No Recession for the Haynesville

Shale play decline rates in perspective

The music you hear wafting through the oil patch likely emanates from a group of natural gas operators singing the blues.

It’s entirely justified given the brutal plunge in price from $13.50/mcf in July 2008 down to where it’s now flirting with the $3 mark.

Of course, it may be a temporary dirge – some analysts expect prices to return to $7 or even beyond during the coming winter, due in part to recent cutbacks in exploration.

But why wait? Some, notably, are singing a different tune right now.

In the high-profile, still-fledgling Upper Jurassic Haynesville shale gas play in northern Louisiana the action has pretty much remained on a steady track.

“We saw a peak number of 95 rigs at one point,” said Don Briggs, president of the Louisiana Oil & Gas Association, “but about half of these were drilling in the (younger) Cotton Valley. The number of Haynesville wells has been stable.”

Chesapeake Energy is credited for kicking off the play when it announced its initial Haynesville shale gas discovery early in 2008. The company has curtailed some production for now but maintains its role as a principal driving force in the action.

“We continue to build out our expansion plans in the Haynesville, and we’re currently operating 26 rigs,” said Kevin McCotter, director of corporate development at Chesapeake. “We expect to be operating 30 at the end of this year and 35 by mid 2010.”

Reasons to Sing

Petrohawk Energy, another major force in the play, also is forging ahead with its program.

“We’re not cutting back on drilling,” said AAPG member Dick Stoneburner, chief operating officer at Petrohawk. “We’ve invested in a sizeable leasehold that’s as good as any set of leases in the play from a quality standpoint.

“To defend those leases that expire in two years, we put together a program that will have 16 rigs running by the last quarter of ’09,” he said. “We’ll maintain that 16 rig program at a minimum through mid-to-late 2011.

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The music you hear wafting through the oil patch likely emanates from a group of natural gas operators singing the blues.

It’s entirely justified given the brutal plunge in price from $13.50/mcf in July 2008 down to where it’s now flirting with the $3 mark.

Of course, it may be a temporary dirge – some analysts expect prices to return to $7 or even beyond during the coming winter, due in part to recent cutbacks in exploration.

But why wait? Some, notably, are singing a different tune right now.

In the high-profile, still-fledgling Upper Jurassic Haynesville shale gas play in northern Louisiana the action has pretty much remained on a steady track.

“We saw a peak number of 95 rigs at one point,” said Don Briggs, president of the Louisiana Oil & Gas Association, “but about half of these were drilling in the (younger) Cotton Valley. The number of Haynesville wells has been stable.”

Chesapeake Energy is credited for kicking off the play when it announced its initial Haynesville shale gas discovery early in 2008. The company has curtailed some production for now but maintains its role as a principal driving force in the action.

“We continue to build out our expansion plans in the Haynesville, and we’re currently operating 26 rigs,” said Kevin McCotter, director of corporate development at Chesapeake. “We expect to be operating 30 at the end of this year and 35 by mid 2010.”

Reasons to Sing

Petrohawk Energy, another major force in the play, also is forging ahead with its program.

“We’re not cutting back on drilling,” said AAPG member Dick Stoneburner, chief operating officer at Petrohawk. “We’ve invested in a sizeable leasehold that’s as good as any set of leases in the play from a quality standpoint.

“To defend those leases that expire in two years, we put together a program that will have 16 rigs running by the last quarter of ’09,” he said. “We’ll maintain that 16 rig program at a minimum through mid-to-late 2011.

“We have a program here that’s got decades worth of development,” he noted. “We think it’s prudent to learn as much as we can about this field – if you compromise data gathering and operational expertise, then you get behind.”

Stoneburner noted the company has not cut production in the play.

“It’s a significant production volume to us, but we’re not changing the world by doing what we’re doing,” he noted. “Supply and demand will correct with time.”

Initial well productivities that average about 20 MMcf/d have been announced by some companies involved in the play.

“Our statement to that is we continue to enjoy the same types of initial production rates generally announced by industry,” McCotter said, “and we continue to be extremely pleased with our operating results.”

What Goes Up …?

On the downside, there’s been plenty of talk that these babies decline seemingly at the speed of light, with first year decline rates of about 80 percent being tossed around – but the jury’s still out, according to McCotter.

“There’s not that much information published on decline rates,” he said. “I think that’s because this is such a young play, and there’s not a long history of existing Haynesville wells.

“It’s a big question mark that a lot of operators have,” McCotter added.

Steve Dixon, chief operating officer at Chesapeake and an AAPG member, noted that everyone is aware that the Haynesville has a very steep first year decline.

He pointed out that the company has only two wells more than one year old, and these had neither many (frac) stages nor long laterals.

Stoneburner, too, put the issue of decline into perspective.

“When you start at 20 million a day,” he said, “you can give up a high initial decline rate and still have a significant reserve as long as the hyperbolic component of the curve is real.

“The industry should now realize the hyperbolic component is there,” he noted. “What the component is may still need more time and refinement to make a more accurate forecast on reserves.”

Typical laterals on the horizontal Haynesville wells range from 4,000 to 4,500 feet, with a vertical wellbore usually maxing out between 11,000 and 13,000 feet. Average well costs tally about $7 million, according to McCotter.

The potential for the play kind of boggles the mind.

“We recently announced that we believe the Haynesville will likely become the nation’s largest natural gas producer by 2015,” McCotter said. “That speaks to the massive size of the Haynesville – and in fact we estimate there’s about 250 trillion cubic feet in the Haynesville.

“We see it as roughly a 3.5-million-acre area predominantly in north Louisiana and east Texas,” McCotter said. “In this 3.5 million area we see 4,700 sections, and within each section we believe there’s about 180 Bcf, of which 52 Bcf is recoverable.

“In 2007, the EIA estimated the nation consumes about 21 Tcf a year,” he noted. “The Haynesville alone could run the country for 12 to 15 years.”

Home-Grown Success

Chesapeake is continuing to lease in the play, albeit at a different price structure than last summer.

“After the binge of 2008, which was like drunk sailors on shore leave, reality has set in,” said John Hyatt with Pinoak Operating in Shreveport. “A few landowners are asking, ‘Where’s my $25,000?’ but prices now are anywhere from $1,000 to $5,000 an acre for the Haynesville, depending on where you are.”

This area historically has been home to many small operators looking for finds in the Hosston and Cotton Valley formations, and many successful wells have been drilled – although nothing like the deeper Haynesville.

Hyatt noted, however, that lease prices and royalty for these shallower horizons have escalated due to all the Haynesville action, forcing a lot of the longtime players to re-evaluate their activity.

Given today’s more reasonable yet still-high price to enter the play, this is not the place for novice companies to try their hand at drilling. Instead, some new faces have appeared on the scene via other means.

Mainland Resources in Houston, for instance, acquired a 2,700-acre leasehold having stacked pay that paved the way to a joint venture in the Haynesville with Petrohawk.

“Petrohawk is on the third well in the venture now,” said Mike Newport, president and CEO at Mainland, which originated early in 2008.

“We also picked up the zones above the Haynesville – the Cotton Valley, Hosston, Bossier – and already have the reserves report,” Newport said. “We could start drilling there and use the existing infrastructure to develop these.”

Current activity in the Haynesville play includes developing the infrastructure needed to move the present and anticipated shale gas production to market.

Despite the region’s long history of production in the shallower zones, none of the gathering systems in place are capable of handling the sizeable capacities or high pressures of the Haynesville shale gas.

McCotter noted Chesapeake has made a commitment to two lines being constructed, one appropriately called the Tiger pipeline in deference to the often-intense allegiance much of the populace harbors for the state’s flagship university, Louisiana State University. Another pipeline, the Haynesville Connector, also is being constructed.

Chesapeake has taken a very visible lead – along with high-profile AAPG member T. Boone Pickens – in promoting the use of compressed natural gas (CNG) for transportation. McCotter predicted the Louisiana legislature is poised to enact some of the most far-reaching state legislation in the country that provides tax incentives for CNG.

The legislation will target consumers who convert vehicles or buy a dedicated vehicle, as well as private entrepreneurs installing CNG fueling equipment at service stations.

“If we’re going to be the largest U.S. natural gas producer,” McCotter said, “then Louisiana should take a leadership role in promoting the use of this very American, clean-burning, job-creating fuel.”

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