Wednesday, December 29, 2010

2010 Haynesville Shale Top 10 List

It has become a tradition in all media to roll out a year-end top 10 list of big stories for the past year.  As much as I try to eschew other people’s traditions, I find it to be a worthy exercise to look back at the year to try to discern larger trends.  I’ve tried to do that below with a focus on the stories and trends that impacted the Haynesville Shale to the greatest degree.  While the news around the play hasn’t been all that great this year, there is some good news in the larger trends.

10. Restricted choke size practice gains traction.  The practice of flowing wells with lower choke sizes (i.e. 14 or 16/64” vs. 22 or 24/64”) has taken hold for some operators, most notably Petrohawk, which is using the technique on nearly every new well now.  The theory is that narrower chokes will lead to less steep decline rates and better overall gas recoveries from the formation.  Proponents say that the cumulative recoveries with lower flow rates actually catch up with “normal” wells in +/- seven months because of the improved decline curve.

9. CNG continues to make progress.  Compressed natural gas is slowly making inroads throughout the country as fleets are slowly adding NG vehicles and subsequently CNG fueling infrastructure.  I’m not sure which is the chicken and which is the egg, but progress towards natural gas vehicles is real, albeit slow.

8. LNG export from U.S. advances.  Building LNG import infrastructure was all the rage in the 2000’s but these days, the remaining unbuilt LNG projects are getting scrapped and some of the new ones are applying to become LNG export facilities.  Two facilities at the Texas/Louisiana border are making real progress toward that end.  With the Haynesville and Eagle Ford Shales in close proximity, we might see gas leaving the country in a few years.

7. Energy legislation stalls.  Congress couldn’t agree what to have for lunch this year, so comprehensive energy reform was definitely unlikely.  While the coal lobby was heavily involved in the process, coal was destined to lose market share in any legislation.  But it didn’t happen and uncertainty still rules in the market.  But…

6. Coal starts to lose future market share.  What legislation couldn’t do, uncertainty in the market is slowly taking care of.  For the past two years, coal has been losing share to gas because some utilities switching fuels from coal to gas temporarily because of low gas prices, but that persists only as long as gas prices scrape bottom – a small silver lining.  Without a new energy policy (see previous entry) there is no clear direction in the utility market.  But what is not uncertain is that coal plants are aging, “clean coal” continues to be a mirage on the horizon and utilities must update and add to production infrastructure.  Utility executives must make 30+ year investment decisions, so why invest hundreds of millions of dollars in new coal plants with the risk of new regulation?  As a result, several companies have publicized long-term plans to retire existing coal plants and build new gas plants.  Interestingly, the lack of a more restrictive policy might hurt coal interests more than a new law.

5. Race to liquids.  Nearly all of the natural gas producers are now claiming to be “oily” and talk about their liquids portfolio of oil and natural gas liquids.  The dry gas of the Haynesville Shale has fallen out of favor because of low commodity prices.  The only thing keeping this from being the #1 story of the year is the fact that Haynesville producers had to keep rig counts high to hold leases by production.

4. Gas storage rides a roller coaster.  The economy has been recovering slowly, so demand did not rebound in 2010 as expected and natural gas storage levels (an important driver of price) were at the mercy of the weather.  A harsh winter depleted gas reserves quickly in January and February, which led to improved gas prices early in the year.  But that ended abruptly in mid-March.  A hot summer depleted reserves faster than normal, but that too ended abruptly in late summer.  With a mild fall, storage levels soared higher than last year’s record numbers.  Storage finished the year just under last year’s level, but that’s not saying much.  With shale plays across the U.S. producing lots of gas at somewhat constrained levels, high storage levels will continue to hold down commodity prices until demand picks up to levels that are higher than before the recession.

3. The big boys take over the kids table.  The big boys are the big multi-national producers and deep pocketed investors while the kids are the independent producers who pioneered shale plays across the country.  The trend started a year ago with Exxon buying XTO Energy and the deals have continued to flow throughout 2010.  They have taken all forms:  corporate acquisitions, LBOs (mostly proposed), asset purchases, joint ventures and minority investments and they have impacted all of the U.S. shale plays.  The deals are too numerous to name in this space, but the key ingredient is that smart folks with deep pockets are buying into the shale and many did so at a price premium.

2. Haynesville rig counts peak; drilling activity moves south.  The investment community has been waiting for the Haynesville rig count to fall.  By my count, the rig count peaked July 30 at 184 working rigs.  It currently stands at 161.  The Louisiana count peaked on July 30 at 136 and has since fallen to 114.  The Texas count peaked on July 9 at 52 but has only fallen to 47, so there is room for Texas to peak again.  As reflected in rig counts and completion results, activity in the Haynesville Shale shifted south throughout 2010.  That’s not to say that the sweet spot moved (at least not in Louisiana), but attention sure has shifted.  Sabine Parish, LA has seen rigs increase from four in January 2010 to 22 in November (it's 11 today).  Red River Parish, on the other hand, saw its rig count peak at 32 mid-summer and fall to 10 by year end.  In Texas, activity in Shelby Co. has remained strong throughout 2010, but it has picked up significantly in Nacogdoches Co. (from five to 11, Jan. to Dec.) and San Augustine Co. (from five to 10, Jan. to Dec.). 

1. Low natural gas prices persist.  A no-brainer for anyone who gets a royalty payment.  Prices drive everything in the energy business and continued low prices have put constant pressure on Haynesville producers and likely will deeply suppress activity once producers start pulling rigs in the second half of 2011.

Honorable mentions:

  • Hydraulic fracturing: still woefully (and willfully) misunderstood.
  • Bossier Shale: a few more data points, but true understanding a few years away.
  • We’re #1: US overtakes Russia as #1 world gas producer in 2009 as shale continues to befuddle world market.
  • BP Macondo oil spill: more pressure on all forms mineral extraction.

Happy New Year!

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