Wednesday, March 17, 2010

EnCana: Haynesville Update

EnCana's analyst day shed light on the company's strategy and successes in the Haynesville Shale.  The 2010 strategy is four-fold:
  1. Drill for land retention
  2. Test more of the Mid-Bossier Shale (discussed in previous post)
  3. Create a "gas factory" pilot project in Q2
  4. Test lands in the southern part of the Haynesville Play with step-out drilling in the southern portions of DeSoto and Red River Parishes, LA along with tests in Shelby, Sabine and San Augustine Co., TX
Of these priorities, land retention is at the top of the list.  In the Q&A portion of the presentation, an EnCana exec said management is "infatuated with (the) land retention strategy in the Haynesville."  It should be.  EnCana declares the Haynesville Shale to be its top performing asset in the company's portfolio.  EnCana plans to drill 225 gross wells in 2010 (109 net).  EnCana, which currently operates 23 rigs in the play, will average between 20 and 25 for the year.  Partner Shell (a.k.a. SWEPI, LP) will operate between seven and ten rigs.  EnCana's 2010 Haynesville capital budget will be $1.191 billion, and it expects to average 325 MMcf/day of gas production in 2010.

The "gas factory" concept has been discussed on these pages before.  Briefly, the concept is to drill multiple wells from the same pad. Ideally, a pad located near a section line could drill eight wells in each section for a total of 16 wells per pad.  This assumes 80 acre spacing, but EnCana is looking at the possibility of 40 acre spacing.  The illustration below shows a schematic drawing for one section. If EnCana drills two sections from one pad, you would see a mirror image below.

The gas factory approach saves time and money, as EnCana can realize economies of scale and limit movements of equipment and personnel.  It can also use a single pipeline and concentrate its water sourcing and disposal activities.  EnCana has used the gas factory design with success in the Piceance formation in Colorado, if only because there are so few drilling sites in that mountainous region.  By example, from one 4.2 acre pad, EnCana is able to drill 52 wells.  Skeptics like Arthur Berman have argued that the Haynesville Shale is not conducive to gas factory operations because of the play's geology.  I guess by this time next year we will have a really big data point from EnCana to measure the concept's success.

In terms of  results, EnCana has been adjusting its completion formula in recent months to complete wells with longer laterals and more stages, two factors it feels drive better recoveries (see slide below). 

As a result of improved completion techniques, EnCana has adjusted its Haynesville type curve upward from 5 Bcf EUR to 7.5 Bcf EUR.  The curves from the most recent wells completed over the past 90 days shows this improvement.  The first thing that jumps out is the Big Mamou 37 MMcf/day 24 hour peak IP well drilled in NW Red River Parish.  The company didn't name it, but I'm sure we will be hearing more about it shortly.

Management noted that the company previously had been constrained by treating capacity, but through supporting third party gathering and treating efforts it can now flow wells unconstrained at 25 MMcf/day at 7,000 pounds of pressure.  Average 30 day initial flow rates have increased from 8.2 MMcf/day in Q4 2008 to 16.9 MMcf/day in Q1 2010, and the company hopes to edge this number closer to 20 MMcf/day.  As a point of reference, 17 MMcf/day for 30 days yields half a Bcf of gas.  At the same time, costs are coming down through efficiencies.  A couple of recent wells were completed for $7.5 million.

In one more concept that needs to be promoted more widely around the gas industry, EnCana pledged to eat its own cooking (my term, not theirs).  In other words, the company will use natural gas powered rigs, drive CNG vehicles and build a CNG filling station to service the region (I'm not sure if it will serve outside users).  Other companies, like Chesapeake and Exco, have supported similar efforts with CNG, but for natural gas to become more widely used, the industry has to take the lead in both showing the way and helping build retail infrastructure (like filling stations).

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