Wednesday, September 30, 2009

A New GMX Completion

GMX Resources announced that it has completed its Verhalen "B" 1H well. The initial production rate over 30 days was 5.7 MMcf/day on a variable choke. I believe the well is in the North Carthage Field in Harrison County, TX, but I need to verify this.

The company also announced that it has drilled the Verhalen "C" 1H and the well is scheduled for completion in October 2009. GMX noted that the well should cost approximately $7 million, its lowest capital expenditure in the Haynesville Play to date.

Bossier City’s CNG Stations

Bossier City announced locations for two new public CNG filling stations (short article starts at bottom of page) as part of the city’s effort to convert as many municipal vehicles to natural gas. It’s nice to see a local government take the lead in solving the CNG “chicken and egg” problem. The CNG fueling infrastructure will have to take the lead (the egg?) before widespread adoption of CNG vehicles (the chicken?) can begin.

Exco: More Non-Core Sales

This week, Exco Resources announced that it has sold all of its Oklahoma operating properties to Sheridan Holding Company I, LLC for $540 million and certain Ohio and Pennsylvania properties to EV Energy Partners, LP for $145 million. Selling more of its "non-core" portfolio allows Exco to concentrate on its big investments in shale plays. Moves like this generate upfront cash that can be used to retire debt or invest in drilling. It also allows for greater management and operational focus on shale.

Some might argue that Exco is surrendering good future cash flow and portfolio diversification to concentrate its risk in shale, but it clearly speaks to the company's belief in Big Kahuna plays like the Haynesville.

Standing at the Crossroads

The Wall Street Journal has a great short article about the big picture for the natural gas industry. I feel like I’ve been saying the same things, but posting these thoughts over time in an erratic fashion tends to dilute my message. The article says it well – check it out (link should be good at least seven days).

The natural gas industry is at a very important point. The arrival of shale gas has completely changed the supply paradigm for the industry. North America is awash in natural gas. The question now is what happens on the demand side?

The biggest prospect for gas is to power more electric power plants, and the incredible opportunity that presents itself is the current move to revise our nation’s energy policy to limit greenhouse gasses. This is a tailor-made situation for gas, which when burned has half the carbon output of coal and almost none of the other pollutants like mercury and sulfur.

Unfortunately, the gas industry had its head in its rear when it came time to lobby the House of Representatives and was “schooled” by the coal lobby. There is still a chance to change the policy in the Senate, but coal still has the more powerful lobby supporting an inferior and dangerous product for which it will fight to the death (think: tobacco).

If new demand drivers are not found for natural gas, the price of gas will be capped for the foreseeable and producers will be fighting a constant battle to keep a lid on production while still drilling new wells. It will not be pretty. The gas industry stands at the crossroads and the outcome of the energy/climate debate in Congress will largely determine its future, at least for the next few years.

Tuesday, September 29, 2009

Hydraulic Fracturing Needs to Come Clean

There is going to be a lot of discussi0n in coming months over the technique of hydraulic fracturing. Much of this will come from the Appalachian region, where the Marcellus Shale is on the verge of ramping up. Fracing is also being discussed in Congress, where the FRAC Act has been introduced to regulate hydraulic fracturing under the federal Safe Drinking Water Act, from which it was previously excluded.

First, a little bit on fracing. Here is a good explanation of the practice (the second half of the article). It, along with horizontal drilling, is the key enabling technology for the production of shale gas.

The controversy over fracing comes from the use of potentially dangerous chemicals as a small part (+/-1%) of the injection fluid mix. Now that the Marcellus Shale is being developed in earnest, there are many environmentalists and communities raising concerns over the use of these chemicals. Because there is limited information about the contents of fracing fluid – the contents change depending on the geology and the company selling the fluid – there is some misinformation being circulated by opponents of the practice. The discussion has fed a movement to limit Marcellus drilling on a local and regional level.

While drilling has taken place in the Appalachian region for 150 years (Titusville, PA was the site of the first oil well drilled in the U.S. exactly 150 years and one month ago in August 1859) and Pennsylvania and West Virginia have the second and third most gas wells in the country, respectively, the industry doesn't seem as ingrained in the region as it is in Texas and Louisiana. Appalachian residents also believe, rightly so, that the beauty of the region and the quality of drinking water need to be preserved.

Recent incidents of spills, most notably by Cabot Oil & Gas in Dimock, PA, have heightened concerns. There is no proof that fracing impacts aquifers, and incidents like Cabot’s result from surface spills and accidents. Opponents to the practice, however, do not differentiate how the damage occurred, only that it did occur.

Gas production companies hold that the practice is very safe, especially because the chemicals are injected thousands of feet below the surface and the fluid’s dangerous chemicals are used in very small quantities. One problem they have in making the argument is that they are bound by their suppliers’ confidentially agreements not to disclose the mix of ingredients because of the proprietary nature of each company’s fluid. Schlumberger and Halliburton don’t want the other to know the recipe for their secret sauce.

There has been a recent movement by E&P companies, especially Chesapeake Energy and Range Resources, to pressure their service providers to disclose the chemicals and seek new, less dangerous chemicals that do the same thing without the risk. Technically, the service providers don’t have to do disclose their fracing recipes and look for safer alternatives, but it would be in the best interest of the gas industry for them to do so. If their opacity leads to regulation of the practice, they will be forced to disclose their recipes eventually.

There is a bright light shining on the gas industry now thanks to the recent shale discoveries and the opportunity for natural gas to be used as an environmentally-friendly alternative to coal. But the future of natural gas is drilling all over the country, not just in Texas and Louisiana where people often turn a blind eye towards drilling. The gas industry is going to have to prove that it is a good neighbor and an effective steward of the land if it is going to be welcomed in new prospects.

Natural gas is poised to become this nation’s leading energy source, and it is in the best interest of everyone involved in the industry to be transparent and responsible. The “golden goose” is at hand – don’t let it get strangled by intransigence.

[UPDATE 9/30/09: Here is an article from Bloomberg about Schlumberger pressing its suppliers to reveal the contents of fracing fluid.]

Monday, September 28, 2009

Severe Contango in Action

Several times today I glanced at the ticker showing the natural gas near month futures price. It was a down day. At one point it was down about 6% and was trading about $3.75. A few minutes later I checked and it was at $4.80. My sudden burst of enthusiasm was tempered when I looked at the calendar and realized that today is three days before the end of the month, the day the near month futures contract expires. At some point during the day the various tracking indexes switched from the October 2009 contract to the November contract.

The difference between the October and November contracts illustrates contango, which is what traders call the situation when commodities futures prices are higher than the spot prices. Contango is a natural state for commodities markets because there is an implied cost of storing and financing commodities for delivery at a future time. But 33% between months is extreme. Part of this contango is seasonal because November is the beginning of the consumption months when prices are somewhat higher, but 33% is extreme.

Many people pointed at the extreme contango as a reason that natural gas prices will increase to the $5 to $6 range before the end of 2009. That optimism is tempered by the storage situation, which is approaching full. While there is available storage, the capacity number is a theoretical one. Most of the available storage is in the “consumption” areas, especially in the east, and not in the “producing” areas. If storage is filled up before the end of the injection season (October 31 or thereabouts), the spot price should plummet. If storage doesn’t fill up, the price should hold steady and hopefully rise. Not that I’m predicting anything…

[UPDATE 9/30/09: Here is a short article from the Wall Street Journal with more information about the transition between the Oct/Nov contracts and the coming end to the storage injection season.]

Bossier Pipe Plant to Reopen

News came last week that a Northwestern Pipe Co. factory in Bossier City that was closed in 2005 will reopen to fabricate pipe for Haynesville Shale drillers.  Obviously, this is good news and it shows some of the positive ancillary impacts of the Haynesville Play on the region.  I think we will see a number of similar announcements of new offices or plants in the next few years.  Government economic development professionals have to be licking their chops at the prospect of luring new companies to the region.

Alaskan Pipeline Open Season Might Fail?

Last week, representatives of TransCanada Corp. suggested that an open season for the proposed Alaska/Lower 48 gas pipeline supported by the Alaska Gasline Inducement Act (AGIA) might fail. Open season is a period when potential customers commit certain quantities of gas to a pipeline project in anticipation of signing long term transportation contracts. These contracts then make it possible to finance the pipeline project. The belief among pipeline officials is that the bids received during open season, which will not be until early 2010, will be conditional bids.

I've been following the controversial AGIA pipeline because it comes at a time when the natural gas supply paradigm has been flipped on its head by shale gas. Suddenly the Lower 48 has plenty of gas and the prospect of building a $30 billion pipeline to deliver more gas from Alaska doesn't seem smart.

The situation is a complicated one. There are only a few major producers on the North Slope of Alaska and two, BP and Conoco, are proposing a competing pipeline called Denali. Exxon recently joined the AIGA project, albeit in a non-committal way. I believe along with the fear of new supply in the Lower 48 is the concern that the price of natural gas might be rather low for a prolonged period of time. If nothing changes to juice up demand, oversupply from shale deposits will be a long-term problem and will keep a damper on natgas prices. I think Alaskan producers are looking at that situation carefully.

Ultimately I think they will look at creating an LNG export center in the Valdez area. Alaska is reasonably close to the Asian market, which will pay more for gas than the North American market. Already plans are underway for an LNG export facility in Kitimat, British Columbia for these same reasons.

Just another fun story to watch in the ever changing world of natural gas.

[UPDATE 9/29/09: The AGIA vs. in-state pipeline to Valdez has become a major issue in Alaska and has prompted one official to announce a run for governor with the "all Alaska pipeline" as the cornerstone to his candidacy.]

Saturday, September 26, 2009

One New Texas Completion

I noted only one new completion reported in Texas this week:
  • Jernigan "A" Unit 4H, Devon Energy: 6.593 MMcf/day on an adjustable choke; North Carthage Field, Panola Co., TX (Bossier Shale)

Friday, September 25, 2009

Rig Count: Up Again

The Baker Hughes weekly rig count showed a total U.S. increase of 7 to 1,017.  It's still 978 lower than the count this week last year.  In terms of breakdown, oil rigs were up four, gas rigs were up five and miscellaneous rigs were down two.

In the Haynesville area, which includes some other targets, the count was up five, up four in Louisiana and up one in Texas.  The table below shows the U.S gas. rig count (left axis) versus the North Louisiana rig count (right axis - as a percentage of U.S. gas rig count), showing that North Louisiana represents approximately 14.5% of the gas rigs deployed in the country.  In this case I am using North Louisiana as a proxy for the Haynesville Shale because a higher percentage of the area's rigs are dedicated to the Haynesville Play.


Chesapeake in Midstream Deal

The deal machine that is Chesapeake Energy announced a new joint venture arrangement, this time concerning midstream assets (gathering and pipeline).  The deal creates a new 50/50 JV entity called Chesapeake Midstream Partners, LLC with investor Global Infrastructure Partners (GIP) to cover midstream assets in the Barnett Shale and its non-shale midstream assets in the Arkoma, Anadarko, Delaware and Permian Basins.

While this transaction is not directly related to the Haynesville Shale, I note it for three reasons:

1) I believe that deals involving midstream assets will be the best way for private equity (PE) investors to invest in shale plays at this point.  PE funds have lots of cash they need to spend, but they like to invest in "leveraged transactions" - deals where they can invest alongside a big slug of debt from a bank - which can be hard to do on the E&P side.  But operators are still looking for cash to explore and produce, so PE funds are a good source of investment.   Exco Resources recently closed a transaction with BG Group for 50% of its Haynesville midstream assets.  I think there will be more deals like this. 

2) Hey look, debt funding!  A deal like this, which involves a new $500 million bank loan, shows that the credit markets are loosening, at least a little bit.  That's good news for everyone in the economy because the market depends on banks lending new money.  The $500 million loan was less than GIP's $588 million equity investment and the purchase of legacy midstream assets is not a huge stretch, but any big loan is progress.

3) It is always fun to watch the Chesapeake deal machine in action.  Stay tuned because it won't be the last one.

Ticker Explanation

I've gotten a few questions about the components of the Haynesville Shale Ticker at the top of the page, mostly about the confusion between the Henry Hub spot price and futures prices that are more widely reported (including on the "Energies Monitor" widget in the upper right of the page).  To clarify things I've written a longer explanation and cited the sources for the information.  It is available at this link and the ticker itself is now linked to the explanation.

Thursday, September 24, 2009

NPR on Gas: Why the Gas Lobby Has to Fight an Uphill Battle


Today concluded the three part NPR Morning Edition series on the natural gas industry. Today’s story featured the industry’s anemic previous attempts at lobbying. The famous line about lobbying is, “if you’re not at the table, you’re on the menu.” Natural gas was served as a five course meal.

Natural gas has a huge uphill battle, especially against the coal lobby. Coal is deeply entrenched in Congress. Coal has friends. There is a Coal Caucus (there isn’t one for natural gas, as you may suspect). In the first six months of 2009, the recently formed natural gas industry group AGNA spent $310,000 on lobbying, while the coal industry spent $78 million. Guess who got heard. Guess who was left out? Another issue is that there are hundreds of independent gas companies that do most of the gas drilling, while there are only a handful of big coal producers; therefore the coal industry is far more organized.

It is an interesting piece and will send a few shivers down the spines of gas fans. Check it out:

Storage Up, Not Too Bad

The EIA released the natural gas in storage number this morning. Storage was up 67 Bcf to 3.525 Tcf. It’s still on a record pace, but it is not growing as fast as it did a few months ago. The storage figure is 16.9% higher than the figure last year and 16.0% higher than the previous five year average. The spread over the five year average continues to narrow slightly, down from 16.4% last week.



Most of the gas seems headed east to the consuming region for storage.  It is also where the area with the smallest differential from the five year trailing average, as shown below.


Wednesday, September 23, 2009

Shreveport Postpones Vote on Regulations

The Shreveport City Council defered action on city regulations to address impacts of Haynesville Shale drilling.  The reason for the delay was to explore the idea of incorporating the new rules as "stipulations in well contracts" rather than passing an ordinance. 

I'm not quite sure how that would work since the council would probably have to pass an ordinance to put the language in all new contracts.  What's the difference?

Two Recent Louisiana Completions

I noted the following recent completions from the Louisiana DNR:
  • Kathryn Drake 4 H #1, EnCana: 8.064 MMcf/day IP on 19/64" choke at 5,627 psi; Holly Field, DeSoto Parish, Sec. 4/Township 14/Range 14; serial #239169
  • Matthews ETAL 17 H #1, Petrohawk: 8.014 MMcf/day IP on 14/64" choke at 8,984 psi; Red River-Bull Bayou Field, Red River Parish, S17/T13/R11; serial # 239157
I have updated the list of LA completions with this information.

NPR on Gas: The Rise of the Small Independent

"...Big oil got beat."  That's the last line of the introduction to the second of a three part series NPR's Morning Edition is doing on the changing natural gas industry.  The focus of today's report is how U.S. natural gas came to be dominated by small independent companies.  According to the report, 82% of domestic natural gas is produced by companies with an average of twelve employees.  Big integrated oil companies largely gave up on domestic gas production a long time ago.

This is a fascinating story, and it's uniquely American.  It shows how the persistence of the little guys has created a huge opportunity for everyone.  Two interesting facts from the story that show why the domestic gas industry favors little guys:
  1. Because terrestrial gas wells have rapid decline rates, domestic gas production requires lots and lots of new wells to be drilled.  Big guys don't like that. They want to drill the monster and keep feeding the downhill "value chain."
  2. Most drilling takes place on private land and land owners retain mineral rights, something else that is uniquely American.  That means a land owner can create his own small company.  It also doesn't favor Big Oil because they don't like to have to put thousands of parcels together to make a drilling tract.  They want to bid at auction and nail down a large single tract for a long period of time.
One downside to being a thousand tiny producers is the inability to speak with a single voice concerning large issues like environmental impacts and energy policy.  That will be tomorrow's story.

Check it out: 

Exco Resources: Analyst Day

Exco Resources is holding its "Analyst Day" today. For nerds like me, it's really cool. For everyone else in the world: yawn! Anyway, below are some of the things I judged relevant to the Haynesville Shale.


In its introductory remarks, the company commented on the expected "LNG Tsunami," noting that it has not materialized. The reasons they cite: 1) recovering economies in Asia, specifically China and India, are increasing LNG demand, and 2) increased demand from Europe, which is seeing less natural gas from Russia. Exco notes that nearly all LNG produced in 2010-11 is already contracted (although that doesn't count the "monster" projects coming out of Australia in a few years). The company also noted that the U.S. is the only country in the world to price natural gas independent of crude oil. Presumably that leads to lower prices in the U.S., making it a less desirable market. This is good news for domestically produced natgas.

The company also noted in its intro that the abundance of North American shale gas provides greater visibility to future supplies and output, which should promote greater consumption. This stability of supply argument is one I'd like to see promoted in the industry's lobbying efforts, but I guess the first step is getting people to tune in to natural gas at all.

Exco as a company has shifted its strategy from one of growing by acquisition to one of organic growth with an intense focus on shale gas. The joint venture deal with BG Group for production and midstream assets allows Exco greater flexibility because it now has a smaller debt load and lower projected capital expenditures. It's ownership of the resources produced went down significantly with the deal, but so did the company's risk. That's a fair trade in the investment world.

Exco currently runs 12 rigs in the Haynesville Play (7 operated, 5 non-operated) but is planning to add another seven operated rigs in the next few months for a total of 19. All of these rigs are leased from third parties. Because of the rig count has dropped by more than half over the past year, short term lease day rates actually are running considerably lower than long term lease rates ($13-15K/day vs. $23.5-24.5K).

Well costs are continuing to come down. Exco was running $13 million/well in Q1 2009 but is down to $9 million in Q3 2009. The company expects that number to drop to $8 million per well going forward. The capex cost breakdown is approximately 50/50 between drilling and completion with completion stimulation (33%) being the costliest component. As the breakdown below shows, stimulation costs have actually come down 55% since Exco drilled its first well.


One of the main drivers behind cost savings is shortening the drill time since many cost components are on day rates (rig, labor, etc.).  So far, Exco has been able to reduce drilling days fairly significantly, as the graph below indicates.


In terms of results, Exco is doing quite well. The company has many of the top producing wells on an initial production basis and recently had one clock in at 30.1 MMcf/day IP.  The chart below shows cumulative production from the first 15 wells.  You will note one well that is less than ten months old has already produced around 2.75 Bcf. 



The chart below shows why producers are so excited about the Haynesville Shale.  The midpoint line (green) shows cumulative revenue generated based on a $5/Mcf price of natural gas.  Based on the company's estimates, after two years of production, a 20 MMcf/day IP well (a big 'un, grant you) would produce $22 million of revenue.  Subtract royalties of about 20% (based on wellhead prices) and a capital expenditure of around $9 million and you've got a great return on investment.  Stamp out a handful of these and you are minting money.  These big wells return their investments so quickly that it creates a huge incentive to drill a lot of wells in a short period of time.



The following two IRR (internal rate of return) charts show the magic.  (Again, keep in mind that the illustrations below show very successful wells in terms of initial production.)  The first shows a 20 MMcf/day IP well and the second a 15 MMcf/day IP well.  Exco targets a 20% IRR, and it only takes a selling price of around $3.15/Mcf at an $8.5 million well cost to hit 20%.  At $4.75/Mcf for the same capex, the IRR for a 20 MMcf/day IP well jumps exponentially to 100%.  Compare these to traditional Cotton Valley wells where the producers struggle to squeeze out a 20% return with prices between $5.50 and $7.00.  These  Haynesville returns are huge!





Exco also published its current production curves, and they showed decline rates that were not as steep as originally predicted.  Unfortunately all of the inputs, especially EUR, were not in the presentation.  Of course the IP rates they are seeing are more than double the rates they expected, so that's nice.



In case the Haynesville Shale were not enough, Exco is starting to develop plans for the Mid-Bossier Shale, the formation above the Haynesville.  As the slide below shows, it appears to be a thicker deposit but it might not be as rich as Haynesville. 



Drilling water, both coming and going, was also addressed.  In terms of source water, Exco is pursuing multiple avenues, including produced water from Cotton Valley, industrial waste water and recycled water.  In terms of water disposal, Exco is building a water gathering system with a 30 mile pipe for transportation to a disposal field, as shown below.



Pipeline capacity was another issue addressed in the presentation. Takeaway capacity is a vital component of Exco's ambitious plans.  The map below shows the web of takeaway infrastructure in the area.  The lines that are shaded and labeled TGG or Talco are Exco/BG lines.  The dashed lines (red, blue and green) are the proposed expansions to Exco/BG transportation lines.


The two slides below show more detail on how the transport lines interconnect and show expansions to the gathering capacity for the company.





I apologize for the lengthy post, but there was a lot of information covered.  The bottom line is that Exco is positioned to continue to invest lots of resources in the Haynesville Shale.  Strategically, the Haynesville Play has become the company's centerpiece project, so expect to hear a lot more about Exco in the future.

Tuesday, September 22, 2009

Shreveport Considers Regulation

Following the lead of neighboring local governments and the city of Ft. Worth, TX, the City Council of Shreveport is considering a package of regulations to apply to Haynesville Shale drilling. Caddo Parish, where Shreveport is located, passed a set of ordinances last week. There is nothing ground breaking or unique in Shreveport's proposed regulations compared to those of other local governments, but it's another step for localities to exert greater control the activities within their borders.

NPR Series on Natural Gas Industry

There is a series of reports on NPR Morning Edition this week about the natural gas industry and its changing place in the national energy debate. Today's first report (audio page, article page) gives an overview of shale discoveries and the advancements in drilling and completion techniques. One interviewee noted that if we had seen the same level of technological advancement in oil production it would have been widely reported: "If that had happened in the oil industry, it would be a headline item ... But because it happened in gas, nobody seems to be paying any attention."

One of the central themes of the report is that we now have an abundance of gas in the U.S. and that it is competing against coal to be the dominant domestic energy source. The piece also hits on the use of natgas as a transition fuel to alternative energy, its use in vehicles, the pollutant comparison against coal and the fact that natgas is domestically sourced, among other topics.

Tomorrow's report will focus on how the natural gas industry, which is comprised mostly of small "mom and pop" independents will be able to compete against big coal and big oil, especially in the energy policy debate.

It's great to see NPR taking notice of the natural gas industry and putting together a series of reports. I was disappointed, however, reading the plethora of negative comments. It seems as though they are mostly reflective of the angry debate over drilling in the Marcellus Shale in Appalachia, where there is a high level of concern over environmental safety. Too bad they aren't as concerned about the environmental impacts of coal mining.

New Mainland/Petrohawk Completion

Mainland Resources touted a recent Haynesville Shale completion on its acreage. The well, the Dehan 15H #1, is operated by Petrohawk and had an initial production of 7.643 MMcf/day on a 14/64" choke at 8,396 psi. The well was completed on August 18 and had average daily production of 8.3 MMcf/day through September 4. Dehan 15H is located in the Holly Field in DeSoto Parish, Section 15, Township 13, Range 14.

Monday, September 21, 2009

I am an Environmentalist

I've spent most of my waking life as an "environmentalist." You can argue the definition, but I believe that a true pragmatic environmentalist is someone who is concerned about the health of the planet for the benefit of human existence. Sounds pretty selfish, I admit.

I've always been amused at the concept many espouse that man can destroy the earth. It's not going to happen that way. If things go really badly, man will destroy the habitat that supports human life. Then human life will die off. Thousands of years will pass and the earth will slowly restore itself. The earth will be just fine, only the human species won't be around to enjoy it.

I've been reading numerous articles recently by environmental types pooping on natural gas, specifically shale gas, as an integral part of the world's energy future. Everyone comes from their unique points of view: some bleed green, others are peak oil zealots and others have business interests in conflict. The common theme is that they are taking swipes at shale gas. I guess that means shale gas has finally "arrived."

I confess my environmental bent after reading Randy Udall's rambling article presumably about shale gas. Udall co-founded ASPO-USA, a peak oil organization. A big problem some environmentalists have is not naming the solution but identifying the enemy. Foreign oil is a great villain, but the coal industry does much more to pollute our nation than oil. The notion that we will achieve a green energy solution by becoming a nation of plug-in hybrids without fundamentally changing how electrical power is generated in this country is naïve and foolish. Udall sort of gets it, but he is mistakenly hung up on the concept that natural gas production in North America has peaked. He mentions shale gas but he never acknowledges that he is quoting dated material.

You can't talk about the great green future without mapping out the path to get there. I firmly believe that the best and most economical source of green power in the 21st century will be distributed generation supported by larger “green” installations and a baseload system of natural gas generation. In other words, the most effective sources of energy will come from small power generation sources at homes and businesses. Solar panels, biomass, windmills, whatever. But we are not there yet. We need more work to achieve a higher level of efficiency, especially in solar, before we can see widespread distributed generation at economically viable levels.

Until then we will need a baseload power source that is cleaner than coal. Even if we achieve great new sources of solar and wind energy, we will need a relatively clean backup power source. Coal doesn't fit the bill. Gas plants can be fired up quickly and can work in the background. They emit a fraction of the carbon of a coal plant and are not sources of mercury and sulfur like coal plants. And don’t get me started on coal mining and its heinous environmental impacts.

It’s cliché now, but natural gas is the bridge fuel to a green tomorrow. But I think many green power advocates are afraid of natural gas because they think that recognition of natural gas’s attributes will stifle green energy innovation like cheap gasoline stymies fuel economy improvement. But I believe the two can work together. There is no one right energy solution, especially at this time, and most green power technologies have a long way to go to become economically viable. Switching a greater share of power generation to natural gas buys the green energy movement more time to reach economic viability and all of us a better human environment.

Coal vs. Gas Closer to Home

The Shreveport Times reported a potential conflict between coal and gas producers in DeSoto and Red River Parishes. While Louisiana is not widely known for its coal production, it does produce some lignite coal. Two mines in North Louisiana, Oxbow and Dolet Hills produce lignite coal for the Dolet Hills Power Station east of Mansfield. They happen to overlay a portion of the Haynesville Shale where EOG Resources has petitioned to create 49 drilling units in the Trenton and Ten Mile Bayou Fields.

If drilling occurs at some of EOG's planned well sites, certain unmined sections of the coal prospect that overlay the shale will become isolated and inaccessible for mining. The Louisiana Office of Conservation heard arguments over the conflict because it oversees all mining in the state. The Commission will have final judgement over the conflict, but Commissioner Jim Welsh sent the parties away to try to reach a reasonable solution.

Petrohawk: Focus

Petrohawk announced today that it is selling its Permian Basin gas properties to a private company for $376 million. The purpose of the sale is to increase its operational (and financial) focus on the Haynesville and Eagle Ford Shale plays. This is a very telling move because it shows the importance of these two shale plays to Petrohawk's future. Expect a white-hot focus on the play from the Hawk

Sunday, September 20, 2009

A Few New Completions

I noted a few recent completions this weekend:

  • Hall 34 H #1, Samson Contour Energy E&P, LLC: 7.7 MMcf/day at 20/64” choke at 4,600 psi; Sligo Field, Bossier Parish, LA; Haynesville reservoir A, serial #239461
  • New Horizons #7H, XTO Energy: 6.906 MMcf/day IP at 22/64” choke; North Carthage Field, Panola Co., TX (Bossier Shale)
  • PEC Minerals Gas Unit #2, XTO Energy: 6.873 MMcf/day IP at 48/64” choke; North Carthage Field, Panola Co., TX (Bossier Shale)

Friday, September 18, 2009

Eureka!

I had my Eureka! moment when I opened my Wall Street Journal this evening to see a two page full color ad spread from the natural gas lobby touting natural gas as "cleaner, smarter energy."

Then I saw a "clean coal" ad on TV by one of the tentacles of the coal lobby and felt ill.

The ad campaign is part of an advertising and lobbying blitz sponsored by the American Natural Gas Alliance (AGNA) to lobby the U.S. populace and lawmakers in advance of the energy policy debate. The campaign is led by the ad firm Grey (here is a quick article about the campaign and the other mercenaries working on the campaign). Check out the web site newnaturalgas.org.

Goodrich: Recent Completions

Goodrich Petroleum released information on a few new wells today. The company has a joint venture agreement with Chesapeake Energy for a portion of its acreage, so some of these wells get reported as Chesapeake wells. Please keep in mind that all of the wells below are self-reported on a 24 hour IP, so the production rates below might be higher than the later official reports.

Louisiana:

  • Johnson 10H #1: 17.0 MMcf/day on 22/64” choke at 7,500 psi; Bethany-Longstreet Field, DeSoto Parish, serial #239645
  • Dixie 31H #1: 14.4 MMcf/day on 22/64” choke at 6,600 psi; Bethany-Longstreet Field, Caddo Parish, serial #239735
  • Trosper 2H #1: 11.7 MMcf/day on 22/64" choke at 5,800 psi; Greenwood-Waskom Field, Caddo Parish, serial #239841
  • Bohnert 25H #1 (I think this is actually 28H, not 25H): 7.5 MMcf/day on 16/64” choke at 5,300 psi; Longwood Field, Caddo Parish, serial #238486 (if it is the Bohnert 28H)

Texas:

  • Swiley 4H: 7.0 MMcf/day on 20/64” choke at 5,300 psi; Beckville Field, Rusk Co.
  • Beard-Taylor 1H: 6.5 MMcf/day on 21/64” choke at 5,100 psi; Beckville Field, Rusk Co.

Goodrich is currently running five rigs in the Haynesville Play, four in the Bethany-Longstreet Field (LA) and another in the Beckville Field (TX). Once the Beckville well is completed, the rig will move to the Greenwood-Waskom Field (LA), and all of the rigs will remain in Louisiana for the rest of the year.

Rig Counts Rise

The Baker Hughes rig count showed that the U.S. rig count increased by 11 to 1010 this week. Of the rig increase, five drill for oil and six drill for gas. Since bottoming out in mid-July 2009, the gas rig count has jumped by 40.

The rig count in the Haynesville area of E. Texas and N. Louisiana, which includes other formations, increased by eight to 145. Both Texas and Louisiana saw four rig increases.

I started thinking the other day about the changes in the Haynesville rig count versus the national rig count. I wanted to see how they've changed relative to each other. I took a crack at a comparison, below.

I used the north Louisiana rig count as a proxy for the Haynesville Play since the Texas figures include lots of other fields. The green line is the U.S. gas rig count, and the blue line is the percentage N. LA represents of that figure. It is not a 100% apples-to-apples comparison because the NLA rig count is inclusive of all rigs (although don't believe there are many oil rigs are drilling in N. LA) and the green line is just gas rigs. Nevertheless, it gives some indication that since the Haynesville Shale was first publicized in March 2008, the N. LA rig count has risen steadily while the national count has dropped in response to economic conditions and plummeting gas prices. It also gives a good indication why national production has not fallen as much as expected with the significant drop in rig count.

Caddo Joins the Regulation Parade

Following the model of Ft. Worth, TX, which enacted municipal regulations to cover drilling operations in the Barnett Shale, the Caddo Parish Commission yesterday passed a set of ordinances targeting operations at wells drilled after January 2008. The Commission set the January time threshold to exclude non-Haynesville activities, presumably by smaller operators.

The article cited above doesn't go into too much depth about the specific regulations, but they don't sound much different than some of those passed by the Louisiana Office of Conservation. They generally concern road use, noise, light and the use of public water.

Given the row between the north Louisiana municipalities and the Office of Conservation over well site regulations, I was expecting something a little more radical, something more befitting of the grand question of state vs. local control. But it seems like the question of who regulates the operations around well sites will remain a gray area for the near future.

Mississippi Venturers Join Up

Mainland Resources and American Exploration Corp. have signed a letter of agreement to jointly develop 13,500 acres in western Mississippi that the companies believe is prospective for the Haynesville Shale. Yesterday I noted American Exploration's news that a Schlumberger report showed lots of potential for the acreage.

Mainland contributed 8,500 acres to the venture while American contributed 5,000. Mainland will be the operator and contribute 80% of the initial drilling costs (drilling and completion) for a 51% working interest in the venture. The remaining costs will be split 51% Mainland/49% American. I'm not quite sure how the economics work: American contributes 37% of the land and 20% of the costs for a 49% ownership interest? I've got to get in on a deal like that. I'm guessing that American's land might be better quality acreage, but that is not clear from the release.

That American and Mainland would get together is no surprise. Drilling a complicated horizontal well at the depth required in Mississippi (the shale there is thicker but deeper underground) will require lots of capital and expertise. Also, Mike Newport, CEO of Mainland, is a technical advisor to American Exploration, so I figured it was just a matter of time before they joined forces.

Thursday, September 17, 2009

Game On!

The natural gas industry is ready to fight, or so its leaders say. The debate over energy/climate change legislation is moving to the Senate after the gas industry "got schooled" by the coal lobby in the House of Representatives.

Here is a good article from Bloomberg framing the issues and the mountains the industry must climb. All I can say is if Aubrey McClendon and the natgas CEOs are successful in getting the gas industry well represented in the bill and can create some new demand drivers for natgas, they will have earned their massive paychecks and I won't make any more negative comments about egregious pay packages (not that I ever did in the first place).

See Spot Run

OK, enough with the "spot" puns, but I couldn't resist. In less than two weeks, we've seen the Henry Hub spot price of natural gas rally an astonishing 84% from its (very) low price of $1.88 on September 4. The spot price closed at $3.46 today, up 5.5% from yesterday. It's still well below last year's price, but it's creeping back towards where it stood six months ago.

This price spike is probably as much due to investors' warmer feelings about the economy and the fundamentals of gas as it is to activities of traders who seem to have declared a bottom. Whatever. Keep it coming.

American Believes in Mississippi

American Exploration Corp. released news Tuesday that Schlumberger had conducted an analysis of the company's leases in Mississippi and found that the property has characteristics similar to those of the Haynesville Shale. The analysis indicates that the shale area is eight times thicker than the shale in Louisiana and Texas, and Schlumberger estimates that the area has gas in place of 300 Bcf per section.

Long Island CNG

Nassau County, NY announced last week that it will purchase 40 new compressed natural gas (CNG) dump trucks for its municipal fleet. The county received funding through a regional initiative that was funded by the 2009 federal recovery act. Grant funds will also be applied to constructing five new CNG stations and purchasing 209 new alternative fuel vehicles in Nassau and Suffolk Counties (I'm not sure how many of these are CNG and how many are other "alt" fuels). Nassau County already is a leader in alternative fuel vehicles, with around 100 alternative fuel vehicles. It also boasts a municipal bus service of 330 buses that is 100% CNG fueled.

The widespread use of CNG in vehicles is going to have to start with fleets and municipalities that have the critical density of vehicles in a geographic region and the wherewithal to build fueling stations. Once the fueling stations proliferate, the general public can get in on the CNG fun.

Storage Excess Narrows Again

The ice cream is melting a little slower this week. The Energy Information Administration released its weekly gas in storage report this morning, and it showed a increase of 66 Bcf last week (ending September 11). The storage number sits at 3.458 Tcf, which is still quite high, 16.7% greater than this time last year and 16.1% higher than the average for the past five years.

The only good news is that the margin by which the current gas in storage number exceeds historical trends is narrowing slightly each week. The bad news is that storage is going to be pushing maximum capacity in a few weeks. It will yield an all-time storage record, but the question is will it max out?

Wednesday, September 16, 2009

Penn Virginia: Update

Penn Virginia's most recent investor presentation had a couple of interesting tid bits. As the map below shows, PVA's Haynesville acreage is all in east Texas. While the Louisiana wells seem to be generating lots of excitement because of high initial production rates, PVA believes in the end that the Texas and Louisiana wells will have the same estimated ultimate recovery (EUR), in the 5-6 Bcf range. The explosive Louisiana IPs notwithstanding, PVA believes the decline curves on the Texas side are more gentle and all will even out over time.

The company also gave some update on well economics. PVA has found better results drilling eight frac stages, which has increased well costs from $8.0 million to $8.5 million. Here is a link to the whole presentation.

Goodrich: Type Curve Updated

Goodrich Petroleum has also been on the investor presentation ciruit lately. The company is still excited about the Haynesville Shale and is putting its money where it's enthusiasm is by dedicating 65% of its capital budget, or $149.5 million, to the play. Since most of the corporate presentations have become revisions of the previous versions, I have to compare them side-by-side to see if there is any value to report. In Goodrich's presentation, I noted a few things, most noably that the company has updated its decline curves based both on results the company has experienced and market conditions.

I've pasted the new and old curves below, but you can see that pretty much all of the inputs have changed over time. Notably, the initial production numbers have changed and the assumed price of gas has decreased from $7 to $6/Mcf. Interstingly, the resulting curves are steeper. The decline in year one went from 81% to 84% and in year two from 32% to 40%. The economics didn't change all that much because the initial production was higher, but it feeds into the assumption that the Haynesville Shale wells deplete quickly.

New Curves:


Old Curves:


Goodrich also updated its production map of the Bethany Longstreet Field in Caddo and DeSoto Parishes with new results. While these results are published elsewhere on this site, I like to see these maps to keep things in geograhpic perspective.

Response to the Skeptic

A haynesvilleplay reader forwarded me a paper written by Drilling Info Energy Strategy Partners that addresses point-by-point the August column written by Arthur Berman that suggest shale gas finds are largely uneconomical based on his analysis of the Barnett Shale. The paper is very interesting, even for us non-geologist types. Although it's 14 pages, as we said in high school, there are lots of pictures and not so many words.

Not being a geology professional, I can only weigh the competing points at the surface level, but I've been struggling to reconcile why so many companies would be investing billions of dollars in something that, according to Berman, is be so uneconomical. You can read the specific points if you're interested, but there were a few takeaway points for me:
  1. The authors contend that Mr. Berman's analysis was superficial and based on data that was not properly parsed. They dig a little deeper based on information from their company's internal database.
  2. "The cost of superficial analysis has very real consequences in terms of energy policy today like never before." That line really struck me. Previously I didn't pay a whole lot of attention to the argument, assuming it was largely theoretical and the truth would be apparent in new wealth (or losses) to investors in a few years. But the stakes are so much higher at this time, given what is going on in Washington.
  3. "Unlike conventional reservoirs, the economics of shale plays highly favor operators that invest in engineering and ongoing experimentation in optimizing their drilling, completion, and stimulation practices." The authors state that the best operators produce 40% more than the average operator from equivalent quality acreage and four to five times more than inefficient operators. That's a strong statement. I'll bet that there are lots of people out there who knew this before they signed their leases. There will definitely be some winners and some losers.
  4. Because of the technological and skill differences between operators, there might be an opportunity for the better operators to acquire leases that lesser operators release once the original terms expire.

M&A, E&P and PE

Yesterday brought the news that publicly traded Texas oil and gas E&P company Parallel Petroleum Corporation would be acquired by private equity ("PE") firm Apollo Global Management. Parallel drills in Texas, most notably in the Permian Basin and the Barnett Shale, and New Mexico, and its portfolio is biased towards oil.

This transaction was a "distressed sale" because the company was facing a reduction in its borrowing base and likely would have ended up in default. It likely was a better for shareholders deal to sell out at a lower price than risk the damage a loan default would cause. Many energy industry observers have been expecting more mergers and acquisitions in this low price environment, but it hasn't really played out that way.

I wonder if this the beginning of a wave of energy M&A transactions involving PE companies. The PE world has been looking at the energy industry, especially natural gas because of the depressed commodity prices, so I would not be surprised to see more announcements in the next three months, especially since some of the fog of uncertainty surrounding natural gas is beginning to clear.

Many PE companies really like "distressed situations" and the gas industry is full of them. PE companies are sitting on mountains of investor cash and they are on the clock to make investments (most funds have a deadline for investment, otherwise they have to return money to investors and forgo substantial investment fees). But PE companies nearly always require lots of patient debt to make deals, so the demolished state of the financial industry has really put a damper on new investments. Now that banks are starting to come out of their foxholes to make some (very conservative) loans, the PE guys are very anxious to "do deals."

So far there have been several PE-backed pipeline investments (see Regency Energy) but not as many riskier deals on the upstream side of the business. Investments in E&P might be more difficult because these companies can be harder to "lever up" with debt, especially when commodity prices are volatile. An E&P investment would require a PE investor to pony up lots of equity cash, something they are reluctant to do. But if the choice is doing an equity-heavy deal versus not doing a deal, they are going to spend the money and do the deal. Trust me, it's how they get paid.

There are several private equity backed businesses out there, mostly startups, that are making noise. One of note is NFR Energy, which combines Nabors Industries and energy PE specialist First Reserve Corporation. The company has been very active in drilling Texas Haynesville Shale wells. Earlier this year famed PE investor KKR invested in East Resources, a Marcellus Shale operator.

It will be interesting to see if PE companies make investments in the Haynesville Shale. PE-backed companies tend to be very aggressive because the aim is to sell the company or have an IPO within five years. Since most of the Haynesville land has been leased, PE money might end up with smaller companies playing the fringes or in infrastructure projects. Or they might wait until leases start to expire and invest then. We'll see. Yet another interesting story to follow in the Haynesville Play.

Tuesday, September 15, 2009

Two Accidents in DeSoto

There were two accidents at Haynesville rigs in DeSoto Parish, LA, as reported by the Shreveport Times, where one man was killed and another was critically injured. The fatality occurred Monday morning north of Logansport, while the other accident occurred Sunday evening northeast of Mansfield. The article notes the other injuries that have resulted from recent drilling accidents.

This sad news shows just how dangerous rig work is. Many of us who own a little piece of what's underground often don't fully appreciate the danger above ground to those involved in the everyday exploration and production of minerals. Our thoughts go out to the families of these men.

EIA Energy Outlook: Prices and Usage

I was cheered by today’s 13.5% increase in the Henry Hub natural gas spot price to $3.20. I’m assuming this price increase has something to do with a good economic trajectory for the nation.

My enthusiasm was short lived as I recalled the Energy Information Administration’s Short-Term Energy Outlook, which came out last week. The EIA expects the Henry Hub spot price of natural gas to average $2.32 in October and rise somewhat towards the end of the year. This depressed price projection is due directly to gas in storage, which the EIA expects to reach a record of 3.84 Tcf by the end of October (it is at 3.4 Tcf today). The Henry Hub spot price expectation for 2010 is $4.78, which is disappointing. Of course, it’s just a prediction, not a crystal ball reading.

On the supply side, the EIA expects LNG imports to increase in 2009 by 110 Bcf to 460 Bcf. The LNG import figure is expected to increase by 200 Bcf in 2010 to 660 Bcf.

The consumption numbers for the first half of the year were pretty ugly, but they show signs of improving in the second half. As the chart below shows, the EIA expects natural gas consumption in 2009 to be down 2.4% compared to 2008 and flat in 2010 compared to 2009.

Industrial gas consumption was down 12% in the first half of 2009 compared to the same period in 2008. The downward trend will continue in the second half but not be as bad and it’s expected to be flat in 2010. In the second half of the year, gas use in electric generating should show growth of 4.3%. The EIA also expects this figure to flatten out in 2010 as an increase in gas prices and the addition of 10 gigawatts of new coal-fired generating capacity in the next year will help coal regain some of the baseload generation share from gas.

I believe electricity generation is natural gas’s greatest growth opportunity. As the chart below shows, the EIA expects electricity consumption to be down 3.3% in 2009 compared to 2009 and up only 1.2% in 2010 over 2009.

While these numbers don’t scream growth, the most important issue is the fuel mix. Taking a few percentage points of market share from coal in 2009 has helped gas prices from sinking to even lower lows. This trend might not continue in 2010 with new additional coal-fired generation coming online, but if electric power generators have to start paying for at least some of the carbon and other pollutants they emit, they will realize quickly that burning gas will be one hell of a lot cheaper than burning coal.

Regency Energy Expanding Haynesville Pipelines

Regency Energy has been busy. The company announced two expansions to ongoing pipeline projects serving the Haynesville Shale. The first is the addition of 17 miles of 20” pipe along with compression and dehydration facilities to the company’s Nexus Gathering System. The project, called the Logansport Expansion, will serve wells in DeSoto Parish, LA and Shelby Co., TX and will interconnect with CenterPoint Energy Gas Transmission’s Line CP.

The second project is an expansion of the Regency Interstate Gas Line (“RIGS”) project that is still under construction. The expansion, called the Red River Lateral, will extend the reach of the new pipeline 12.5 miles (36” pipe) into the western portion of Red River Parish, currently a hotbed for big fat wells. The slide below does not show the Red River Lateral, but you can see where it will come from. I’ll post a drawing of the extension when I find one.

The RIGS Haynesville Expansion project, which pairs Regency with private equity investment partners, is expected to be in service, including the Red River Lateral, at the end of 2009.

Economy Improving...Slowly

I've noted several hopeful signs that the U.S. economy is improving. First, it is being widely reported that Federal Reserve Chairman Ben Bernanke says it is over, so it MUST be true. Actually, what he said at a speech today is, "the recession is 'very likely over.'" This is old news to economic analysts, who estimate that the gross national product is growing at a rate of 3% in the third quarter (July through September). Of course, a recovery is a lengthy process, so while the economy is expanding, there are still jobs being lost, albeit at a considerably slower pace than before. (Here is a more comprehensive article from the Wall St. Journal - good for at least seven days.)

The second glimmer of hope is an improvement in manufacturing. Earlier this month, the Institute for Supply Management's manufacturing index (below) showed a sharp spike, rising from the mid-30's to 52.9. A number above 50 means the manufacturing sector is expanding. The index has not been sustainably above 50 since mid-2007. This is good news to me because manufacturing and industry are big natural gas users. (Here is an interesting feature article from the Sunday New York Times)

Third, the Commerce Department released figures showing that retail sales for the month of August increased 2.7%. This was no surprise because the "cash for clunkers" program drove huge increases in auto sales, but it exceeded analysts expectations of a 2% increase. Stripping out car sales, retail sales increased 1%. That's not a lot, but it is movement in the right direction. Like it or not, retail sales are a huge driver of our economy (BTW, I don't like this fact), so their recovery is good for all sectors.

As I've said before, there are lots of reasons natural gas prices are down, but one of the biggest is the recession and the decrease in demand. I view the above developments as very positive to the fundamental demand for natural gas. It will not be an overnight recovery, but the first step in turning the aircraft carrier is changing the direction of its momentum.

Monday, September 14, 2009

Spot Price Down, Futures Up

The Henry Hub spot and near month futures prices diverged sharply today. The futures price traded up all day, ending up 15% at $3.42, but the spot price was down 4% to close at $2.82.

I read an article today noting that Goldman Sachs analysts predict that natgas prices will rise to $6 this winter and $7.50 next summer because of production declines. While I want to believe this, I don't think we've seen the kinds of production declines we've expected with such a drastic decrease in rig count. Producers have cut back, but they are focusing on fewer, bigger wells, so production hasn't dropped as much as people were expecting it to six months ago. Plus, if prices start to rise, producers are going to open the spigot on the wells they have choked back over the past few months. Until demand picks up to a sustainable level, I think "turn the dial" production increases are going to beat back price increases.

But what do I know? I'm not a well paid Wall Street analyst. Heck, I don't even get paid for this! I hope they're right. Stock market analysts, for as smart and well informed as they are, can be wrong. Now, if Goldman is trading on this expectation, I would have much greater confidence.

El Paso: Update

El Paso is among the companies making the rounds at investor conferences. This time, the company provided some better detail on its progress so far. You can read the slides below, but the company is currently operating four rigs in the Haynesville Shale and see about 250 to 300 potential locations on their 40,000 gross acres. Currently, the company says wells cost $7.5 million and they are doing 14 stage fracs on the horizontal wells. Compared to other companies, that is a very low cost. Since I don't know all of the components of the $7.5 million, I can't say that they compare apples-to-apples.

The company has eleven wells producing a total of 54 MMcf/day (net to El Paso), all in Louisiana. The wells with their initial production numbers are listed below:

Sunday, September 13, 2009

A Couple of Interesting Big Picture Stories

There were a couple of interesting big picture news stories this weekend:

  • Gorgon LNG Project: The big Australian gas field and proposed mega-LNG project got lots of press in the Wall Street Journal this weekend with a small feature article on Friday and a news item (dated tomorrow) noting that the project is expected to go ahead. The second article gives a good 10,000 foot overview of the Australian natgas production market, which is a big provider of LNG to Asia. Australia also has an oversupply problem, but for them it manifests in a race to develop fields and lock up LNG customers before their competitors do. Without long-term contracts, there is no point of developing a new field. It will be interesting to see how the proliferation of natural gas impacts the global pricing and supply market and how long it takes for other nations to find new uses for natural gas.
  • Clean water: A little off topic, but the New York Times had a long front page feature on how clean water laws are neglected across the country. While the story is national in scope, it focused particularly in the Appalachian region where coal mines have polluted the water for generations. Lest we who live in the south get too haughty, the article points out that 70% of the Texas water systems and 23% in Louisiana are in violation of the Clean Water Act. Pretty scary stuff. It’s a very long feature resulting from exhaustive research, but the relationship between water and gas drilling will continue to be a major issue. (Generally, I think access to clean water is going to be one of the big issues of the 21st century, not only in developing nations but in North America as well.)

Saturday, September 12, 2009

One Recent Texas Completion

I only noted one Texas completion, but it was a pretty good one:
  • New Horizons #3H, XTO Energy: 9.415 MMcf/day on 48/64" choke; North Carthage Field, Panola County, Bossier Shale

Friday, September 11, 2009

Spot Price Jumps Again

I'm starting to think last week just didn't happen. The Henry Hub natural gas spot price closed today at $2.94, up 26 cents, or 9.7%, from yesterday. This is a whopping 56% increase from last Friday when the price simply fell off a cliff and closed at $1.88. While today's spot price is lower than I'd like, it is more in line with prices we were seeing a couple of weeks ago.

Interestingly, the futures price ended down sharply, losing 8% to close at $3.00. For the first time in a few weeks, the spot price and the near month futures price are not significantly out of alignment.

U.S. Rig Count Dips

The Baker Hughes rig count for the week showed a drop of ten rigs in the U.S. for a total of 999 operating rigs. The gas rig count dropped by two to 699 rigs.

In the Haynesville Shale area, which includes some other fields, the net rig count was down three to 137. It was up six in north Louisiana (to 95) but down nine in East Texas (to 42).

Electric Generation: Gas vs. Coal

There was a great Reuters article this week about electrical generation and the slow shift from coal to natural gas. The article summarized the big picture and focused as much on the long range as the current situation. The author's bottom line: the long-term prospects for coal are diminishing. This will happen quicker if there is an economic cost applied for carbon output.

A key issue for a transition from coal to natgas is supply stability, and electric companies are starting to get comfortable that the supply of gas will be sustainable going forward. One of the positives of coal is the relative stability of supply and price. Between big shale finds and the infrastructure to import LNG, natgas supply will become greater and more sustainable. Additionally, as new gas fields are explored and pipeline and storage infrastructure is constructed, the aggregate gas storage capacity will increase, helping offset issues of peak demand.

Coal still costs less than natgas, around $2.24/MMBtu for coal vs. $3.83 for gas in the second quarter of 2009, but one analyst calculates that coal's share of the electrical generation market has dropped from 49% to 45% this year. He noted that for the last twelve months through June 2009, coal-fired generation fell 12.7%, while gas-fired generation fell 0.3%. This year's statistics might be an anomaly, but I think it is indicative of a long-term trend.

Horn River Potential

When it comes to natural gas finds, I like to believe the cliche that a rising tide floats all boats. This week, EnCana was in the news talking about the potential for the Horn River shale play in northeastern British Columbia. Horn River is not a new discovery, but companies that have leased land are starting to see some drilling results (I've previously noted Exxon's excitement). The field is estimated to have approximately 500 Tcf of gas in place with about 110 Tcf recoverable. That would make it the third biggest North American gas play behind the Marcellus (1500 Tcf in place/262 Tcf recoverable) and Haynesville (717 Tcf in place/251 Tcf recoverable) Shales.

What is particularly attractive is the Horn River play's geology, which has produced less severe decline rates than other shale plays. The play is young and only a handful of wells have been drilled to date, so solid information is yet to come. What is less attractive s the play's remote northern location. There is a lack of pipeline infrastructure and its location far from consuming markets makes gas from this area more costly to transport. Additionally the drilling season is somewhat limited by weather.

While Horn River may not be poised to supply North American population centers, it is close to the coast and there are plans to create an LNG export port in Kitimat, BC. To me, this makes perfect sense for Canada. The biggest LNG consuming nations are in Asia, and it's easier to cut across the north Pacific to deliver gas than make your way from the Persian Gulf. Listen up, Alaska. Before building a $26 billion AIGA pipeline to the lower 48, you might think harder about an LNG port. (Note: map below is NOT to scale!)

Coincidentally, EnCana's Horn River frothiness comes as the company has resurrected plans to split the company in half, separating the pure play natural gas company (keeping EnCana name) from the more conservative integrated oil company (new name: Cenovous Energy). While this transaction is not slated to close until the end of November 2009, it reminds me a bit of when Chesapeake "broke the story" on the Haynesville Shale and then announced a big stock offering the next day.

Thursday, September 10, 2009

Making Green in a Sea of Red

The Wall Street Journal had a good article today on three types of market participants that are making good money in this depressed price natural gas market (link good for at least a week).

First, the article talked about traders who are taking advantage of the steep contango with gas prices. This link better describes contango, but it is a situation where the future prices for a commodity are significantly higher than the current prices. This allows an entity, be it a hedge fund, electrical generator or trader, to buy gas at low current prices (spot price is $2.68/MMBtu today) and lock in a sale at a higher future price (October 2010 price is $5.89/MMBtu). The gas is stored somewhere for a year and then delivered to the buyer.

The contango trade and the diminished natgas consumption creates the second big moneymaking opportunity: natural gas storage. As storage facilities, which are everything from tanks to empty salt domes, fill up they can charge a premium for storing more gas. Gas storage rates are not regulated, so the market price reflects the degree of the need that is being satisfied.

The third profitable area is in natural gas liquids (NGL) separation. Petrochemical producers are using NGLs like ethane as a feedstock in making plastics, and companies that provide a process called fractionation are doing well. Usually this feedstock comes from oil, but because the ratio of prices of natgas and oil, which are usually aligned, has separated badly (the normal 6:1 ratio jumped to 37:1 on Friday before recovering to the mid-20s), natgas products are much more attractive. Many in the market believe that gas will remain cheaper than oil on a per energy unit basis for a while so the fractionation business might be a good place to be. While this creates new customers for natural gas products (although NGLs are not present with all gas), it is dependent on continued low prices of natgas.

I’m happy for these folks making money in a down environment, but their success depends on natural gas prices being cheap for the foreseeable future, something I don’t want to see come to fruition.

Storage Growth Moderate

The dreaded gas in storage figure was released by the Energy Information Administration today.  It showed that gas stocks increased by 69 Bcf to 3,392.  This number is 495 Bcf (+17.1%) greater than the figure this time last year and 503 Bcf (+17.4%) above the four year average.  The chart below shows the current storage amount (red line) compared against the five year range (shaded band).


The bad news is that the storage numbers are still well above average, but the good news is that the injection amount was not above the norm for this time of year.  In fact, the variance percentage has decreased slightly.  More good news is that the gas was injected in the right place.  By geography, storage levels are highest in the so-called Producing Regions (+32.4% variance above five year average) and are lowest in the consuming East Region (+9.6%).  Of the 69 Bcf injection this week, 80%, or 55 Bcf, went into storage in the East Region.

The market seems to like the news.  As of this writing, the near month NYMEX futures price for natural gas is up 15%.

Wednesday, September 9, 2009

Recent Louisiana Completions

I noted the following recent completions in Louisiana:
  • Broussard 5 #1, J-W Operating Co.: 2.8 MMcf/day IP on 24/64” choke at 1,600 psi; Elm Grove Field, Bossier Parish, Sec. 5/Township 16/Range 12; completed 4/13/09, serial #238891
  • Pennywell 15 #1, J-W Operating Co.: 4.4 MMcf/day on 14/64” choke at 3,500 psi; Caspiana Field, Caddo Parish, S15/T15/R14; completed 6/2/09, serial #239106
  • Kelley ETAL 19 H #1, Chesapeake Energy: 9.875 MMcf/day on 16/64” choke at 7,225 psi; Caspiana Field, Caddo Parish, S19/T15/R14; completed 7/12/09, serial #239582
  • Hunt Plywood C #7, KCS Resources (Petrohawk): 20.8 MMcf/day on 24/64” choke at 7,790 psi; Caspiana Field, DeSoto Parish, S35/T15/R13; completed 7/19/09, #239145
  • Justice 13 H #1, Chesapeake Energy: 6.327 MMcf/day on 12/64” choke at 7,124 psi; Logansport Field, DeSoto Parish, S13/T11/R15; completed 7/7/09, serial #239344
I will add these to the list of Louisiana completions.

Spot Jumps Again!

After yesterday's 30% increase in the Henry Hub spot price of natural gas, the spot price jumped another 11% today to close at $2.71.  This price is roughly in line with where the price stood two weeks ago. Let's just pretend last week, when the spot price dipped to $1.88, just didn't happen.  OK?

The Hawk and the Tail

Petrohawk was one of the presenters at Barclay's Energy/Power Conference that is going on this week.  Since the company provided an operational update in August, there was not a whole lot of new information.

One thing that was interesting was the discussion of the southwestern portion of the Haynesville Play that dips  into Shelby and Nacogdoches Counties, TX.  There is new leasing activity in the area, and Petrohawk is taking a partnership approach, working with a couple of companies that don't have much Haynesville exposure, Newfield and Noble, along with EOG Resources.  Other participants in the area are XTO, Common Resources and Devon.  The company has completed two wells and two more are waiting to be fracked.  The slides below give more detail, but in the coming months we will know more about the area's potential.




Petrohawk is still very excited about its core Louisiana proprties, but with the low natural gas prices it seems to have narrowed its focus on the wells that are most economically feasible, located inside the circle below.

Coal Will Fight to the Death

I was perusing the Energy Information Administration web site today when I came across an image (below) from the 2008 EIA Annual Energy Report on coal that proved to me that the coal industry will do anything and everything it can not to be bested by natural gas in what will become a head-to-head confrontation in the negotiations over the energy and climate legislation being considered in Washington.  This is a life or death situation for the coal industry and coal will fight to the death.

The image in question, below, is the “Coal Flow” diagram for 2008.  It shows the sources of all coal in the U.S. and all of its uses.  For most industries, the right side would look like a plate of spaghetti of multiple end users, but for coal it looks like a fat log of one big user.


It is a little confusing at first, but on the left are the sources of coal. Of the 1.219 billion short tons (“ST”) of all coal mined, imported or derived from waste in 2008, 96% (1.172 billion ST) was mined domestically.  At the top, you see exports and rounding errors and to the very right you see consumption.  This is what really has to scare the coal industry.  Of the 1.122 billion ST of coal consumed each year, 93% (1.042 billion ST) was used in electric power generation.  Now that’s a concentrated situation with 96% of the coal produced being mined domestically and 93% of all coal consumed being used by one type of customer. 

Think about it:  if legislation passes that creates incentives for utility companies to use gas over coal, the coal consumption level will drop immediately, and no other consuming industry will be there to pick up the slack.  If production doesn’t drop accordingly, suddenly you’ve got a colossal supply problem and you know what happens then.  Sound familiar natgas fans? 

The coal industry now has a supply issue of its own as the chart below points out. The chart shows the electric power sector’s coal stocks for the past five years (in thousands of short tons) through May 2009.  As the chart shows, the May 2009 figure of 198 million ST is 39.3% higher than the average storage number for the same month of the previous four years.  Comparatively, natural gas storage is about 18% higher than the five year historical average.  But while gas is easier to transport than coal, coal is easier to store than gas (just make the black mountain higher and wider), so you don’t hear as much about the coal stockpiles.

It wasn’t always this way.  As the charts below show, sixty years ago, coal consumption was relatively balanced between industrial users, electric generation and residential/ commercial/ transportation uses.  Over the past sixty years, residential/ commercial/ transportation uses have gone to near zero and many industrial users have switched to natural gas.  The electrical power industry more than picked up the slack, as its use of coal grew substantially since the mid-1960’s. 


If it weren’t for cheap coal to power electrical plants, I’m guessing many coal mines would have been shuttered a generation ago.  Now, the coal industry is entirely dependent on the electric utilities and probably does everything but shine their shoes each morning.  The energy/climate legislation is the battle for the coal industry’s life, and it will fight like a cornered wildebeest.  Just like the tobacco industry, which has been fighting for its life in the courtroom for the past decade, coal is going to throw every conceivable resource at this proposed energy legislation to pull out a win.  It will be ugly, and I wouldn’t bet against the coal industry.