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The key argument often used by natural gas bulls is that the dramatic reduction in rig counts in the dry gas producing shales will translate into a rapid drop off in supply and lead to the price recovery toward the $5 level, and possibly higher. The Haynesville shale, where the rig count has declined from the peak of over 180 rigs two years ago to approximately 27 currently, is often presented as the most compelling evidence supporting that argument.

The key argument often used by natural gas bulls is that the dramatic reduction in rig counts in the dry gas producing shales will translate into a rapid drop off in supply and lead to the price recovery toward the $5 level, and possibly higher. The Haynesville shale, where the rig count has declined from the peak of over 180 rigs two years ago to approximately 27 currently, is often presented as the most compelling evidence supporting that argument.

The view has been advocated by several prominent industry CEOs, including Chesapeake’s Aubrey McClendon and Ultra Petroleum’s (UPL) Michael Woodford. During Ultra’s 2Q earnings conference call on August 2, Michael Woodford re-iterated his macro perspective on natural gas: “Capital is being withdrawn from natural gas investment as seen in the rig count reduction and pressure pumping softness. Production lags capital expenditures and the decline in production is imminent. We see $4 gas in 2013 and $5 gas in 2014.” With regard to Haynesville specifically, he commented: “We have a view that says: production supply is about to shrink pretty rapidly. I think there are some comments out yesterday, with some companies that announced and talked about the Haynesville, that they would see a 10% per quarter reduction in their production. I think it is plus or minus 40% for the year. If you apply that to the 6 Bcf per day of Haynesville production, it is 2.5 Bcf per day of annual rate reduction, so I think we are about to see a drop off in supply.” Michael Woodford was referring to the earnings callremarks by QEP Resources (QEP) the night before.

2.5 Bcf per day is a big number, particularly given that Haynesville is just one producing field of many, albeit a significant one. If that rationale held, the $5 natural gas outlook would probably be conservative. However, a more rigorous look at the Haynesville operating data leads to somewhat different conclusions.

In less than four years since its discovery announcement, the Haynesville production went from zero to almost 7 Bcf per day, by some industry estimates, or over 10% of the total US natural gas production, demonstrating the exceptional productivity of this field as well as the scalability of the supporting operational infrastructure including oilfield services, gathering systems, and pipeline off-take. The rig count peaked at about 186 rigs during the summer of 2010 but has been in a steady decline ever since. There are currently approximately 27 rigs working in the play, about evenly split between the Louisiana and Texas portions of the play. Of these rigs, approximately 11 rigs, including 8 run by Anadarko (APC), are focusing on the liquids-rich part of the Haynesville, mostly in Panola County of Texas. The other approximately 16 rigs are targeting dry gas.

Based on the analysis of the well distribution profile by vintage, I estimate that the field-wide base production decline is currently in the 2.5%-3.0% per month range. Applying the decline rate to the estimated base production of 6.5 Bcf/d, the base production drop off equates to 165-195 MMcf/d per month. How many new wells per month would it take to offset the base decline?

For illustrative purposes, let’s assume that half of all wells are being completed in the liquids-rich area or in the less productive Tier II part of the play (to hold acreage) with an average first-month restricted dry gas flow rate of 4.5 MMcf/d per well, while the other half of the completions are concentrated in the dry gas sweet spots and flow at an average first-month restricted rate of 7.5 MMcf/d (my analysis of recent completions data leads me to believe that these assumptions are conservative). This translates into a total of 27 to 33 wells that need to be put in-line per month to maintain the base production flat. In a pad development mode, one rig can yield as many as 10 wells per year. In the delineation mode, rig productivity is lower and I assume a yield of 8 wells per rig-year. These calculations result in a total of 36 to 45 rigs required to keep the production flat, assuming no completions are deferred. These figures will likely decline with time as the operational productivity and completion techniques continue to improve.

The graph below illustrates this analysis. It shows the number of wells added to the “producing” category for the past two years in the Louisiana part of the play (the Louisiana Haynesville data are more available and consistent than the Texas Haynesville data). During that period, the producing well count in the Louisiana Haynesville went from approximately 570 at the end of July 2010 to approximately 2,038 at the end of July 2012. Data is subject to frequent adjustments and reporting delays and therefore should be thought of as approximate. The red line on the graph shows the calculated number of wells that would have been required to be brought to sales during each month in order to keep the Louisiana Haynesville production flat at that time.

During the period from August 2010 through January 2011, the number of new producing wells averaged over 70 per month, or four times the minimum number of new wells required to keep the production flat. As a result, during that period the aggregate production from the field showed strong growth.

Well additions slowed in February 2012 and crossed below the minimum required new wells line in June, for the first time since the field’s inception.

The analysis implies that the field’s production should have grown all the way through May 2012, although the growth pace would have slowed substantially at the beginning of the year. In actuality, Haynesville pipeline deliveries peaked in November-December last year, with the field’s production declining by approximately 0.4 Bcf/d during the first quarter. The difference to the model is explained most likely by the January 2012 decision by Chesapeake (CHK), the largest operator in the field, to curtail as much as 1.0 Bcf/d of its Haynesville and Barnett production throughout the year, with as much as 0.5 Bcf per day curtailed in January or possibly even earlier. Also in January, Chesapeake announced the decision to defer new well completions and pipeline connections whenever possible. Other operators may have joined Chesapeake with similar measures as natural gas prices continued to roll over.

Another important factor in this equation is the inventory of wells waiting on completion or pipeline connection. In the Louisiana part of the play that number stood at approximately 250 wells at the end of July 2012, according to Louisiana Department of Natural Resources (LDNR). In light of the math presented above, this is a significant backlog. Assuming for illustrative purposes that 100 wells, or 40% of the total inventory, will be brought to sales within the next 12 months, the rig requirement is effectively reduced by approximately 10 rigs during that period. While the backlog in the Texas portion of the field is difficult to estimate, it is clear that it is also sizeable.

The staggering conclusion of this analysis is that the 27 rigs currently working in the Haynesville, in combination with some reduction in the drilled but not producing well backlog and the unwind of the production curtailments, may be sufficient to keep Haynesville production at its current level for at least a year, or even longer.

The natural gas industry needs the Haynesville and other dry gas fields to reduce their contribution to the total supply so that the rapid production growth from the more profitable liquids-rich areas can be accommodated. Therefore, more rigs must go on the sideline in the Haynesville and elsewhere so that the production can show tangible declines. That is unlikely to happen with natural gas prices above $4. At that price, dry gas sweet spots in the Haynesville can deliver solid returns (30%+ IRR at the well level, in my estimate). The liquids-rich part of the field will be even more profitable. In addition, the economics of the play will likely continue to improve, due in part to the lower services cost, but more importantly, as a result of the better wells being drilled. Encana (ECA) reports that it has already reached its cost of supply target in Haynesville and can drill economic wells (9% rate of return) even at $3 Henry Hub.

With the well productivity like in the Haynesville, $5 natural gas may not be a realistic economic assumption for the foreseeable future. $4 may also prove to be unsustainable, despite the recent strength of the forward curve.

Currently active rig count in the Haynesville shale by operator:

• Anadarko Petroleum: 8 rigs
• Exco Resources (XCO): 5 rigs
• Petrohawk / BHP Billiton (BHP): 5 rigs
• XTO Energy/ExxonMobil (XOM): 4 rigs
• Chesapeake Energy: 2 rigs
• EOG Resources (EOG): 1 rig
• Royal Dutch Shell (RDS.A): 1 rig
• Valence Operating (private): 1 rig

Most active operators in the Louisiana portion of the Haynesville shale by the number of producing wells to date (% of total):

• Chesapeake Energy / JVs with Plains Exploration (PXP) and Goodrich Petroleum (GDP): 30%
• Petrohawk / BHP Billiton: 11%
• EXCO Resources: 11%
• Encana: 11%
• Royal Dutch Shell : 6%
• QEP Resources: 5%
• Comstock Resources (CRK): 5%
• El Paso / Apollo Group (APO): 5%
• EOG Resources : 2%

Companies that have substantial leaseholds in the play but have no rigs running at the moment:

• Devon Energy (DVN)
• Forest Oil (FST)
• GMX Resouces (GMXR)
• SM Energy (SM)
• Goodrich Petroleum

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Gregory Kallenberg, who made one of the first documentaries on the natural gas boom, has returned with a series of short films, called the Rational Middle Energy Series, which were introduced last week at the 2012 Aspen Ideas Festival.

The Rational Middle Energy Series is a set of several 10-minute films that discuss the role of energy and the challenges of meeting energy needs, while also addressing  environmental and economic concerns.

“The films are trying to provide balanced information for a public that needs to know about an incredibly important topic,” Kallenberg said in an interview with the Houston Chronicle. “My feeling about our energy future is that it has to be sustainable and affordable and as environmentally friendly as possible. Energy is so entwined in our lives — we need to start discussing how to create an energy future.”

The first three films — “What’s the Rational Middle”?, “Energy 101″ and “What’s At Stake” –  premiered at the Aspen festival and are also available on a public website,www.rationalmiddle.com. Kallenberg expects to launch the next short film on July 11 in Shreveport and then release a new film each week throughout the summer.

The message behind the films, Kallenberg explained, is that the United States stands to gain by trying to depolarize the discussions about energy.

“I think that there is this natural distrust that has always existed between certain elements of the environmental side — that the energy industry will never deliver energy in a fair and responsible way — and the energy industry, which has a natural defensive posture,” Kallenberg said. “Those are the high, shrill voices that are out there, but we are entering this amazing time, where people are sick of it. What the rational middle wants to do is get to place where you understand what the real risks are of an industrial process like hydraulic fracturing.”

Kallenberg said that the inspiration for the series came while he was working on his first energy-related documentary, Haynesville, which explored how the development of the Haynesville shale impacted various people and communities in Louisiana.

“When I started working on Haynesville, I saw that many people were confused and underinformed or misinformed,” Kallenberg said. “One of the things we are trying to do is to back it up and discuss what we consider the real risks. Drilling is an industrial process – it is a disruptive process. There are other things you have to watch for – what you have to be vigilant about is the construction of the well, that the casing is sound, and that some of the chemicals are not spilled on the surface. But if the gas industry does their job right, I am convinced there is a way to make the hydraulic fracturing pretty safe.”

original article

A natural gas gathering system located in the village of Ashland was dedicated today by owner Chesapeake Energy with village residents and elected officials in attendance.

Called the Football Gas Gathering System (GGS), the facility will transfer natural gas to interstate pipelines then distribute it to other parts of the country. It’s located on a recently completed six-acre site, where up to 20 million cubic feet of natural gas per day will be gathered and transported from three wells.

The system got the name Football GGS because of its shape. “In surveying the area from aerial shots, it resembles the shape of a football – thus the name,” said Katie McCullin, media relations and corporate development manager.

In addition to building the Football GGS, Chesapeake also made improvements to a quarter-mile of Coffee Crossing Road off state Highway 153 that leads to the site.

The village of Ashland is not reaping any financial benefit from the facility, but Mayor Gahagan Lee welcomes it just the same.

The village owns some property but none where the site is located. And the village does not have a tax.

“But we’re proud to have it here. I just haven’t figured out a way for the town to get any money off of it,” Lee joked.

He added: “Maybe one day we can turn it into some employment for our local people. … It all takes a while. But at least there’s activity here; that’s a plus. We’re proud to have it here. Chesapeake has been a good neighbor.”

“Without question, the Haynesville Shale bodes well for the village of Ashland, Natchitoches Parish and the state,” Paul Pratt, Chesapeake’s director of corporate development, said in a news release. “We are very excited to make this investment in this area. The Football GGS clearly demonstrates our commitment to a long-term presence in the Haynesville Shale.”

original article

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BHP Billiton is accelerating the recovery of 1.5 billion barrels of liquid hydrocarbons from the Eagle Ford and Permian fields in the US as it attempts to avoid a multibillion-dollar write-down of its US shale assets.

BHP petroleum chief Mike Yeager yesterday said the recovery target had been increased by half a billion barrels in the past six to eight months and he extolled the company’s $US20 billion acquisitions of Fayetteville and Petrohawk, which had given it a premium position on the ”unique” Haynesville shale play, the largest gasfield in the US.

Mr Yeager said liquids at Eagle Ford would make up half of production volume – and more than 80 per cent of revenue – with BHP targeting 300,000 barrels of oil equivalent a day within five or six years.

”We’re going to bring it forward in a big way,” he said.

Another 100,000 barrels of oil equivalent a day would flow from the Permian field, which was 80 per cent liquids. Combined, the two fields would produce 250,000 barrels of liquids a day and ”$US100 barrels are going to flow through to our company”.

The forecast revenue would more than offset the slump in US gas prices after the fourth-warmest winter in US history, and would feed into a valuation of the business when BHP ruled off its accounts on June 30.

Analysts at investment banks including Citi and Credit Suisse have said there may be a US shale write-down of $US2 billion or more, but yesterday Mr Yeager said BHP would factor in its proprietary view on future gas and oil prices and ”let the accounting fall where it may”.

Mr Yeager said US gas prices had already risen by more than 30 per cent from their bottom. Gas prices had previously fallen below the cash cost of production and operators were pulling out of shale extraction. But he said that longer term, gas was the ”premium, preferred fuel of the future and it will rebound and it will be strong”.

While the Haynesville shale was an unconventional resource, he said it was ”big, fat, juicy unconventional”.

The advent of unconventional gas was a ”revolution” that would last 50 years and was bigger than the shift from 2D to 3D seismic surveys, or from shallow to deepwater drilling. ”It’s the biggest thing in my 33 years in this industry,” he said.

Mr Yeager was confident that the US would allow exports of LNG to Asia, potentially competing with Australian projects including BHP’s Scarborough field.

Mr Yeager said Western Australia was ”very, very expensive” and a floating LNG facility was an option at a smaller field such as Scarborough as it would save on the cost of pipelines, storage tanks and a jetty.

Mr Yeager said BHP had brought in some of its best shale experts from Petrohawk to study the potential for shale gas development in Australia.

original article

A precipitous plunge in natural gas prices has turned the national shale gas rush into a retreat.

Oil and gas companies released a stream of announcements last week of plans to close off natural gas wells, pull out gas rigs and curtail spending in gas fields from Texas to Pennsylvania.

Oklahoma City-based Chesapeake Energy, the nation’s second-largest natural gas producer after Exxon Mobil Corp., launched the barrage with an announcement on Monday that it would slash natural gas drilling in half over the next few months.

Conoco- Phillips followed, reporting that it would close off natural gas wells and dial down spending in gas fields.

Then on Thursday, Noble Energy and Consol Energy released plans to cut 41 wells from their joint venture’s original 140-well shale gas drilling program in the Northeast.

“This situation has been a long time coming,” said Robert Ineson, head of the North American gas research group for IHS CERA.

The price of natural gas has plummeted from more than $13.50 in 2008 to under $3 per million British thermal units. Developments in drilling techniques, including hydraulic fracturing and horizontal drilling, led to a resurgence in North American drilling, particularly in dense shale rock formations. That released a glut of natural gas onto the U.S. market, causing prices to drop.

Hopes that a frigid winter would help, as homeowners used natural gas for heat, didn’t materialize. Instead, fall and winter temperatures have been warmer than usual for many Northern states, and natural gas prices have continued to fall.

“As it got below $4, you heard some grumbling,” Ineson said. “But when it got below $3, you saw things change pretty quickly.”

Shale rock cutbacks

Shale rock fields holding dry natural gas, or methane, are experiencing an exodus. Companies are chopping operations in the Barnett Shale in north Texas, the Marcellus Shale in the Northeast and the Haynesville Shale on the Louisiana-Texas border.

There are 780 natural gas drilling rigs operating in North America, down from 906 a year ago.

The U.S. Energy Information Administration noted that 2011 brought the largest increase in marketed natural gas volumes in history. Daily production grew by more than 7 percent over 2010. But year-over-year, growth will drop to 2 percent this year and to 1 percent in 2013, the federal agency projects.

“In the face of continued low spot and future prices, as well as record high storage levels for this time of year, drillers appear to have begun cutting back on new production plans for 2012,” the agency wrote.

Huge amount stored

But so much dry natural gas is in storage that it will be awhile before slower growth in production has much effect on the market, Ineson said.

Prices rose last week in response to the tightened production – closing Friday at $2.68, compared with $2.34 a week earlier.

But the United States is saddled with 3 trillion cubic feet of natural gas, 21 percent more than it typically has in stock at this time of year, according to federal data.

“It’s a huge, huge number,” Ineson said. “And it’s going to take awhile to absorb all that, even if companies dial back on production.”

Energy producers won’t completely curb natural gas production. Turning off a well’s spigot can damage the rock below. And some land use contracts go void if companies don’t drill or produce.

Plus, some natural gas wells produce high-value liquid fuels like butane, propane and ethane, making it worthwhile to keep them running.

ConocoPhillips executives said that’s what’s keeping them from pulling more rigs out of fields.

Of the 2.5 billion cubic feet of natural gas that ConocoPhillips produced in North America each day in the final months of 2011, two-thirds produced enough natural gas liquids to make them economic, Chief Financial Officer Jeff Sheets said.

“Off the top, there’s a portion of our portfolio where it’s just not going to make sense to shut in wells,” Sheets said. But, he added, “We will have some shut-ins of natural gas going forward, on the order of 100 million cubic feet a day.”

Chesapeake, one of the first companies to make a bet big on U.S. shale gas, plans to cut up to 16??percent of its daily natural gas production and curb drilling in areas including the Barnett Shale.

About 90 percent of the company’s capital spending budget targeted dry natural gas in 2009. This year, it is just 15 percent.

The rest will funnel into fields containing high amounts of oil and natural gas liquids.

More to come

Other energy companies are likely to follow suit, said Alan Lammey, an energy analyst for WeatherBell Analytics.

“By spring, we will see prices really run down, and more producers will put the brakes on supply.”

Because natural gas prices are closely tied to heating demand, the price tag slumps as temperatures moderate in March.

But the shale gas boom hasn’t become a bust, Lammey emphasized.

“We could very well have a bar-the-door, hellacious winter next year,” he said.

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Washington (Platts)–7Jul2011/259 pm EDT/1859 GMT

While predicting that US natural gas prices will reach $6/MMBtu by 2015, Goldman Sachs analysts projected they will average about $4.25/MMBtu in the near term as new shale gas continues to flow into the market.

Goldman said it believes gas supplies will grow by 2.9 Bcf/d this year and by 1.2 Bcf/d in 2012, but said higher-than-expected coal prices are creating a price floor for gas as utilities switch toward the fuel.

“US coal prices have traded above our expectations this year, allowing this fuel substitution to take place at a higher gas price level,” Goldman said.

The investment bank’s coal analysts are forecasting Central Appalachian coal prices of roughly $5.60/MMBtu-gas equivalent because of increased demand for CAPP in the export market.

Based on coal prices, Goldman’s analysts raised their gas price forecast slightly to $4.50/MMBtu over the next six months to a 2011 average price of $4.13/MMBtu. The bank forecast gas prices will average $4.25/MMBtu in 2012.

After that, Goldman said expects that a combination of coal plant retirements and a rise in industrial demand will erode more the gas surplus and strengthen prices. In addition, long-term US natural gas demand may be further supported by possible delays in the construction or license renewals of nuclear power plants as well as by potential US LNG exports, the bank said

“We believe that US natural gas prices will likely be supported above the $6/MMBtu range from 2015 onward,” the analysts said in a note to clients.

Original Article

I just learned I’m going to save money! My apartment building in New York will switch from heating oil to cleaner natural gas. Gas is much cheaper than oil now because energy companies found ways to get more of it out of the ground.

Even more astounding is that by using this technique, America won’t run out of natural gas for 100 years or more! Time to break out the Champagne?

Not so fast, say environmentalists. To get gas out of the ground, companies use pressurized chemicals to blow up rock. It’s called hydraulic fracturing — fracking. An Oscar-nominated movie, “Gasland,” says that fracking contaminates our water supply with chemicals. In the movie, some homeowners set their tap water on fire.

That got my attention. I’ve seen Michael Moore’s movies and environmental documentaries, which I thought were nonsense. But “Gasland” is more convincing.

Unfortunately, “Gasland” producer Josh Fox turned down my interview requests, as did representatives of the big national environmental groups that oppose fracking. I think I know why. The movie and the left’s arguments against fracking are deceitful.

First, the movie implies that nasty chemicals get into the water table. That seems logical, since they shoot them down into gas wells. But it turns out that the shale gas wells are thousands of feet below the water table. Do the chemicals flow up — against gravity?

But then what’s the explanation for the most dramatic part of the movie: tap water so laden with gas that people can set it on fire?

It turns out that has little to do with fracking. In many parts of America, there is enough methane in the ground to leak into people’s well water. The best fire scene in the movie was shot in Colorado, where the filmmaker is in the kitchen of a man who lights his faucet. But Colorado investigators went to that man’s house, checked out his well and found that fracking had nothing to do with his water catching fire. His well-digger had drilled into a naturally occurring methane pocket.

“There are lots of …

naturally causing effects that occur,” says Matthew Brouillette of the Commonwealth Foundation, a think tank in Pennsylvania — where much of the film was shot. “It’s really no surprise. We find that 40 percent of the wells in Pennsylvania have some sort of naturally occurring methane gas and other types of things.”

John Hanger, former director of Pennsylvania’s Department of Environmental Protection, who also appeared in the film, is less sanguine:

“Gas can migrate … from poor drilling into people’s private water wells. … We have had gas move from poorly done gas drilling through the ground and reach people’s water wells. So there is a need for oversight … gas does have some impacts. It is not perfectly clean. But compared to coal and oil, which are more dirty fossil fuels, natural gas can be produced and consumed in a manner that is cleaner than coal.”

Filmmaker Josh Fox concedes that the states concluded that the fire wasn’t caused by fracking, but he says the government regulators collude with industry, or don’t use good science. His movie portrays Hanger as an indifferent bureaucrat. Hanger says the movie is just inaccurate. “Josh Fox has a mission. … He is trying to shut down the gas — drilling industry.”

Frankly, I’m skeptical of all of them: lefty moviemakers who smear companies, companies with economic interests at stake and the regulators, who are often cozy with industry and lack essential knowledge. The surest environmental protectors are property rights — and courts that assign liability to polluters.

But hydraulic fracturing is a wonderful thing. It’s not new. Companies have done it for 60 years, but now they’ve found ways to get even more gas out of the ground. That’s the reason gas is getting cheaper and panicky politicians no longer rant about America “running out of fuel.”

Natural gas is not risk-free, but no energy source is. Perfect is not one of the choices.

Original Article

FOR IMMEDIATE RELEASE May 2, 2011
2011 HAYNESVILLE SHALE BASS TOURNAMENT TO BENEFIT CHRISTUS® SCHUMPERT SUTTON CHILDREN’S MEDICAL CENTER

WHAT: Chesapeake Energy Corporation has partnered with local natural gas and oil industry professionals for the 2011 Haynesville Shale Bass Tournament, a three- day, two-team tournament to benefit CHRISTUS® Schumpert Sutton Children’s Medical Center.

WHEN:  May 5 – 7

Thursday, May 5

2 – 9 p.m. – Registration and Kick-off party: Representatives from Chesapeake and tournament teams available for interview.

Friday, May 6
3:30 p.m. – Weigh-in and top 10 teams announced.

Saturday, May 7
3:30 p.m. – Weigh-in begins, top teams and Big Bass awarded and announcement of funds raised. Representatives from Chesapeake, Sutton Children’s Medical Center and tournament winners available for interview.

WHERE: Toledo Bend Reservoir, Cypress Bend Park 3462 Twin Island Road, Many, LA

WHY: The 2nd Annual Haynesville Shale Bass Tournament has expanded to 200 teams fishing to benefit CHRISTUS® Schumpert Sutton Children’s Medical Center, a dedicated children’s hospital caring for families across a multiple-state area.
Designed to bring the community of oil and natural gas professionals in the Haynesville Shale together in the spirit of sportsmanship and charitable giving, the two-person Haynesville Shale Bass Tournament began in 2010 and raised $20,000 for Gingerbread House and Cara Center, child abuse advocacy groups located in Shreveport, Louisiana.
MEDIA CONTACT:
Katie McCullin Chesapeake Employees For Haynesville Communities (318) 423-9362 katie.mccullin@chk.com