July 28, 2009

Don Briggs: Haynesville Shale no longer a diamond in the rough

North Louisiana’s rig count continued its upward trend to 85 rigs last week, up nine rigs from 76, while the south Louisiana land, inland water and Gulf of Mexico rig count collectively gained two rigs for a total of 52, a historic low.

The growth in the north Louisiana rig count is unprecedented in the United States. While the south Louisiana rig count is down 55 percent compared to last year, north Louisiana’s rig count has increased over 20 percent. The growth in north Louisiana stands out more clearly when compared to the rig decline of 52 percent for the United States and even more so compared to Texas’ and Oklahoma’s decline of 64 percent and 62 percent, respectively.

Just over a year ago, when north Louisiana’s rig count was at 47, I wrote, “As much as I dislike the word ‘boom,’ there are likely the beginnings of one in north Louisiana. Just how vast an area the Haynesville Shale covers, I don’t know, but I have been told from good sources it spreads out into five north Louisiana parishes.”

I went on further to predict the Haynesville Shale rig count would be at 70 rigs in 12 months. Platt’s wrote at that time, “Until some solid repeatable well data emerges, the Haynesville will remain more a diamond in the rough than diamond ring.” It appears to me the Haynesville shale no is longer a mere diamond in the rough.

The Haynesville Shale is the real thing. Today, there are 130 producing wells, 60 drilling, 149 waiting on completion and 156 permitted to drill in the natural gas formation primarily in northwest Louisiana. The Louisiana Conservation Office reports there are 888 adopted Haynesville Shale units.

Just how big is the Haynesville Shale? Estimates are 250 trillion cubic feet of natural gas and up.

The economic impact of the Haynesville Shale on Louisiana is of major significance.

To understand the potential magnitude, Louisiana Natural Resources Secretary Scott Angelle contracted economist Loren Scott to study the Haynesville Shale impact on the state economy in 2008.

Scott determined:

— The extraction activity of seven firms generated about $2.4 billion in new business sales in Louisiana.

— New business sales, in turn, created new household earnings for Louisiana residents. As a result of these activities, nearly $3.9 billion in household earnings was created in 2008. This estimate includes direct and indirect earnings and almost $3.2 billion in lease and royalty payments to private landowners.

n Including the direct employment of about 431 employees and contract workers reported by these seven firms, there was an increase of 32,742 jobs.

— Our conservative estimate is that, collectively, state and local tax revenue increased by at least $153.3 million due to extraction activities in the Haynesville Shale. In one parish, sales tax collections alone are up more than 300 percent in the first quarter of 2009.

At a difficult time for our state’s economy and our industry, the Haynesville Shale will be a major pillar that will help prop up the businesses and economy of Louisiana.

Don Briggs is president of the Louisiana Oil and Gas Association. Send e-mail to him at don@loga.la.

http://www.shreveporttimes.com/apps/pbcs.dll/article?AID=2009907280310

Chesapeake Continues Gas-Production Increase

By BEN CASSELMAN

Chesapeake Energy Corp. is continuing to increase its production of natural-gas, despite low prices and growing oversupplies.

The Oklahoma City company, the top U.S. independent gas producer, said Thursday that its production grew 5% in the second quarter compared to a year ago, well ahead of its own guidance and analysts’ expectations. Production grew 4% from the first quarter of the year, and proved reserves grew 5.7% from a year ago.

The increase signals that Chesapeake is apparently abandoning the strategy it adopted earlier this spring of turning off some of its wells due to low prices. Prices haven’t improved much since April, when the company said it was shutting down about 13% of its production, but the company has nonetheless turned those wells back on.

“It’s an about-face, there’s no doubt about it,” said Subash Chandra, an analyst with Jefferies & Co. in New York.

Chesapeake spokesman Jim Gipson said in an email that prices and pipeline capacity improved enough to justify turning back on its production.

Chesapeake warned, however, that the industry may be forced to shut off some wells later this year as storage facilities and pipelines fill up, leaving no room for more gas. Earlier on Thursday, the Energy Information Administration reported that the amount of gas in storage had risen 71 billion cubic feet in the past week to more than 3 trillion cubic feet, 19% above normal.

Storage levels are rising because U.S. companies are continuing to produce more natural gas even as the recession has driven down demand for the fuel, which heats more than half of American homes and generates roughly a quarter of the nation’s electricity. The glut of gas has driven the price down to under $4 per million British thermal units, from a high of more than $13 per million BTUs last year.

But in recent days, companies that have reported big production gains have seen their share prices rise, despite fears that increased supplies could keep prices low. Newfield Exploration Co., for example, saw its stock jump 11% Thursday after it reported unexpectedly large production growth.

“The market is responding to it,” Mr. Chandra said.

Chesapeake saw some of its biggest production gains in the Haynesville Shale, a massive natural-gas field in northern Louisiana and East Texas that the company discovered last year. Chesapeake’s production there grew 85% in the second quarter from the first quarter.

Recently discovered fields such as the Haynesville Shale have seen continued drilling activity in recent months, even as drilling has slowed in most other areas, because improved production techniques have made the newer wells profitable at low prices. Dan McSpirit, an analyst with BMO Capital Markets in Denver, said producers with assets in the Haynesville and similar fields have a big advantage over their competition.

“You either have assets that can survive in a chronically low price environment or you don’t,” Mr. McSpirit said.

http://online.wsj.com/article/SB124899172528895117.html

Gas Daily
Friday, July 31, 2009

Rigs moving out of Barnett Shale, into Haynesville

As producers continue ramping up production in the Haynesville
Shale of northern Louisiana, drilling rigs are being pulled into the play
from other large producing basins — most notably, the Barnett Shale of
North Texas.

Running counter to the national trend, the Haynesville has seen a
dramatic increase in drilling activity at a time when producers are laying
down rigs in reaction to a supply glut and deflated wellhead prices.
According to a July 27 article by Don Briggs, president of the
Louisiana Oil & Gas Association, the North Louisiana rig count grew by
about 12% in the previous week, to 85 from 76.

“The growth in the North Louisiana rig count is unprecedented in the US,”
Briggs wrote, adding that the count has increased by more than 20% year over
year. “That stands out more clearly when compared to the rig decline of 52% for
the United States, and even more so compared to Texas’ and Oklahoma’s decline
of 64% and 62% respectively,” he said.

“Today there are 130 producing Haynesville Shale wells, 60 drilling, 149 waiting
on completion, and 156 permitted to drill,” Briggs wrote.

As drilling activity has fallen off in other producing basins, the Haynesville
has become a magnet both for investment capital and drilling activity, attracting
rigs from those other areas, Richard Mason, publisher of Land Rig newsletter,
told Platts.

“Rigs, especially higher-spec rigs, are relocating to the Hayneville, typically out
of the Barnett,” Mason said.

“The biggest thing to have happened is [drilling in] the Barnett has gone
down. The Haynesville has benefitted from that as the rigs have relocated 200
miles east into Louisiana,” he said. “If you’re an operator, you’ve probably cut
back on what you’re doing in the Barnett and if you’ve got Haynesville holdings,
you’re moving your capital to the Haynesville. And the rigs will follow.”
In addition to attracting rigs from its neighboring state’s biggest shale play,
Louisiana’s Haynesville also is snaring rigs that until recently were operating in
even closer unconventional gas plays in Texas, such as the Bossier Sands and the
Cotton Valley formation.

“Some rigs that have been idled in East Texas have been redeployed — they
really didn’t have to go very far — into northern Louisiana,” Mason said. “I’m not
aware of any rigs coming out of the Rockies or farther markets to work in the
Haynesville. That’s not to say it hasn’t happened. But if it has, it’s been on an
incremental basis, one or two rigs.”

In addition, a number of the rigs operating in the Haynesville are newly built,
specially designed to drill to the deeper gas-bearing formations there. “Those rigs
that were added to the market … were fit-for-purpose rigs, configured for the
higher demands of drilling in what is one of the most difficult land drilling areas
in the US,” Mason explained.

“They need a higher-spec rig in the Haynesville. It’s a much deeper formation.
Often times you’re looking at a 1,500-horsepower rig with a million pounds of
hoist. That’s probably a little big for the Barnett, although there were some of
those rigs working there,” he said.

Reflecting the recent trend toward rapid gas development in the
Haynesville, Oklahoma-based Chesapeake Energy last week announced plans to
spend $2 billion annually over the next 20 years to develop its gas properties
in the North Louisiana region.

Chesapeake officials made the announcement last Friday at the opening of the
company’s new corporate office location in Shreveport in the northern portion of
the play. “The Haynesville Shale is likely to surpass the Barnett Shale by 2015 to
become the largest natural gas-producing field in America and one of the 10
largest fields in the world in time,” Chesapeake Chairman and CEO Aubrey
McClendon said in a statement.

Kevin McCotter, Chesapeake’s director of corporate development for
Louisiana, said the company is currently producing about 306,000 Mcf/d and
operating 29 rigs in the Haynesville.

“We’ve continued to add rigs, just as we had previously announced. In fact
we’re a little ahead of schedule. We had forecasted that we would end the year
with approximately 30 rigs and we would be operating approximately 35 rigs by
the middle of 2010,” he said. “With the fact that we’re at 29 rigs before the first
of August, we’re a little ahead of that forecast.”

Louisiana Governor Bobby Jindal, who attended the opening ceremonies for
Chesapeake’s Shreveport headquarters, noted in a statement that Chesapeake distributed
nearly $30 million in royalty payments within the state during 2008.
“With an estimated 6.5 billion cubic feet of recoverable natural gas per well
in Haynesville, Chesapeake is certain to remain in Louisiana for some time,”
Jindal said. — Jim Magill