Friday, September 24, 2010

Callon Petroleum: One and Done

Callon Petroleum announced earlier this week that its first Haynesville Shale well will be its last until prices pick up.  The George R. Mills 1H #1 flowed at an initial rate of 10.5 MMcf/day (full information below) and is producing at a restricted rate through the clean up process.
  • George R. Mills 1 H #1, Callon Petroleum:  10.5 MMcf/day IP on 18/64 in. choke at 7,000 psi; Swan Lake  Field, Bossier Parish, S36/T16/R11; res. A, serial #241192
Because the company has no other drilling obligations in the play, it will hold off further activities until gas prices pick up.  That's not a huge decrease in activity in the grand scheme as Callon only planned to drill two wells per year for three years, but Callon made a big deal about its diversification move into the Haynesville and away from the Gulf of Mexico.

Ultimately it is a good business move.  There is no point spending money to produce in a low price environment. I'm sure Chesapeake and Petrohawk wish they could lay down a few more gas-targeted rigs, but they have to drill to fulfill lease obligations.

But I also think it is also proof that small players are going to struggle in the shale game.  Small independents have driven the the natural gas industry for the past century, but they drilled lots of modest wells that required smaller upfront capital outlays.  With the right technical expertise, there are no dry holes in the Haynesville Shale, but not everyone can put up $10 million for a well.  Plus, if you are only drilling a couple of wells per year, how are you going to compete for scarce completion services (at a decent price) against companies  like Chesapeake, Exco, EnCana or Petrohawk that are drilling 50-100 wells a year?

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