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.

The slide below illustrates why Encana feels like it can make money in the Haynesville:  lower costs when spread out over bigger wells. Economies of scale.  But because the Haynesville Shale is deeper and harder to drill than most other shale formations, the Marcellus generally still has better economics for most producers.

Longer laterals crossing sections allow Encana to fully exploit the 300+ foot setback in each section, which should increase recoveries somewhat.  All of Encana's new Haynesville wells will use the resource play hub strategy with long laterals.


Anonymous said...

What do the faults signify in relation to Haynesville drilling? No drilling, or limited drilling if at all? What about the "Bossier" formation, will the faults have any bearing?


Robert Hutchinson said...

I'll leave the geology to the geologists, but I can tell you that faults tend to create underground boundaries, for lack of a better phrase, and are generally avoided, especially in horizontal drilling.

The map in the post is a little misleading because it focuses on DeSoto and Red River parishes and those faults generally form the southeastern boundary of the productive part of the Haynesville Play (although the shale does go a little past that area). While it is difficult to overlay the Encana map over a map of completed wells, one can see that there is very little activity in the brown shaded areas of the Encana map.