Wednesday, June 23, 2010

Haynesville Production Peaking???

Thanks to a couple of readers who have brought an editorial by Bill Powers, editor of the "Powers Energy Investor" newsletter, to my attention.  In the piece, he states his belief that production in the Haynesville Shale has peaked at 1.8 Bcf/day and,
"(t)he peaking of production from the Haynesville shale has significant implications for North American natural gas supplies and will soon be recognized as a contributing factor to the end of shale gas production growth in the U.S." (my emphasis)
Those are strong words.  Mr. Powers is generally bullish on natural gas as an investment because he thinks shale gas is over-hyped and will contribute little more to the overall supply picture.  Although he doesn't state it directly, he seems to believe that natural gas will not end up in an over-supply position and the commodity prices will rise, boosting the value of E&P companies.  He is far from alone in this perspective.  Well-known energy analyst Henry Groppe has made a similar call in his expectation of higher natural gas prices.  Matthew Simmons, late of Simmons & Company, International, has similar views.  Interestingly, Mr. Simmons is also promoted on the same web site that published Mr. Powers' editorial.

I am neither an expert nor Nostradamus, but I tend to think Mr. Powers' argument is a little superficial, and I think it is too early to call a peak in Haynesville production at this point.

I think his analysis fails to fully consider the impact of low commodity prices in the production equation.  Low prices lead to companies constraining the flow of wells in expectation of higher prices later.  It also leads to companies to reduce capital expenditures and drop a few rigs in the short-term.  As he points out, there is a growing number of wells that have been drilled but not completed.  This can been seen as a limitation of the play or a proxy for storage.  As commodity prices and consumption pick up, companies will dip into this backlog of uncompleted wells and start producing them.

I also think he is unnecessarily dismissive of the Texas side of the play.  The northwest part of the play has been disappointing relative to the Louisiana side, but recent wells in the southwest portion of the play are very encouraging.  I'm not sure how he accounts for the Middle Bossier Shale, but I group it together with the Haynesville Shale (if for no other reason than they are covered by the same lease).  The Mid-Bossier might not be as strong as the Haynesville, but when producers start to tap that play, production will continue to increase.  Also, he seems to believe that shale extraction techniques have hit a brick wall and are not improving.  I am pretty certain that there is more to maximizing well production than increasing frac stages.  There is a great deal of fine tuning possible, and if the restricted choke technique promoted by companies like Petrohawk measurably increases well performance, that only serves to increase long-term production (although it might lower daily production).  Plus, we have not seen a true "manufacturing" operation in the Haynesville, the likes of which EnCana promotes.  Also, there are producers that have large quantities of held by production land that they are sitting on, waiting for economic conditions to improve.  Who knows what will happen when they start drilling.

All of these factors make me think that Haynesville production has a ways to go before peaking.  I don't think we're talking a 6 Bcf/day figure that Mr. Powers is refutes, but I think it will be more than 1.8 Bcf.

But there are constraints.  I do think we are approaching the upper limit of working rigs in the +/-180-185 range.  The rig count is high right now because many companies have to drill their leases to hold them.  That activity will subside in 2012.  There also is limited completion capacity, both in terms of physical infrastructure and crews, that will continue to limit new wells from coming online. Well economics and commodity prices will continue to be issues.  These factors will keep a lid on production at a certain level, but I think it is north of where we are now.

I appreciate the points Mr. Powers makes in his article, but I don't think I am sticking my neck out to say that Haynesville production will increase above current levels over time and as market conditions normalize.


The Dude said...

I thought it had peaked as well, but then I updated my production data.

Anonymous said...

Check my updated production charts on GHS.

Les B