Friday, December 30, 2011

2011 Haynesville Shale Top 10 List

Every year I say I’m not going to do a Top 10 Haynesville Play List, but then each year I get caught up in Top 10 mania and can’t resist it. I’ve broken it down into themes instead of specific stories. Here it goes, from 10 to 1:

10. Natural gas as vehicle fuel continues to progress, albeit slowly. Progress has come in small increments, but trucks are the Holy Grail and the federal NAT GAS Act to fund truck conversions still elusive at this point, no matter how many co-sponsors the bill has.

9. Haynesville drilling moving from holding acreage to larger scale production. There are still wells being drilled to hold acreage, but to a much smaller extent than in previous years. This year saw multi-well pads go from pilot programs to full scale operations in places. For many parts of the Haynesville, this will be the way gas will be drilled in the future.

8. New plays rumored and realized. The Smackover Brown Dense went from rumor to reality in 2011, as Southwestern declared its acquisition of 460,000 acres. Other producers announced acquisitions in the area as well. There haven’t been any significant results to report yet, but the first few wells have been spud. Deep oil in Texas remains an unsubstantiated rumor, except for a few cryptic mentions in investor presentations. Many skeptics remain. The Tuscaloosa Marine Shale in south-central Louisiana is also getting lots of attention as an oily play.

7. Fracking even more controversial than last year. While hydraulic fracturing is generally accepted in the Haynesville Shale region, it continues to be a hot button topic, especially in the Northeast. While it hasn’t hampered development significantly outside of New York state (which removed its Marcellus drilling ban this year), it has become a political issue, which is not a good thing. There is no trust between the gas industry and the haters, and there seems to be little middle ground where the two sides can meet.

6. LNG export has been approved for Gulf Coast sites. The two big LNG importers on the LA/TX border are in various stages of receiving approval to convert their locations into export facilities. This should lead to new construction and new investment in the new year. Export is not the silver bullet solution for low gas prices, but it is another end market to help absorb new supply, and export locations along the Gulf Coast are well positioned for the Haynesville, even though the first exports won’t happen for at least two to three years.

5. Chemical plants are being built in the U.S. again because of cheap gas
. Over the past decade, chemical manufacturers have fled the U.S. because of high and unstable natural gas prices. Since gas is the feedstock for much chemical production, it suddenly makes sense again to build plants in the U.S. While gas may not remain as cheap as it currently is forever, strong supply should yield relatively stable pricing, which is good for big end users. These days, there are few examples of major manufacturing industries expanding in the U.S., creating jobs and reversing the export/import balance. This is good for the U.S. (and natural gas) on many levels.

4. Independent producers are giving way to the majors. The M&A activity continued this year as the smaller independents that pioneered the Haynesville Shale continue to be acquired, in what is a generally accepted business cycle in the energy industry. The biggest acquisition was BHP Billiton’s purchase of Petrohawk Energy. Additionally, KKR agreed to purchase Samson (which will invariably lead to another sale down the line). Another big transaction, EXCO’s leveraged management buyout, failed. For Haynesville fans, the big question is whether the new owners will invest more in developing the shale or pull back and wait for prices to recover.

3. Declining drilling activity/investment in Haynesville Shale. In 2011, the Haynesville Shale rig count has dropped from 155 the first week of January 2011 to 89 as of last week, a drop of 66 rigs, or 43%. As the rig count drops, so does the level of capital spending in the region. This decrease was expected and will continue into 2012. The question remains: where will it bottom out?

2. “The Coal Age Nears Its End.” This was a headline I loved in the Wall Street Journal on December 23. While coal remains the dominant fuel to produce electricity in the U.S., it continues to lose market share to gas on the basis of price. In the long run, however, new pollution regulations recently promulgated by the EPA will make operating a coal power station more difficult and expensive. As a result, we will see many coal plants retired in coming years, and that capacity mostly will be replaced by natural gas plants. For gas fans, this is very big news because electricity production is a strong, relatively stable driver of consumption.

1. Natural gas prices remain low without any near-term relief in sight. Unfortunately, low gas prices remain the biggest story in the Haynesville Shale. Because the Haynesville is a dry gas formation, producers have little economic incentive to develop their positions in the current price environment. Gas in storage hit yet another all time record high, as economic growth can’t keep up with new production. There are a number of long-term bright spots (coal to gas for electricity, LNG export, new chemical plants, natgas as a vehicle fuel, etc.), but none of these sustainably will keep gas above $4.00 to $4.50/MMBtu in the near to mid-term.

2 comments:

Anonymous said...

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Jim Wilcox said...

I believe government should explore all energy options (Hydroelectric, Coal, Solar, Biomass, BioGas, Growing oil producting plants and nuclear)and have a balanced combination of all, there are pros and cons for all sources above but which will be most suitable for Haynesville only time can tell. pilot ignition