Thursday, February 28, 2013

EXCO Year End Update

Last week, EXCO Resources reported its year end results.  Below is a high level summary of results relative to the Haynesville Shale:

  • Year-over-year net production in the Haynesville Shale increased by 5% in 2012, but fourth quarter net production dropped from 407 MMcf/day in 2011 to 334 MMcf/day in 2012. 
  • In 2012, EXCO drilled 58 operated wells (21.8 net) and it completed 71 wells.  The average IP rate was 12.7 MMcf/day with a flowing casing pressure of 7,784 psi.  All of the wells were produced on a reduced choke (18/64").  
  • The company continues to focus its efforts on DeSoto Parish, LA.  In 2013, the plan is to drill 26 wells (15.5 net) with a three rig program. The company plans to complete 42 wells (22.1 net) in 2013, as it continues to work through its backlog of drilled wells.
  • Haynesville Shale well costs at the end of 2012 were $8.0 million per well versus $9.5 million a year earlier, as the competitive landscape for services shifted in favor of producers and EXCO continues to refine its completion techniques.
Bottom line, EXCO is doing a good job but it is going to continue pulling back.  From Q4 2012 to Q1 2013, EXCO's rig count has dropped from five to three and production is on a downward trajectory.

Another Methanol Plant Proposed for St. James Parish

I'm starting to lose track of the new methanol, GTL and chemical/manufacturing plants being proposed to take advantage of cheap, plentiful natural gas in southern Louisiana.  The latest proposal by South Louisiana Methanol is for a $1.3 billion methanol plant in St. James Parish, LA.  St. James is also the future home the big Nucor steel plant (remember Nucor's deal with Encana for natural gas supply).

The South Louisiana Methanol project is a partnership Austin, TX-based Zero Emissions Energy Plant Ltd. and New Zealand-based Todd Corp.  The owners expect to begin construction on the plant later this year with expected completion in 2016.  Once operational, the plant would produce 5,000 metric tons of methanol per day.

A Bunch of New Louisiana Completions

  • Weyerhsr 13-16-10 H #1, Chesapeake Operating: 7.488 MMcf/day IP on 22/64 in. choke at 4,169 psi; Perfs: 11,205-15,515, length: 4,310 ft.; Lake Bistineau Field, Bienville Parish, S24/T16/R10; res. A, serial #244731 
  • BSOA 14-14-15 H #2-ALT, Chesapeake Operating: 12.264 MMcf/day IP on 22/64 in. choke at 4,750 psi; Perfs: 12,168-16,698, length: 4,530 ft.; Bethany Longstreet Field, DeSoto Parish, S14/T14/R15; res. A, serial #243678 

EIA: Storage -171 Bcf to 2.229 Tcf

The EIA reported that working gas in storage was down 171 Bcf this week to 2.229 Tcf.  The weekly withdrawal was 61% larger than last year (-106 Bcf) and 45% larger than the five year average (-118 Bcf).  The current storage level is 12.1% below last year (2.536 Tcf) and 16.0% above the five year average (1.921 Tcf).

Monday, February 25, 2013

Dow's Opinion and Mine

Dow Chemical CEO Andrew Liveris wrote an op/ed piece in today's Wall Street Journal entitled  "Wanted: A Balanced Approach to Shale Gas Exports."  It should have been called simply, "Don't Export Natural Gas."  Here's a link to my handwritten comments, so I'll avoid a long point-counterpoint synopsis of the article.  I tried to de-snark the comments, but that didn't seem to improve my handwriting.

But the bottom line is that the battle between the manufacturing industry and the energy industry comes down to who bears the risk  of the commodity price, buyers (manufacturers) or sellers (producers).  Manufacturers like Dow see a golden opportunity to come home and expand their businesses very profitably and are looking to keep gas prices down.  It's a natural approach for a business, but instead of closing the door to gas exports, maybe they should follow the lead of Nucor in its partnership with Encana and invest in gas on the front end.  Dow took a crack at it years ago with an investment in an LNG import facility, an investment in retrospect that might seem unfortunate.  

Coal Continues to Increase Utility Market Share

Since coal and natural gas got close enough to kiss back in April 2012 - at least in terms of market share as a utility fuel - coal has reversed trend and started to regain share.  In November 2012, coal represented 42.2% of electricity generated, compared to 39.9% in November 2011.  Coal has not had this high a market share since July 2011.  Perhaps not coincidentally, natural gas spot prices were 10% higher in November 2012 compared to 2011.  Natural gas represented 26.1% of electricity generation in November 2012 compared to 24.8% in November 2011.

November 2012 Consumption: Also Riding High

Natural gas consumption in November 2012, measured as gas delivered to customers, was 1.978 Tcf, which was 8.0% greater than November 2011 and 17.6% higher than the previous ten year average.

Year to date, gas consumption hit 21.07 Tcf, which was 5.9% higher than last year and 11.9% higher than the ten year average.  So far in 2012, per day consumption was 3.3 Bcf higher than in 2011.  Versus last year, increased use by utilities (+22.9% vs 2011) is making up for reduced use in the residential (-13.2%) and commercial (-9.0%) sectors.

Vultures to Circle over GMX Resources?

GMX Resources announced this morning that it has retained investment bank Jefferies & Co. "to assist the Board and senior management in its ongoing exploration of a variety of financing alternatives, including a potential restructuring of the Company’s balance sheet in light of its current liquidity and cash needs."  I'm sure a sale of the company is on the table as well, although it would fetch a "distressed" price that would be unpalatable to shareholders and management.  Asset sales might be an option as well, but GMX ain't exactly Chesapeake in terms of its wide assortment of holdings.

In the past few weeks, GMX's share price has dropped 68% to around $2.25, keyed mostly by liquidity concerns and the problems the company has had lining up new financing.  GMX is one of those gas-centric independents trying to reinvent itself as an oil shale player, but it is late to the game and is paying the price.  A  balance sheet restructuring likely will hurt shareholders, but will it lead to a sale of the company's Haynesville/E. Texas assets?  Stay tuned...

Sunday, February 24, 2013

Haynesville Shale Rig Count: -1 to 24

The Haynesville Shale rig count dropped by one this week to 24.  Louisiana was down one (Petrohawk) to 13 and Texas held at 11.

Another Big New Shale Play?

Apparently the next big thing is the Cline Shale in West Texas.  Fortunately for gas fans, it seems to be oil-heavy and big, which will make E&P people lather uncontrollably.  The downside for gas fans is the inevitable addition of new associated gas (gas as an unintended target) to the market.  Unlike the Bakken Shale in North Dakota, which has very little natural gas takeaway infrastructure (thus forcing operators to flare lots of the gas produced rather than deliver it to market), the Permian Basin has lots of pipeline infrastructure.

Friday, February 22, 2013

Low Gas Prices: Step 6 is Acceptance

For all of those with rosy expectations about the price of gas rising in 2013 (are there any of you out there anyway?), see below from a short piece in the Wall Street Journal about gas producers accepting the inevitability of low gas prices:
"Another sign of E&P companies accepting that gas prices are low and staying that way is hedging activity. On Thursday, self-described "champion of natural gas" Chesapeake Energy CHK said it had hedged half of its projected 2013 gas output at a price of $3.62. This time last year, it hadn't hedged any—and paid a heavy price as cash flow was crushed. Devon Energy, DVN another big gas producer, has hedged 60% of its expected output at $3.87. This time last year, it had hedged only a third, at $4.73."
Of course, looking at it from a glass-half-full perspective, as Chesapeake usually does, you can call locking in these hedeges solidly in the mid-$3 range as "downside hedge protection."

November 2012 Gas Production: Another New Record

Normally I try to publish the monthly natural gas statistics as one post, but I'm three weeks behind and only have snippets of time.  As a result, I'm going to post them in bits and pieces...starting with production.

U.S. natural gas production (dry gas) in November 2012 was 2.001 Tcf.  This figure was 1.5% higher than November 2011 and 22.4% higher than the previous five year average.

Interestingly, the 1.5% year-over-year increase was the smallest increase this year.

Recent Louisiana Completions

  • AmSouth 31 #7-ALT, EXCO Operating: 11.325 MMcf/day IP on 16/64 in. choke at 7,755 psi; Perfs: 11,838-16,102, length: 4,264 ft.; Caspiana Field, DeSoto Parish, S31/T15/R12; res. A, serial #244464 
  • AmSouth 31 #8-ALT, EXCO Operating: 11.401 MMcf/day IP on 16/64 in. choke at 7,961 psi; Perfs: 11,907-16,102, length: 4,195 ft.; Caspiana Field, DeSoto Parish, S31/T15/R12; res. A, serial #244465 

U.S. Rig Count: -1 to 1,761

The Baker Hughes U.S. rig count dropped one this week to 1,761.  Oil rigs were down eight to 1,329, gas rigs were up seven to 428 and miscellaneous rigs were unchanged at four.  By type, horizontal rigs were up one to 1,140, vertical rigs were down five to 424 and directional rigs were up three to 197.  Among gas rigs, horizontal rigs were up four to 309, vertical rigs held at 60 and directional rigs were up three to 59.

Thursday, February 21, 2013

More on Encana's Re-Entry to Haynesville

I've gotten several questions about Encana's return to the Haynesville and their strategy.  Below are a few slides from their recent investor presentation that offer some more explanation.  Bottom line is that they think they can economically produce Haynesville using economies of scale to spread the cost of expensive well designs over higher producing wells to drive down the costs per unit of gas.

The question they don't answer is whether or not it's a good idea in the big picture to drill more gas.  But that's another story altogether. 

The question analysts are asking is why fall back to gas?  Is chasing 30-40% returns the best use of the company's financial resources?  The answer may be yes, and this conservative approach is a rather bold answer when Wall Street is demanding that the natural gas-centric independents go out of their comfort zone to chase oil and liquids.  Unfortunately, in most cases the gas producers are late to the liquid plays and therefore have to pay up for the land, and then they have to build expertise on the fly.  While the economics favor liquids, I would argue that the strategy of chasing liquids doesn't necessarily make sense for everyone.  Encana didn't come out and say it, but I have to believe it is part of their motivation to pull back a bit from liquids.

In any case, here are the slides.  The strategy is to drive down well costs relative to the size of the laterals and the expected higher production.  I believe the brown lines on the slide below are fault lines.

EIA: Storage -127 Bcf to 2.4 Tcf

The EIA reported that working gas in storage dropped 127 Bcf to 2.4 Tcf.  The weekly withdrawal was 18% lower than last year (-155 Bcf) and 9% below the five year average (-140 Bcf).  The current storage level is 9.2% below last year (2.642 Tcf) but 17.7% above the five year average (2.039 Tcf).

While better than last year, the deviation between the current storage level and the five year average continues to widen.

Wednesday, February 20, 2013

Another GTL Plant Eyeing Haynesville Region

EmberClear Corp. of Canada announced yesterday that the company had completed the technical feasibility study for a natural gas to liquids plant that would be located on an 800 acre site along the Mississippi River in Natchez, MS.  The Natchez site has access to American Midstream's Midla pipeline, which interconnects with three other major pipeline networks and can source gas from the Haynesville Shale, among other formations in Louisiana, Texas and Oklahoma.  If built, the facility would be capable of producing 4,000 tons of methanol per day or 14,000 barrels of gasoline per day.

American Midstream's Midla Pipeline System


Tuesday, February 19, 2013

Good Haynesville Article

With natural gas prices staying low, the Haynesville Shale is becoming the forgotten play nationally.  The most interesting news of the past several months has been Encana's announcement that it will be bringing as many as five rigs back to the play to drill wells with long laterals that could generate up to 18 Bcf EURs.  That announcement is the point of departure of a recent article on on the Seeking Alpha web site that takes a crack at quantifying the "sweet spot" of the Haynesville Play.  It offers a pretty good summary of what's going on.

Monday, February 18, 2013

EXCO Enters JV for Shallow North LA Properties

EXCO Resources announced on Friday that the company had entered into a joint venture with the Harbinger Group to operate EXCO's shallow properties (Cotton Valley and above) in the Danville, Waskom, Holly and Vernon fields in north Louisiana.  Additional EXCO properties in west Texas were included in the deal as well.  You can read the link above for details, but to summarize, EXCO received cash upfront and will remain the operator of the properties but will have only a minority limited partner ownership in the properties.

Harbinger Group is a diversified holding company headed by Philip Falcone that owns an array of consumer brands (Black & Decker, George Forman, Miracle Ear, etc.) and has interests in life insurance and annuity companies.  This seems like an odd combination, but Harbinger is the former Zapata Corporation, which was the oil company founded by former president George H.W. Bush.  Harbinger seems to have little energy expertise now, but it will not be the operator.  Falcone has been in the news lately in his failing efforts to save another company, LightSquared, from bankruptcy.

Sunday, February 17, 2013

New Louisiana Completions

  • Branch Ranch 36 #3-ALT, EXCO Operating: 12.444 MMcf/day IP on 18/64 in. choke at 7,535 psi; Perfs: 12,661-17,142, length: 4,481 ft.; Kingston Field, DeSoto Parish, S25/T14/R13; res. A, serial #244633 
  • Samuels 36 #2-ALT, EXCO Operating: 13.009 MMcf/day IP on 18/64 in. choke at 7,744 psi; Perfs: 12,615-16,764, length: 4,149 ft.; Kingston Field, DeSoto Parish, S36/T14/R13; res. A, serial #244635

New Anadarko Texas Completion (with Liquids Noted)

1/29/13 - 2/17/13:
  • CGU 17 #51HH, Anadarko E&P: 8.168 MMcf/day IP, 361 Bbl oil or condensate, 20/64" choke, 5,640 psi; Perfs: 11,496-17,525, length: 6,029 ft.; Carthage Field (Haynesville Shale), Panola Co., Survey: MILLER, W, A-454

New Texas Permits

2/1/13 - 2/17/13:

  • CGU 13 #56HH, Anadarko E&P; Carthage Field (Haynesville Shale), Panola Co. Co., Survey: DUNCAN, S, A-158 
  • Brammer Pan #1H, Chesapeake Operating; Carthage Field (Haynesville Shale), Panola Co. Co., Survey: JACKSON, S, A-352 

Saturday, February 16, 2013

Haynesville Shale Rig Count Unchanged at 25

The Haynesville Shale rig count was unchanged at 25 this week.  Louisiana held at 14 and Texas did the same at 11.  Encana is now up to three rigs drilling in Red River Parish, LA.

Friday, February 15, 2013

U.S. Rig Count: +3 to 1,762

Baker Hughes reported that the U.S. rig count increased by three rigs this week to 1,762.  Oil rigs were up seven to 1,337, gas rigs were down four to 421 and miscellaneous rigs held at four.  By type, horizontal rigs were down four to 1,139, vertical rigs were down two to 429 and directional rigs were up nine to 194.

Thursday, February 14, 2013

Exploring Encana's Motivation to Expand in the Haynesville

Encana held its year end earnings call earlier today.  There was one mention of the Haynesville Shale in the company's prepared remarks, but it certainly caught my interest given Encana's "dark period" in 2012.  Here it is verbatim:
"Turning to the Haynesville. Louisiana’s Office of Conservation amended its rules to allow drilling of cross-unit wells with consent of a simple majority of owners in units affected by drilling. This policy change enables Encana to develop its acreage with lateral lengths averaging more than 7,500 feet and 6 wells per 960 acre unit, thereby reducing capital requirements and improving program metrics. We have allocated about $270 million to our Haynesville asset in 2013 to demonstrate the robust economics of advanced well design."
Encana has been pushing the longer laterals and has had some success with the few they have completed in Louisiana.  The capex figure of $270 million pleasantly surprised me.  Encana expects to make money (30% IRR) at $3.50/MMBtu and have five rigs working by year end.  The longer laterals cost around $13 to $14 million per well, but a 7,500 foot lateral could yield an 18 Bcf estimated ultimate recovery (EUR) per well, especially now that the company is adopting the restricted choke approach pioneered by other Haynesville producers that have been successful in flattening decline curves and achieving higher recoveries.

EIA: Storage -157 Bcf to 2.527 Tcf

The EIA natural gas storage report showed a 157 Bcf withdrawal this week, bringing total working gas in storage to 2.527 Tcf.  The weekly withdrawal was 39% greater than last year (-113 Bcf) and in line with the five year average (-154 Bcf).  The current storage level is 9.7% below last year (2.797 Tcf), which is not saying much, but 16% above the five year average.

Temperatures in the Lower 48 last week averaged 34.4 degrees, which was 8.3 degrees cooler than last year and 0.1 degrees cooler than average.

Saturday, February 9, 2013

Haynesville Rig Count: Unchanged at 25

The Haynesville Shale rig count was unchanged this week at 25.  Louisiana held at 14 and Texas did the same at 11.  The only thing interesting to report is that this is the first week since I started this rig count in January 2010 that there hasn't been an active Haynesville rig in Shelby Co. TX.  A couple years ago, the Shelby Co. count peaked at 20.  My, how times have changed.

Friday, February 8, 2013

U.S. Rig Count: -5 to 1,759

The Baker Hughes U.S. rig count was down five this week to 1,759.  Oil rigs were down two to 1,330, gas rigs were down three to 425 and miscellaneous rigs were unchanged at four.  By type, horizontal rigs were up seven to 1,143, vertical rigs were down 14 to 431 and directional rigs were up two to 185.

Thursday, February 7, 2013

One New Louisiana Completion

  • O B Madden 7-18 HC #1-ALT, Encana Corp.: 19.557 MMcf/day IP on 28/64 in. choke at 5,660 psi; Perfs: 12,782-19,535, length: 6,753 ft.; Woodardville Field, Red River Parish, S7/T14/R10; res. A, serial #243657
This well highlights why the Haynesville will not see any significant increase in drilling activity for a while, even if prices nudge upwards.  It looks like Encana completed this well from its inventory of previously drilled wells.  A rig was last on the well in November 2011.  It goes to show that when producers are looking for new production from the Haynesville, whether to take advantage of a little price bump or the need to satisfy some volume requirements, it is more cost effective to complete a well from the backlog rather than start a new drilling program.

Exporting the Problem

(c) Edward Burtynsky
A few years ago, I bought a terrific book of photography by Edward Burtynsky called Manufactured Landscapes.  Among the subjects was ship breaking, where old ships are disassembled and most of the components are recycled. Sounds good, but many old ships are full of environmentally hazardous substances (PCBs, asbestos, lead paint, etc.), so most ship breaking now occurs in coastal regions of Bangladesh, Pakistan and India that are not "burdened" by modern health and environmental regulations.  Burtynsky's powerful photos showed these monolithic ship hulls surrounded by small armies of barefoot peasants scavenging the wrecked carcasses.  With ship breaking we essentially export our terrible pollution to these third world countries.

I couldn't help but think of these images when reading about the recent boom in exporting thermal coal to Europe to replace more expensive natural gas in electricity generation.  It's a natural market reaction to cheap shale gas  displacing coal in U.S. power generation.  Coal producers have successfully found alternate markets for thermal (or "steam coal") in Europe, which has allowed big producers to maintain strong profits for now.  The export phenomenon likely will cause further ripple effects in the coal industry and lead to a round of corporate consolidation as smaller producers will struggle to compete against larger companies with the wherewithal to export coal.

EIA: Storage -118 Bcf to 2.684 Tcf

The EIA reported that gas in storage decreased 118 Bcf last week to 2.684 Tcf.  The weekly withdrawal was 26% higher than last year (-94 Bcf) but 28% below the five year average (-165 Bcf).  The current level of working gas in storage is now 7.8% below last year (2.91 Tcf) but 15.0% above the five year average (2.333 Tcf).

After working gas in storage increased to be as much as 60.5% above the five year average in April 2012, the deviation crept down to as low as 4.5% in late November 2012.  With mediocre withdrawals so far this winter, the differential between the current storage level and the five year average is starting to rise.  This is bad news, especially when you consider that the five year average includes three consecutive record high storage years.  If you can't keep up with that crappy past, you are in trouble...

Wednesday, February 6, 2013

Does TEPCO Know Something We Don't Know?

TEPCO, the operator of the infamous Fukushima nuclear plant, announced today (technically tomorrow, considering the International Date Line) that it has agreed to purchase 800,000 tons of LNG annually from the U.S. The gas would be purchased through trading firms Mitsui & Co. and Mitsubishi Corp. from Sempra Energy's proposed Cameron LNG facility in Cameron, LA.  

Since Cameron's application to export gas to countries without free trade agreements with the U.S. is still cooling its heels in line with nearly twenty others in a state of limbo, either TEPCO knows something the rest of us mortals don't or they are getting dibs on the gas expecting the project to be approved.  I'm guessing the latter, although smart money is on Cameron as one of the five or six facilities most likely to be built.  This deal just helps it along to what I imagine is an inevitable end.  

Another Nuke Plant to be Mothballed

There has been much made about "cheap gas" contributing to the early retirement of smaller nuclear plants and those that require significant capital reinvestment to continue to operate.  Continuing this trend, Duke Energy announced yesterday that it will close down its idled Crystal River nuclear plant in Florida and replace it with a new $900 million natural gas-fired plant in North Carolina.

Nuclear was long ago billed as the cheapest of energy sources, but the enormous capital investment required for long-term upkeep of troubled plants make them easy marks for the scrap heap.  Plants with smaller capacity have trouble covering the overhead nut when coal and gas are both inexpensive.  Nuclear remains a valid power source, but with cheap, plentiful natural gas and highly efficient gas turbines, the "nuclear paradigm" holds up in fewer situations than it did a decade ago.

I view the utility market as the greatest opportunity for natural gas to expand gross consumption.  Most of this new consumption will come at the expense of aging coal plants that will be retired because they are heinous polluters and retrofitting them to meet new air pollution standards would be cost prohibitive. But with the mothballing of more than a handful of nuclear plants years before their permits expire, natural gas has an additional opportunity to gain market share.

This will be an interesting trend to watch.

Tuesday, February 5, 2013

Anadarko in Louisiana

I was interested to see that Anadarko E&P, which is running seven Haynesville rigs in Panola County, TX, permitted a couple of Haynesville wells in the Caddo Pine Island field in Caddo Parish, LA.  Out of curiosity I looked back and noticed that they took over eight wells in the Elm Grove field of Bossier Parish from J-W Operating.  The wells in question were completed in the April to September, 2010 time frame and are located in sections 1, 3, 8, 9, 11 and 17 of township 16N range 12W.  J-W retained its other 32 or so Haynesville wells and recently permitted four new Haynesville wells (and is now drilling two of those)

I didn't hear anything about a deal between the companies, but I find that they don't write, they don't call.

Here are the "new" Anadarko Louisiana Haynesville wells that were originally completed by J-W:

  • Womack 11 #3: 18 MMcf/day IP on 22/64 in. choke at 5,200 psi; Perfs: 11,198-15,361, length: 4,163 ft.; Elm Grove Field, Bossier Parish, S11/T16/R11; res. A, serial #239632 

Sunday, February 3, 2013

Haynesville Shale Rig Count: +1 to 25

The Haynesville Shale rig count was up one last week to 25.  Louisiana was up one (Encana) to 14, while Texas held at 11.  Fourteen rigs is the highest level of Haynesville wells in Louisiana since July 27, 2012.  Sort of a sad statement given that there were 136 Haynesville rigs operating at one time in Louisiana in the summer of 2010.

Friday, February 1, 2013

U.S. Rig Count: +11 to 1,764

Baker Hughes reported that the U.S. rig count was up 11 rigs this week to 1,764.  Oil rigs were up 17 to 1,332, gas rigs were down six to 428 and miscellaneous rigs held at four.  By type, horizontal rigs were up nine to 1,136, vertical rigs were unchanged at 445 and directional rigs were up two to 183.

Freakonomics and the "Health Upside of Natural Gas"

Yesterday, a new post on the Freakonomics web site cited a working paper for an academic study that shows a correlation between increased use of natural gas for home use and decreased infant mortality in Turkey.  It makes sense when you think that gas is largely replacing coal and other "low tech" fuels like burning wood that cause poor air quality.

Given the contentious nature of any "conversation" about natural gas these days, I doubt this will be the last we hear on the subject.