Department of Natural Resources' new Haynesville impact ruling addresses nearly everything but surface roads. Each parish is going to have to take it upon itself to enact appropriate rules (with enforcement) so the roads stay safe for all users. One good measure noted earlier this week is the idea of recycling frac water on site so that the number of trucks hauling the waste water is approximately halved. That's a win-win solution, hopefully the first of many to come.

Wednesday, July 29, 2009

Great Illustrations of Oil/Gas Well

The Energy In Depth web site (an industry site) has a really good set of illustrations showing the various parts of a drill site. Along with the three views of the site (complete with audio explanations), it also has a video of a typical vertical drilling process, complete with a soothing deep-voiced announcer. If you've always wondered what all those pipes and tubes are, this illustration will tell you. Very cool.

Tuesday, July 28, 2009

Rules for Reusing Waste Water Coming to LA

The Louisiana Conservation Office of the Department of Natural Resources announced that it is working on rules to allow producers to reuse waste water from the hydraulic fracturing process as a way to relieve some of the strain on North Louisiana's aquifers. Final rules should be released by the end of the year.

One thing the article doesn't mention is that reusing the water should help lower truck traffic on the already strained local roads. Right now, all of the used frac water is trucked off site to salt water injection wells. If a rig reuses its frac water once, it should cut that rig's water trucking requirement by half - less going in, less leaving the site. Multiply that by, say, 40 rigs and it does amount to a positive outcome.

The Commission earlier encouraged companies to use the Red River Alluvial aquifer, but that doesn't help producers that aren't drilling close to the Red River. Several companies, including Chesapeake, Petrohawk and Questar have received U.S. Corps of Engineers permits to draw directly from the Red River.

I read an interview with Commissioner Jim Welsh who also wants to find a way to use water from lignite mines in Red River and Desoto Parishes. The lignite is below the Red River Alluvial aquifer, so millions of gallons of water must be pumped out of the mines. Welsh wants to find a way to use that water for fracing.

While North Louisiana doesn't face the same water issues as places like western Colorado, it is important to address the issue upfront since the fragile water sources must be shared with agricultural and urban users.

[UPDATE: 7/29/09: Here is a good editorial from the Shreveport Times on the subject of water, but the main point is that we need to be proactive about environmental impacts rather than trying to fix the problem later. I couldn't agree more.]

Good Article on Pipeline Expansions

There was a good article in today's Wall Street Journal (link should be good for seven days) about the quandary facing pipeline companies. New drilling techniques for natural gas have created an opportunity for them, but it is one that comes with heightened risk in this low price environment.

Horizontal drilling techniques have made shale drilling economical, leading to huge new finds, such as the Haynesville Shale. At the same time, it has made existing fields suddenly appear flush with gas. Newfield Exploration recently announced finds in Oklahoma's Granite Wash formation that are yielding production of 22 MMcf/day with fairly low decline rates. Companies have been drilling Granite Wash since the 1950's but it's never produced like this!

Suddenly you've got tons of gas that's got to get to market (or storage). Much of it is coming from traditional gas producing regions like Oklahoma, Texas and Louisiana. This will require expansions of existing systems. This is doable because the rights of way are mostly in place and it's a matter of federal approval and capital investment. But a large amount of gas will soon come from places like the Marcellus Shale in Pennsylvania, West Virginia and New York where the takeaway infrastructure isn't in place to move that quantity of gas. This will be a more involved process.

This is a great opportunity for pipeline companies - it's what they pine away for: the opportunity to invest more money to move more product. Pipelines are mostly set up as Master Limited Partnerships (MLP), which are like REITs of the energy world because they invest lots of capital and must distribute most of their cash earnings to shareholders. As a result, they live for new projects.

Pipeline companies also make a point to investors that they get paid based on quantities moved, not gas prices, therefore they are more stable investments. While this is mostly true (I'm sure rates can get renegotiated during prolonged periods of depressed prices), they face a problem if gas prices stay low for a long time. With long-term low prices, drilling will be reduced and gas wells will be shut in. This could lead to depressed quantities in the new pipes. While most people expect prices to return to the neighborhood of an equilibrium level to help balance the supply/demand relationship, there are no guarantees.

Some Recent Texas Completions

Here are some recent Haynesville/Bossier Shale completions in East Texas from the past couple of weeks from various sources:

  • J.K. Williams No. 7H, Goodrich Petroleum: 2.5 MMcf/day on 18/64 choke; Panola Co., TX
  • J.T. Ross Unit No. 1HS, Chevron U.S.A.: 5.6 MMcf/day on 20/64 choke; Panola Co., TX (Bossier Shale)
  • Muslow Oil No. 1, NFR Energy: 0.3 MMcf/day on 34/64 choke; Harrison Co., TX (Bossier Shale), likely a vertical well
  • D’Asto No. 3, NFR Energy: 0.7 MMcf/day on a 48/64 choke; North Carthage Field, Harrison Co., TX (Bossier Shale), likely a vertical well
  • Stratocaster Gas No. 1H, Petrohawk Operating: 9.7 MMcf/day on 24/64 choke; Waskom Field, Harrison Co., TX
  • J.M. Furrh #2-H, Penn-Virginia: 9.6 MMcf/day IP, flowing casing pressure of approximately 2,800 psi, first 30 days averaged 6.5 MMcfe/day; Harrison Co., TX

In scanning Louisiana DNR information last week, I didn’t notice any recent LA completions.

Monday, July 27, 2009

Bossier City Planning NatGas Fueling Stations for Buses

The Shreveport Times reported that Bossier City may be able to tap into Federal recovery dollars to build natural gas fueling infrastructure to support the conversion of city buses and possibly school buses to natural gas. The state of Louisiana received $10 million for this purpose through the Federal recovery package. Thankfully Gov. Jindal didn't decide to reject this particular pile of stimulus money to bolster his conservative street cred.

Bossier City wants to build three fueling stations and open them to the public for those who own natgas fueled vehicles. The city is looking to convert as many vehicles as possible to clean burning natural gas because it faces potential EPA penalties next year for its poor air quality. There is also an economic benefit to the city since compressed natural gas is cheaper than gasoline. On top of everything else, it supports the natural gas business, especially from the Haynesville Shale.

To me, this is a great use of federal recovery money. It is a one-time spend on a project that has significant environmental and economic benefits. It encourages the use of clean burning, domestically produced natural gas. A win-win across the board.

Sunday, July 26, 2009

Exxon Fracing Article

Watch out Chesapeake! The aircraft carrier called Exxon Mobil seems to be on a public relations offensive to establish itself as the King of Natural Gas. In an article in Sunday's Dallas News, the hometown newspaper portrays Exxon as frac-happy and downright in love with natgas. In other recent articles, the company has already touted its Canadian and international shale leaseholds.

I jest, but it's actually a good article about the advances the company is making in hydraulic fracturing technology in the Piceance Field in Colorado and the company's approach to and greater appreciation for natural gas. The Piceance field is a sand field, not a shale play, but the company believes the progress it is making there will apply to shales.

The article is a good follow-up to the Packers Plus article I noted earlier.

CHK opens Shreveport Office; Jindal Signs HB 110

A double "finally!" An article in yesterday's Shreveport Times notes that Chesapeake has opened a new office in downtown Shreveport and that Gov. Jindal signed H.B. 110 to increase the tax credit for using alternative fuel (including CNG) vehicles.

On the CHK office: what took you guys so long? Chesapeake is a true believer in the Haynesville Play - they should have considered moving their headquarters to Louisiana! But I know there is too much Oklahoma blood in the company to do that. In his remarks, Chesapeake CEO Aubrey McClendon noted that the company plans to spend $2 billion per year in Louisiana until 2029. I hope Gov. Jindal got that in writing.

On HB 110: The article reports that HB 110, which was authored by Shreveport Rep. Jane Smith, was "co-authored by all legislators." I knew there were a lot of tag-alongs, but I didn't realize it got to 100%. Jindal wasn't exactly left with a choice about whether or not to sign it. His comments at least indicate that he gets it: "This new law will stimulate the demand for the production of more natural gas and, in turn, help to grow our economy...Most importantly, it drives the demand to produce more energy here at home instead of remaining dependent on foreign countries to supply our energy needs." Let's hope he realizes that we've got the cat by the tail. While he's traveling the country on the Jindal 2012 Express he should also push the gospel of natural gas.

Good Article on Hydraulic Fracturing Pioneer

There was an interesting article in the Calgary Herald this weekend about Packers Plus, one of the companies that originated hydraulic fracturing technology. It's a good article that gives some more information about the mechanics of how fracing works.

Packers Plus is not the only provider of this technology, something the article fails to mention, but the piece does give a nice summary of the impact of these recent technological advances and how they have made huge quantities of natural gas economically available. It has permanently changed the supply dynamic the world over. Now if the demand dynamic can just catch up...

Saturday, July 25, 2009

NatGas & Coal: Race to the Bottom

There was an interesting piece in the Saturday WSJ regarding the fall in natural gas and coal prices. It seems natgas isn’t the only electric power plant fuel source with a supply and demand problem leading to depressed prices. Right now, natural gas is actually cheaper than coal, making it cheaper to run some natural gas power plants than coal plants. Appalachian coal prices are currently at a 2½ year low, 50% off last year’s price.

This condition isn’t likely to lead to a sudden spike in gas prices as power plants switch fuels. Coal companies are busy cutting output. Sound familiar? Wood Mackenzie, a noted energy research company, estimates that around 66 to 84 million tons of output cuts have been announced this year, but the industry will require another 50 million to right the supply/demand ship. As with natgas, it is a tricky calculation because coal stockpiles are now at a 22 year high.

Friday, July 24, 2009

Rig Counts: Up 'n Up

The Baker Hughes rig count was released today and it showed increases across the board. U.S. rig count was up 23 to 943. That's the highest the rig count has been since May 1, 2009 - no great record, but it's 67 higher than the lowest figure this year, recorded June 12. It's still off 1,014 from this week last year, however. Interestingly, both oil (+13) and gas (+10) rigs increased.

In the Haynesville Shale region of North Louisiana and East Texas (inclusive of other fields), the rig count increased by 9, all in Louisiana. The E. Texas count was unchanged. I'm no mathematician, but it looks like 90% of the weekly increase in natural gas rigs came from the Haynesville Play.

Thursday, July 23, 2009

Gas Prices, Inventories and ETFs

It’s no secret that natural gas prices have been in the tank this year. The combination of high supply and weak demand have been the main culprits, and the success of shale plays like the Haynesville Shale partially have been to blame on the supply side. I’ve been doing lots of reading on the subject lately and while there’s no real consensus, there seems to be a belief by many that natgas prices have bottomed. Earlier this year there was talk of $2 natgas by August, but that prediction might not come true (knock on wood, lots of wood).

In one article, an analyst, Peter Beutel of Cameron Hanover, commented that “the market has already discounted the high levels of natural gas storage and is beginning to focus (on) an inevitable drop off in supplies brought about by lower drilling activity.” I always find it scary when analysts start saying things like, “it’s already priced in there” or “the price includes the discount for XYZ.” Ultimately the prices in the markets for stocks and commodities are determined by the individuals on either side of the trades, a largely human interaction, and it is true that certain negative information is “priced in” to a trade. Still, it’s like the lifeguard at the beach during a shark alert announcing that it’s safe to swim. “We know about the sharks, but we’ve quantified the risk and it is priced into our call.”

The big news for Thursday is the release of the U.S. Energy Information Administration’s gas storage reports. That’s juicy news for traders. If the change in inventories surprises traders, expect the natgas prices to move one way or the other. FYI, the “consensus” estimate is an increase of 68 Bcf.

Another drag on natgas prices has been the natural gas exchange traded fund, UNG. The fund has been extremely popular since May 2009 because investors have been betting on an increase in natgas prices. They have been buying shares like crazy and the fund has run out of shares. The fund’s managers have applied to the SEC to increase the number of potential shares by six times, but the request, which was filed in early June, is still working its way through the SEC. I’m no good at explaining the exact mechanics of why many people believe the UNG share problem has been holding down natgas prices, but here is an article from the Financial Times discussing it in depth.

Ultimately, the thing that will help move natgas prices north is an increase in demand fueled by an improved economy.

Wednesday, July 22, 2009

More Louisiana Completions

In reviewing records posted last week by the Louisiana Department of Natural Resources Office of Conservation, I noted a few recent (and a few updated) completion reports. First, the new completions:

  • Ninock 25-1, Petrohawk: 19.6 MMcf/day on 24/64 choke; Swan Lake field, Caddo Parish, LA; S35, T15, R11, Haynesville Reservoir A.
  • Moran 26-2, Exco Resources: 14.2 MMcf/day on 24/64 choke, 7,359 lbs PSI; Kingston field, DeSoto Parish, LA; S26, T14, R13, Haynesville non-unitized.
  • Jacobs ETAL 36-2, Petrohawk: 15.3 MMcf/day on 24/64 choke, 7,550 lbs PSI; Red River-Bull Bayou field, DeSoto Parish, LA; S36, T13, R11, Haynesville Res. B.
  • Kinsey 21-1, J-W Resources: 0.15 MMcf/day on oopen choke, 780 lbs Psi; Elm Grove Field, Caddo Parish, LA; S21, T16, R13, Haynesville Res. A.

The J-W well above was a vertical well drilled presumably to hold the lease. Honestly, I’d be really pissed if I’d leased to J-W and they were just drilling vertical wells to hold my lease. Since J-W is not publicly traded and doesn’t have the luxury of raising debt and equity capital in the public markets, this is one case where size is a disadvantage. J-W is either waiting for gas prices to rise substantially or looking to sell their leasehold to a bigger player. Don’t get me wrong, it’s a smart business move by J-W, but I would hate to be the guy on the other side of the lease who sees his neighbors hosting fat horizontal wells on their properties.

There were two other completions that showed up from the past eight months:

  • B.S. Moore ETAL-1 ALT, Forest Oil: 0.36 MMcf/day on 18/64 choke, 150 lbs PSI; Woodardville field, Red River Parish, LA; S12, T14, R10, Haynesville Res. A (a vertical well, completed 12/7/08).
  • Oden Heirs 30 H-6, Exco Resources: 12.8 MMcf/day on 20/64 choke, 6,857 lbs PSI; Holly field, DeSoto Parish, LA; S30, R14, T13, Haynesville Res. A (completed 12/3/08).

Ditto the J-W comment above to the Forest Oil B.S. Moore well. The Oden Heirs 30 H-6 well was reported back in February 2009 with a mambo 22.9 MMcf/day IP and a 15 MMcf/day average production rate (over an unknown period). In fact it made No. 12 on a top 20 list. I’m not sure why the restatement now, but it’s not clear if the new published rate is a revised rate or just a current rate.

Great Article by RFK, Jr.

This week, the Financial Times published an Op/Ed piece by noted environmentalist Robert F. Kennedy, Jr. called "How to End America's Deadly Coal Addiction." Say what you might about the Kennedy family, but RFK, Jr. in his leadership of the Waterkeeper Alliance has been one of the most important environmentalists in the U.S. over the past decade.

The piece focuses on the environmental evils of coal for electrical generation, but it presents a strong case for the use of natural gas over coal. It brings up some really interesting points, first about the environmental damage caused by the mining for and burning of coal and then about the kooky conventions that keep coal as a preferred fuel to gas in many places.

He points out that, "of the 1,000 gigawatts of generating capacity currently needed to meet national energy demand, 336 are coal-fired. Surprisingly, America has more gas generation capacity – 450 gigawatts – than it does for coal. However, public regulators generally require utilities to dispatch coal-generated power in preference to gas. For that reason, high-efficiency gas plants are in operation only 36 per cent of the time." Clearly something is wrong.

He also notes that most coal plants are old and small. They are very inefficient and are located near population bases. Continuing to depend on coal for our power has long-term economic and health disadvantages for our country.

While he briefly touts the virtues of alternative energy, his clear message is that natural gas is a superior fuel to coal for power generation. He makes the point that the supply dynamic for natural gas has completely changed because of the economic recovery of gas from shale. Check out the article. It's a pretty quick read and it makes a lot of sense.

Tuesday, July 21, 2009

NatGas Vehicle Research Bill Passes House

A bill to reauthorize a Department of Energy program for natural gas vehicle research, development, demonstration and deployment won overwhelming approval Tuesday in the U.S. House of Representatives. While it looks like a pork barrel bill to support Oklahoma natgas businesses, it has wide potentially positive ramifications for the whole natural gas industry.

The bill, which was introduced by Rep. John Sullivan (OK-R) won the House by a tally of 393-35 and now heads to the Senate. It is a companion bill to the NAT GAS Act, which is sponsored by Rep. Dan Boren (OK-D), among many others, but is a key part of T. Boone Pickens's Pickens Plan. The NAT GAS Act has a long way to go before it's approved.

Gas trade groups are breathlessly hailing the news of the research bill passing the House, but I think it is an over-dramatic response to the realization that these same groups have a long way to go to push for new sources of demand for natural gas. I'm all for it, but natgas advocacy groups haven't had a seat at the grownups table in a long time, if ever.

Pricing in the Swoon

Monday's big news was Halliburton’s earnings report. The company reported earnings that were down from last year (no surprise) but were buoyed by profits from Asia and the Middle East. Halliburton CEO David Lesser’s comments on natural gas prices were widely reported. He said, “we believe it is unlikely that there will be a meaningful recovery in natural gas prices and, consequently, drilling activity for the remainder of the year.”

Total natural gas in storage as of July 10 was 2.9 trillion cubic feet, 18.7% above the five-year average and 25.6% above last year's level. On top of Halliburton’s CEO’s comments, it looks like expected pleasant weather across much of the nation for the next couple of weeks will depress the need for A/C and keep a damper on gas prices.

At the same time, CEO Lesser said that the gas industry’s long term fundamentals are bright. Halliburton is a provider of pressure pumping, a key part of hydraulic fracturing, which enables the recovery of gas from shale formations. Approximately 45% of Halliburton’s 2008 revenue (not profit, mind you) came from North America. He also noted that the recent depressed commodity prices have impacted pricing from oil field service companies, but he believes that things are "probably close to the bottom in terms of pricing degradation."

Wishful thinking? Probably. On one hand you’ve got Halliburton saying that prices aren’t going to decrease anymore, and on the other you’ve got the producers saying that prices still need to keep going down for drilling to be profitable (read: and for companies like Halliburton to continue to get jobs). Ultimately, the customer hires Halliburton (or Schlumberger) to do the work, and the customer is looking at multiple bids. Until the rig count starts going up significantly, I think pricing power will continue to belong to the customer.

As I see it, that’s good news for the Haynesville Shale. I’ll bet that Halliburton, Schlumberger and the other oil field service giants are focused on the Haynesville Play (and other North American shale formations) with a white hot glare. That’s where the action is and they want a piece of it. If they have to lower their prices to get in, they will.

Schlumberger reports Q2 earnings at the end of this week - I can't wait to hear what they say.

Monday, July 20, 2009

Don't Count Out Alt-Energy Just Yet

I've been reading a bunch of articles lately that have the undertone that alternative energy, specifically wind and solar, are dead with the decrease in natural gas prices (most recently: Energy Business Daily - an article from which I learned the word "ablactate" which is a pompous way to say "wean"). The key fact that most people have seized upon is the postponement/death of T. Boone Pickens' plans for a giant west Texas wind farm.

This news bit makes convenient headlines today, but I don't think the media is probing deeply enough. Maybe it's the cute headlines, "Tilting at Windmills" or "Blowing in the Wind" that makes it a popular story. The article cited above does acknowledge the calamity in the financial markets, noting that access to capital has been difficult over the past year, and most large scale alternative energy projects are capital intensive. The article notes that many of the financial institutions that supported alternative energy projects have been "side swiped by the financial crisis." I'd say instead they've been T-boned by it. But this is a temporary condition.

Alternative energy isn't going to die any time soon. Our energy future lies in a "portfolio approach," with wind and solar key parts of it. The energy sources will be regionally appropriate, i.e. wind works much better in the West than it does in the Southeast and solar works much better in the Southwest than the Northeast. But ultimately the "carbon light" energy sources (including natural gas) will come to dominate the energy picture in this country.

The technology, especially for solar, continues to evolve. We are going to see numerous "game changers" in the next couple of decades that will alter the course of our energy future. Over the past year, technological advances and good old trial and error have led to the shale gas boom in North America that has made trillions of cubic feet of gas commercially obtainable. Don't think it stops there. These are exciting times for the energy industry.

LA CNG Bill Passed

Last week, Louisiana Governor Bobby Jindal signed HB 110 which provides tax credits for the purchase of natural gas vehicles. Finally Louisiana leads the nation in something other than poverty and substandard public education! Even if Jindal didn't support the measure, he faced a bill that had a total of 100 co-authors in both the House and Senate (not to say that he didn't support it).

I've been thinking a lot about CNG and its prospects for widespread adoption in the U.S. I still think we are a long way from seeing natgas vehicles at every turn, but I do believe the early adopters will be municipalities that have lots of short haul vehicles. Buses, trucks, etc. can use a municipal fueling infrastructure and the city can save a bundle of money.

Friday, July 17, 2009

Rig Counts: Up and Down

Baker Hughes released its weekly North American rig count today, and the count for the U.S. is up by four rigs to 920. Oil rigs increased by 10 and gas rigs decreased by seven (there was a decrease of one "miscellaneous" rig to get to the plus four number.

In the Haynesville region of East Texas and North Louisiana (including other fields), the rig count decreased by two. It was down two in Louisiana and even for the week in East Texas.

Father of the Shale

Forbes Magazine published a good interview with George Mitchell this week. Mr. Mitchell is the founder of Mitchell Energy & Development, the company which he sold to Devon Energy in 2002 for $3.5 billion on the strength of his early success in tapping the Barnett Shale.

Mitchell Energy was the first company to successfully exploit shale gas in the Barnett and it paved the way for the development of the subsequent shale plays, most notably (in my eyes) the Haynesville Shale. The interview is a quick read and it addresses questions like why independents are better suited than majors in exploiting shale plays and why the future success of shale gas is based on getting drilling costs down rather than gas prices up.

With any interview of an entrepreneur, you always have to apply the “grain of salt” principle, but it’s good to hear what Mr. Mitchell has to say. He is the main reason we care about things like the Haynesville Play today.

Thursday, July 16, 2009

QueSTAR!

Reading the Wall Street Journal today, I noticed a blurb about investment bank Tudor Pickering & Holt upgrading Questar Corp. to a buy. The TP&H analyst said that Questar's holdings in the Haynesville Shale are "going to be bigger and more impactful sooner that Wall Street realizes." That's pretty strong, especially given that Questar only has about 31,000 acres under lease.

What's good about Questar's position is that its acreage is fairly tightly bunched in the southern Caddo/Bossier Parish region, and it is in the same area where it already drills the Cotton Valley and Hosston formations. The company has been producing in the area for years, so it knows the area and has infrastructure in place. Questar also is a quiet partner with Petrohawk in some of the bigger wells in the Haynesville Play.

The company picked its spots and is poised to do well.

Wednesday, July 15, 2009

Goodrich Announces New Results

Goodrich Petroleum announced today that it has completed its third Texas Haynesville Shale horizontal well, the Taylor Sealey #3H. The well is located in Minden Field in Panola Co. and produced at an initial production rate of 9.3 MMcf per day (over a 24 hour period) on a 24/64 choke with 5,200 PSI. The well is located six miles south of the recently announced Lutheran Church 5H well (9.0 MMcf/day IP).

[8/5/09 update: The Taylor Sealey #3H produced at a rate of 6.5 MMcf/day for the first 30 days.]

Also in East Texas, Goodrich has drilled to total depth on two additional Haynesville wells, T. Swiley No. 4H in the Minden field and Beard Taylor No. 1H in the Beckville field.

Additionally, Goodrich has completed the following three wells in partnership with Chesapeake Energy in the Bethany-Longstreet field in Caddo and DeSoto Parishes, LA (some of these have already been noted):

  • Johnson 32H-1: 12.5 MMcf per day IP on an 18/64 inch choke with 7,800 psi
  • Wallace 36H-1: 15.4 MMcf per day on a 22/64 inch choke with 6,100 psi
  • Bryan 25H-1: 14.0 MMcf per day on a 22/64 inch choke with 4,000 psi.

Haynesville Movie

A couple of weeks ago I read about a documentary film that was recently completed on the Haynesville Shale. Here is a link to the movie’s web site with a trailer.

It looks very interesting. In watching the trailer, it looks like the film addresses some of the same issues I’ve been talking about for the last year (not that I’m so right about anything). Judging by the trailer, it looks like the film balances the concepts of natural gas’s impact on the national energy conversation, the local/regional economic impact and the surface impacts. Although, I’m sure there will be lots of human drama, especially given the subtitle, "Three Lives. A nation's thirst for energy. And the find that can change it all."

I’m more of a facts and figures kind of guy, but I can’t wait to see the film.

Three Forks Play

It's a little off subject, but I was interested to read about a new oil shale play in North Dakota called the Three Forks-Sanish formation. Little is known about the play right now, but it seems to be stacked underneath the Bakken Shale in many locations. The Bakken Shale is a prolific oil shale play in North Dakota that has many producers excited. Early indications are that the Three Forks formation might be as rich in oil as the Bakken.

I mention this because I am pleased to see new discoveries of oil and gas in the Lower 48. I'm not sure how oil shales factor into the peak oil calculations, but anything that keeps us from buying foreign oil is a good thing to me.

Shale.tv Shelved

Speaking of making our lives more interesting, Chesapeake Energy pulled the proverbial plug on shale.tv, a video web site geared towards touting the benefits of drilling the Barnett Shale to residents of north Texas. The site, which employed ten people including high profile regional news anchor Tracy Rowlett, planned to go live in about two weeks, so Chesapeake’s action was unexpected.

I don’t know if the closure is an indication of hard times at Chesapeake or that the company is going to take a lower profile in “PR stunts” going forward, but the timing of the announcement seems sort of odd.

Happy 50th Aubrey McClendon!

Aubrey, I understand that today, Bastille Day, is your 50th birthday. Best wishes from all of us who follow the Haynesville Shale. We are appreciative of your company’s investment of capital and smarts in the Haynesville Play. While you and Chesapeake Energy have had your share of ups and downs over the past year and a half, you’ve been great fun to watch and have enriched our lives in many ways.

Happy birthday!

Monday, July 13, 2009

Recent Louisiana Completions

This past week was a big one for completions in Caddo Parish, but not so much in neighboring parishes. Here are five recent Caddo Parish completions:

  • Bryan 25-15-16 H 001, Chesapeake: 9.8 MMcf/day on 18/64 choke; Bethany-Longstreet Field, S25 T15 R16, Haynesville Reservoir A
  • Clingman AC 2-15-15H 001, Chesapeake: 10.5 MMcf/day on 22/64 choke; Johnson Branch Field, S2 T15 R15, Haynesville Reservoir A
  • Moneyham HZ 001, Comstock: 6.2 MMcf/day on 24/64 choke; Longwood Field, S5 T18 R16, Haynesville Reservoir A
  • JJ Giglio 19 001, J-W Operating: 0.3 MMcf/day on open choke; Elm Grove Field, S19 T16 R13, Haynesville Reservoir A
  • Waters 20 001, J-W Operating: 0.2 MMcf/day on open choke; Elm Grove Field, S20 T16 R13, Haynesville Reservoir A

It looks like the J-W wells were vertical wells drilled to hold the leases by production.

Forest Oil: Second Haynesville Well

Forest Oil released impressive results from its second Haynesville well, the Driver 13-1H in Red River Parish. The well produced at 20.3 MMcf per day with 6500 psi flowing casing pressure. The well has a 3,500 foot horizontal leg and ten frac stages. The total investment was $9.0 million.

Forest has two rigs well working its 11,050 acres, one of which is dedicated to Red River Parish. Since the company has identified 110 potential horizontal well sites on its acreage, it is likely that the company will add more rigs, but that's not likely during 2009.

Friday, July 10, 2009

Rig Counts: Down and Down

The Baker Hughes rig counts came out today and the U.S. count is down by 12 for the week to 916. The oil rig count is up by 5 to 234 and the gas rig count is down by 16 to 672. Compared to this time last year, the gas rig count is down by 872, or 56%.

In the Haynesville region of North Louisiana and East Texas (which includes other formations), the net count is down by three to 120. The count was down four in Texas and up one in Louisiana.

Better Explanation of Alt Energy/NatGas Relationship

There was a good article in yesterday's Wall Street Journal (web version, print version) about the relationship I discussed Wednesday between the price of natural gas and the viability of alternative energy. The occasion for the article, of course, was news of the postponement of T. Boone Pickens' giant West Texas wind farm.

The article does a good job of setting the scene for what's going on today in alternative energy. Low gas prices, increased gas supply and a terrible financing market are combining to doom most large scale alt energy plants. It also discusses the very important issue of electrical transmission and how most new lines in the planning/execution phase seemed geared to support coal plants. I wonder who thought of that.

The key point that is being skirted in the discussion of the big wind farm and the Pickens Plan is the relationship between gas and wind. The Pickens Plan was designed to use natural gas as a bridge fuel for vehicles and power generation while wind resources are being developed on a large scale. But a very important dynamic that needs to be maintained is the demand for natgas, which supports a relatively high price for natgas, which in turn supports expanded domestic drilling AND does not undercut the development of alternative energy.

This is not an unattainable goal, but until the economy turns around it won't happen.

Thursday, July 9, 2009

Chinese Shale, More on Exxon

I read a press release today from Canadian company Petromin Resources, Ltd. about a shale discovery in China. You can read the press release for more details (and a comparison of the Chinese play to several North American plays), but I mention this because I think we are going to hear more and more stories about shale gas in other parts of the world.

Earlier today I cited an article about Exxon's Horn River assets. The article also notes that Exxon has big leases prospective for shale gas in Germany (750,000 acres under lease), Hungary (400,000) acres under lease and Poland that it is beginning to test. Exxon has followed the strategy of seeking out shale gas in areas outside of the U.S. that are close to major energy markets. Other majors, Shell and BP for instance, have acquired their way to increased reserves.

While this doesn't bode well for the oversupply issue that is haunting natural gas prices, I think it speaks to the global abundance of shale gas resources that are not just in the Middle East and Russia. I think this is one of many signals that natural gas is going to become an ever more important fuel in the 21st century.

Exxon: "We are really interested in shale gas"

...A direct quote from Exxon's head of global exploration, Tim Cejka. They also seem interested in flooding North America with LNG, but that's another story.

Today, Exxon touted results from the Horn River gas shale play in northern British Columbia. It says wells are testing at an IP of 16-18 Mmcf/day, on par with Haynesville wells. Here's the article from the Wall Street Journal. Exxon is a 50-50 partner with Canadian company Imperial Oil, Ltd. (of which Exxon owns 69.6%) in the Horn River play.

With all that excitement (and cash in the bank) might Exxon be gearing up for a Haynesville acquisition? In another article (print version), the WSJ says no. Because Exxon now has its own shale reserves it has even less reason to acquire a smaller competitor for its reserves. I only wonder if it will want to acquire reserves that are closer to the U.S. market, like in the Haynesville or Marcellus Shales.

Gas Inventories Rise Less Than Expected

Below is a short article from AP noting that gas inventories did not increase as much as expected last week. This is good for the price of natural gas. Increased inventories can indicate excess supply, which is bad for prices. Of course, it might reverse next week.

NEW YORK (AP) -- Natural gas stockpiles increased less than expected last week, the government said Thursday.

The Energy Department's Energy Information Administration said in its weekly report that natural gas inventories held in underground storage in the lower 48 states rose by 75 billion cubic feet to about 2.796 trillion cubic feet for the week ended July 3.

Analysts had expected a boost of between 80 billion and 84 billion cubic feet, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

The inventory level was 19 percent above the five-year average of about 2.344 trillion cubic feet, and 27 percent above last year's storage level of about 2.195 trillion cubic feet, according to the government data.

Natural gas rose about 8 cents to $3.432 per 1,000 cubic feet on the New York Mercantile Exchange.

Gloom and Doom?

I read an interesting article from the Canadian Financial Post that talks about the supply issues concerning natural gas in North America. It gave a good primer on the supply situation but was pretty gloomy on the whole, hitting on concepts such as the abundance of shale gas, the high current levels of gas storage and the expected wave of LNG bound for our shores. It also notes that the pricing ratio between natgas and oil is around 20 times, which is considerably higher than the traditional 6x, a disconnect that some analysts will remain disjointed for a while.

I agree that the supply dynamics are way out of whack right now, but as I noted yesterday, I think the long-term story is that the newfound abundance of natural gas can be a positive for the gas industry and the nation as a whole. I'm no economist, but the large and reliable supply of gas should lead to a somewhat steadier level of pricing going forward. One of the great shocks to the supply side in recent years was Hurricane Katrina, which shut in lots of offshore gas production and sent gas prices spiking to $15/MMBtu four years ago. With abundant gas from more reliable terrestrial sources, you are less likely to see this kind of shock in the future.

To me it gives potential users (switching from coal and oil) a signal that there is a reliable supply that is less prone to drastic price swings. As a traded commodity, the price of natural gas will always fluctuate, but a higher level of predictability should lead to greater acceptance on the demand side.

Some Recent Louisiana Results

Here is a report of some recent Haynesville completions in North Louisiana:
  • Wallace 36-15-16 H, 1, Chesapeake: 9.8 Mmcf/day IP on 18/64 choke; Bethany-Longstreet field, Caddo Parish, S 36, T 15N R 16W, Haynesville Reservoir A
  • DN Bell Etux, 1, EOG Resources: 12.6 Mmcf/day IP on 30/64 choke; Trenton, DeSoto Parish, S 03, T 11N R 13W, Haynesville Reservoir A
  • Jack R Gamble Jr 11 H, 1, El Paso E&P Co.: 15.4 Mmcf/day IP on 18/64 choke; Bethany-Longstreet field, DeSoto Parish, S 11, T 13N R 15W, Haynesville Reservoir B
  • ERH LTD ETAL 25, 1, Petrohawk: 20.8 Mmcf/day IP on 26/64 choke; Red River-Bull Bayou, Red River Parish, S 25, T 13N R 11W, Haynesville Reservoir B

Impressive results keep coming.

Wednesday, July 8, 2009

Key Senate Support for NatGas Vehicles

Dow Jones carried an article covering a press conference with T. Boone Pickens and Sen. Bob Martinez (D-NJ) on the subject of a Senate version of House Bill 1835, the NAT GAS Act, to provide tax credits for natural gas powered vehicles. The occasion was to demonstrate greater support for the legislation, especially from Senate Majority Leader Harry Reid, who apparently missed the press conference because of pressing work on health care reform. Sen. Reid's absence notwithstanding, it is encouraging to see that key members of political leadership are awakening to the benefits of using natural gas for powering vehicles.

Part of the article's focus was a comment by Mr. Pickens about gas prices. He was asked if using natgas for vehicle fuel would increase prices. He responded in the affirmative suggesting that prices might rise to about $7/Mcf (now about $3.45/Mcf). Given the fact that his hedge fund BP Capital lost billions incorrectly wagering on the price of gas last year, I wouldn't take that price prediction to the bank just yet.

Interestingly, at the end of the article Mr. Pickens clarified reports that he had cancelled plans for his big West Texas wind farm, saying instead that he had only postponed plans by a year or two. What he is going to do with 687 mammoth turbines until then is unknown.

The Hawk Surfaces, If Only Briefly

After complaining about the silence from Petrohawk, I was excited to see a new presentation from the company today. I was disappointed when I realized it concerned the Eagle Ford Shale, a fairly new and impressive looking gas shale formation in south central Texas - as if Texas needed any more big gas fields! Petrohawk seems to have a good position in the Eagle Ford and they apparently want to claim it as theirs, much like Chesapeake gets credit for "discovering" the Haynesville Shale (is that like Al Gore and the Internet?).

Anyway, the one piece of information that I found relevant to the Haynesville Shale was a table comparing the geologic qualities of the two fields. There is a lot of geology here that I can't fully explain/understand, but looking at the stats side-by-side, it looks like there is a reasonably close similarity between the two.

To me, the big news continues to be that there is an abundant supply of natural gas in North America. It probably won't be long before we hear of another big find. It is becoming ever more apparent that we as a nation need to displace imported oil products (and dirty coal) with domestically produced, clean burning natural gas products. It's the way forward.

Here is a link to the presentation for you Eagle Ford Shale fans.

Pickens' Wind Farm Plan Shelved

This week, T. Boone Pickens let it be known that his plan to build an enormous wind farm across the Texas Panhandle has been cancelled. The wind farm would have sported 687 giant turbines that would generate up to 4,000 megawatts of electricity. Unfortunately, Mr. Pickens already ordered the 687 turbines from GE last year at a cost of about $2 billion. Now he needs to find projects to use them. As he noted in one interview, "my garage won't hold them."

This wind farm plan is not to be confused with the "Pickens Plan," Mr. Pickens' advocacy program to cause the U.S. switch to clean sources of energy while using natural gas as a bridge fuel. I believe that his work with the Pickens Plan is one piece of the puzzle to help push our country in the right direction, and his efforts to create new demand opportunities for natural gas, specifically transportation uses, are very good for the gas industry.

The wind farm plan was felled by a combination of a lack of transmission infrastructure to the area, a poor financing market and low natural gas prices. The low gas prices make wind energy expensive versus natural gas generation. It is particularly ironic that low gas prices helped scrap the project given his devotion to gas.

Unfortunately, Mr. Pickens will probably be too distracted over the next year by the need to unload the wind turbines to focus on his advocacy program and the creation of new demand sources for natural gas.

I think he will be able to partner with smaller wind farms across North America to offload most of his turbines. As the article linked above notes, the transmission infrastructure is being built in the Midwest, which means there will continue to be new projects in that area. I'm less hopeful for turbine manufacturers who now have to deal with a glut of turbines in the secondary market.

I'm sure there are many who will have a good laugh at Mr. Pickens' expense given his high profile, but I for one am sorry the project wasn't successful. Ultimately I think history will show that he drove his natgas-powered vehicle into a pothole rather than off a cliff. I wish him the best going forward.

Unit Corporation: Watch and Wait

Unit Corporation is better known as a contract driller, but they also have a gas production company (Unit Petroleum Company) and a pipeline business (Superior Pipeline). From a production perspective, Unit focuses on the Anadarko Basin in Oklahoma, the Arkoma Basin in Arkansas/Oklahoma, and the Gulf Coast Basin, although the company has picked up acreage in the Marcellus, Bakken and Haynesville Shales.

In the Haynesville Play, Unit has 30,300 gross acres (15,500 net). All of the acreage is in Texas, mostly in Harrison and Shelby Counties. The company's strategy is to drill vertical wells to hold leases by production before spending a lot of money on horizontal wells.

So far, Unit has drilled five vertical wells in Shelby County and at last report was drilling one horizontal well in Q2 2009. Unit hasn't released results from the horizontal well but it might shed some light on it during the company's early August earnings call. Because takeaway infrastructure in Shelby Co. is lacking, only two of the wells were hooked to a pipeline, but management reports that the results have been "somewhat disappointing," as each well is producing about 100 Mcf/day and experiencing some water loading problems.

Unit's 2009 drilling plan is for 9 vertical wells and one horizontal well in Shelby Co. (about $25 million of capex) and 3 vertical wells in Harrison Co. (about $6.5 million of capex).

For now, Unit seems content to spend enough money to hold the land, but it will watch and wait before spending a lot on horizontal wells.

Tuesday, July 7, 2009

More on Earthquakes

Last month I noted the attention that several earthquakes in NE Texas in the Barnett Shale region had drawn from the media. I read an article in yesterday's New Orleans Times Picayune that the LA Department of Natural Resources is looking into it the possibility that drilling might have a seismographic impact on the region (link to article, link to print version in case previous link expires).

The issue is only beginning to be addressed, so there's no indication whether or not it will be a problem. To truly understand the potential impacts of drilling, specifically hydraulic fracturing, on the geophysics of the Haynesville Shale region will require lots of monitoring and time. There's not much you can do on the front end, and it is not a reasonable expectation for drillers to take it into consideration at this point.

Monday, July 6, 2009

Where is Petrohawk?

It seems that a few of the big Haynesville Shale players have gone radio silent of late. Perhaps the biggest void is Petrohawk. The company was always happy to tout new wells, but the last big news out of the company was two months ago when it increased capital spending. The Hawk seems unnaturally silent these days. What gives?

A Little More on European Ambitions

The recent deal between EXCO and BG Group of Britain for Haynesville acreage has caused great excitement in the press, as I noted last week. I read a recent blurb on an investment site with a few more details about the motivation of the big European players.

The article noted that a prime motivation for the European producers is to exploit resources elsewhere in the world to break their dependence on natural gas from Russia.

The article also noted some key cultural differences between the big European producers and the nimble U.S. independents. The European companies have deep pockets but they lack the technical knowledge to exploit the shale plays. Also, they are ill-equipped for the speculative nature of new plays. It is hard for them to slowly and quietly build a land position and take the risk that their efforts might amount to nothing.

It equates to the investment world. The independents are like venture capitalists, finding and funding early stage plays. They take immense risks and are richly rewarded when they pay off. They face big losses when a play doesn't work out. The big multi-nationals are like "private equity" firms and the public markets. They come in after the play is established and most of the risk has been squeezed out. They step in when big capital is needed to blow it out.

Now that the big plays are established, the production techniques have been refined and capital is needed in great quantities, it's time for the multi-national producers to participate.

Friday, July 3, 2009

Rig Counts: Up Again Nationally

Rig counts, as compiled by Baker Hughes, were up in the U.S. for the third straight week, rising by 11 to 928. The rig count is off its recent low of three weeks ago by 52 rigs. As expected, most of this week's increase came in oil rigs (+10), but there was a slight increase in gas rigs (+1).

In the Haynesville region of North LA and East TX, the rig count dropped by one to 123.

Biofuels and Externalities

There was an interesting article in this month's Fortune magazine about the lobbying industry behind ethanol. The article focused on the hiring of retired Gen. Wesley Clark by the upstart ethanol trade group Growth Energy (link to web site with images of small children, American flags, and the color green everywhere).

The article is interesting because it takes you behind the scenes of how the ethanol lobbying effort is working to make up lost ground to the food industry after last year's spike in corn prices. It is also fighting a battle against environmentalists pushing to force the cost of externalities onto the industry. The ethanol industry is back on the offensive and one of their main goals is to get the maximum ethanol component of gasoline raised from 10% to 15%.

Since presidential hopefuls won't be circulating in Iowa until 2010 at the earliest, corn-based ethanol lobby doesn't have as strong a voice as it did a couple of years ago, so the DC lobbying effort will have to be fierce.

One of the industry's biggest hurdles is a new concept called "indirect land use." Some economists and environmentalists are pushing the idea that taking U.S. corn out of the food supply reduces corn exports to the world and forces agricultural burdens on developing countries. This issue is particularly acute in places like Brazil where developing new land for agriculture usually means deforestation, especially in rain forests. Economists call this an externality. If you add the indirect cost of this deforestation to ethanol it becomes much more expensive.

In my opinion, corn-based ethanol is already too expensive. It is supported by government subsidies (not factored into the economic price) and grown in a fuel-intensive manner (not factored into its environmental impact). Plus, it screws up the supply dynamic for food. Corn isn't just for eating off the cob. It's a big ingredient in animal feed, for instance. Sudden increases in the cost of corn ripple quickly and violently through the entire food market. That doesn't even factor in the lost of virgin forests halfway around the world, which I believe is a real impact.

The ethanol industry argues that the externalities of oil are not considered, so why force it on ethanol. Very true. If we had to factor in the grotesque costs required to support our foreign oil addition, most notably a recent six year long desert war, we couldn't begin to afford oil.

Ethanol is a crutch for our oil addiction. It's not a solution. Externalities, though difficult to quantify, are real. We are not in a position yet to have solar cars or plug-in hybrids on a large scale. We need to take real steps towards implementing a bridge fuel, like compressed natural gas, to reduce our dependence on oil while other solutions are developed. We are wasting time fooling around with ethanol when we could be moving forward with CNG.

Thursday, July 2, 2009

Hydraulic Fracturing Cross-Section

I saw the image below at the Energy In Depth web site, which is an organization of independent natural gas producers representing an alphabet soup of local and regional gas organizations. While I'm not a huge fan of industry sponsored sites, there is some good info here.

This is a particularly interesting drawing considering the discussions going on at state and national levels concerning the regulation of hydraulic fracturing. The image shows vertical fracturing, but the same concept applies to the horizontal applications. The key takeaway is that the impact of the fracturing occurs well below the water table.

The animation that linked below from the Louisiana Oil and Gas Association shows how the well is sealed and cemented throughout the drilling process to avoid groundwater contamination (link to page with animation).

To me, the biggest issue is the management of the chemicals and processes at the surface, which is more of an HS&E issue. The recent controversy over dead cows in Caddo Parish resulted from a surface spill, not the direct application of fracturing, but it's the kind of thing that makes people nervous.

Wednesday, July 1, 2009

Big News, Big Capital

News of EXCO's joint venture deal with BG Group for its Haynesville Shale acreage (see post below) has generated lots of press in the past couple of days (WSJ, Bloomberg, overseas, among others). I think this is partly the result of the dearth of big deals this year and the attractive pricing of the transaction. It was a full priced investment by BG rather than a bottom fisher snapping up assets on the cheap. A feel good story for the economy.

But this is an important deal for lots of reasons. I made the comparison earlier to other deals made between domestic shale players and multinational oil and gas companies. The interest by international players is something we will continue to see. The U.S. shale plays will become the great demonstration grounds for advanced natural gas technology that will be used to tap shale plays all over the world. I wouldn't be surprised to see other foreign producers like France's Total, S.A. partner with U.S. shale players. Chesapeake is the recognized leader in technology (I can't say that for sure, but the market seems to believe it), but technology transfers quickly in the oilfield, so Chesapeake isn't going to be the only desirable partner.

The other big concept in play with this deal is the need for massive amounts of capital to successfully exploit the Haynesville Shale. Based on the geology in hand, companies can be fairly certain that they won't drill a dry hole. But there is a different kind of risk involved, one that is more Wall Street than oilfield.

Because there was a massive land rush to acquire acreage, much of which went for inflated prices, most of the Haynesville participants have already expended large quantities of cash. Because leases expire in three to five years, they must now drill and produce to avoid relinquishing the leases. The clock is ticking and the price of gas doesn't show signs of improving. Since drilling deep horizontal wells can cost between $7 million and $10 million a pop, producers need to expend lots of money very quickly. The payoff can be huge, but they have to be able to climb the mountain first.

That's why we've seen so many debt and equity offerings in the past year, and it's why the credit crunch really hit the exploration companies. Big companies like Chesapeake, Petrohawk, XTO and the like can now access the capital markets - at a price - while little guys like Cubic are often shut out.

In its presentations, Chesapeake often talks about the shale "haves" and "have nots," inferring that gas producers who have not joined the shale frenzy will be handicapped for years to come. Not stated is that to be a "shale have" a company needs to take on a great deal of financial risk. It's great to be a "shale have" but it is no panacea because the financial risk a company undertakes can hobble it for years to come and ultimately (or quickly) put it under.

I think we are going to see more deals where explorers sell off a portion of their leased acreage or bring in a joint venture partner because they've bitten off more than they can chew. It reminds me of the Far Side cartoon where the dog catches the car. That's great, but what do I do with it now?

EXCO: Big Deal with BG Group

The big gushers have paid off for EXCO Resources. On Tuesday the company announced a big 50-50 joint venture agreement with British gas producer BG Group to develop EXCO's Haynesville Shale assets.

In a painfully worded press release that was likely written by tired lawyers, EXCO announced the deal for its Haynesville/Deep Bossier assets in Louisiana and Texas and some of its shallower Cotton Valley and Hosston assets. The deal did not include property in the Vernon (LA), Redland (LA), Gladewater (TX) and Overton (TX) fields (the TX fields were sold yesterday - more on that below). The deal covers about 120,000 acres in Louisiana (65K) and Texas (55K), of which 84,000 acres are prospective for the Haynesville/Deep Bossier Shale. Most of the property is in Caddo and DeSoto Parishes, LA and Harrison Co., TX. EXCO estimates that the Haynesville acreage in the deal can accommodate 1,600 potential well locations and contains net reserves of 4 to 6 Tcfe.

EXCO will continue to be the operator of these assets. As part of the deal, BG will pay EXCO $655 million up front and will pay 75% of EXCO's drilling costs up to $400 million. Additionally, EXCO is selling BG a 50% interest in the relevant midstream assets. In total, EXCO will receive $904 million upfront cash that will be used to pay down debt.

The deal is very similar to those done by Chesapeake Energy for the development of its shale assets all over the country. It is especially similar to Chesapeake's Marcellus Shale deal with StatoilHydro of Norway in that another deep pocketed European operator will gain technical expertise in shale fields and horizontal gas drilling.

On Monday, EXCO agreed to sell acreage in Texas, Oklahoma and Kansas deemed to be non-core to Encore Operating, LP for $355 million. The company has been busy strengthening its balance sheet.

On the whole, this is a great deal for Exco. They got lots of cash to put a huge dent in the company's debt and they got funding to accelerate their Haynesville drilling program. Exco's 2009 budget now calls for 34 Haynesville horizontal wells, 27 of which will be operated by Exco.