Friday, August 9, 2013

Three Reasons to Love the Haynesville Shale

Those following the ups and downs of the shale oil and gas industry sometimes need to keep a scorecard to figure out what's going on.  There are new revelations and talk of hot new plays every couple of months.  It feels like the industry has lost interest in the Haynesville.  But reading a recent article about the difficulties faced by companies seeking riches in the Utica Shale in Ohio makes me remember why the Haynesville is a special formation and why it will be an iconic play long into the future.

1. The geology is really good.  Sure, natural gas is on the outs right now because of its low price and the sexiness of oil, but the confluence of positive geologic characteristics deep under the ground in NW Louisiana and E Texas are pretty unique and will be compelling to drillers for a long time.

2. Major demand drivers adjacent to the Haynesville Shale are coming to fruition.  Industrial and manufacturing uses are being developed in southern Louisiana and SE Texas because of plentiful natural gas.  There are even a couple of large scale gas-to-liquids plants on the drawing board.  Yes, users like the current low price of gas, but more than anything they like the dependable supply that has reduced volatility.  Big users can hedge prices or come up with special arrangements (see: Nucor/Encana JV), but volatility and unknowns are deal killers.  While gas to run these plants will come from all over, the proximity to the Haynesville Shale gives it a leg up on other formations.

3. The DOE approved the third LNG export facility on the Gulf Coast last week.  The approved natural gas export capacity stands at around 5.6 Bcf/day.  To put that in context, dry gas production averaged around 65.6 Bcf/day in 2012, so this represents approximately 8.5% of total daily gas production.  Export gives the gas industry an entirely new customer base to go alongside residential, power generation, industrial, commercial and transportation.  Don't expect too many more of these approvals, as the market can only handle so many, but LNG export will help diversify end users, which is helpful in times of economic (and meteorological) distress and low consumption like 2009-11.

Those are the three biggest reasons for my optimism.  While gas prices have been slipping over the past few months (they usually do at this time of year), I was heartened to see the Haynesville rig count hit a 13 month high last week.  While there have been more than three thousand Haynesville Shale wells completed over the past five years, producers have only scratched the surface in terms of total supply.  With new drilling and production techniques that have been developed over the past few years, the potential for Haynesville properties continues to grow.

So, chin up, Haynesville fans.  The short and mid-term will continue to be rocky, but I am confident that in the long run the Haynesville will be a big, big winner.

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