BY VICKIE WELBORN

FEBRUARY 21, 2010

Original Article

Two years ago this month, word about a natural gas reservoir to rival all others in the nation began leaking beyond whispers of the competitive oil and gas industry and into coffee shops and restaurants where average citizens were puzzled about the sudden interest in their mineral rights.

About another month passed before Chesapeake Energy Corp. went public with its claim of discovering the Haynesville Shale, pointing to exploratory drilling that started in northwest Louisiana in 2007.

The past two years have been a whirlwind of the good and bad: unexpected riches, disappointment-driven lawsuits, deteriorating roadways, well blowouts that forced folks from their homes, rig or well site accidents that have claimed at least three lives and maimed others, dozens of new businesses and expansion of existing ones, soaring sales tax receipts and water supply worries. The list goes on.

But the Haynesville Shale is settling in as a part of life in this corner of the state. New homes are being built. New cars sit in driveways. Area governing bodies enforce and tweak road laws aimed at heavy truck traffic and noise complaints. Those same governments suddenly have the money to fund new projects, build roads, construct an animal shelter, give raises and update equipment. Surface and groundwater concerns and solutions top agendas at numerous local and regional meetings.

Still, a smidgen of uncertainty remains as far as the shale’s long-term impact. Natural gas prices that escalated in the summer of 2008 to more than $13 per million British thermal units, took a nosedive by the fall and with it a slice of the companies’ profits. On Friday, the price was $5.06 mmBtu.

Most companies appear to have weathered the price variation.

“We employ risk management measures to manage the price we receive for our natural gas,” said Deborah K. West, EnCana Corp. communications director. “For example, we currently have about 60 percent of our 2010 natural gas sales hedged at a price of above $6 per thousand cubic feet. By managing the risk we are able to bring stability to our capital investment program over the long term, and are not as subject to the short-term swings in gas prices.”

Nationwide, new policies supported by the Obama administration threaten a backward step, local industry officials say. At stake are energy tax incentives that some, such as Louisiana Department of Natural Resources Secretary Scott Angelle, believe would push higher energy prices and a greater dependence — beyond the 60 percent already imported — upon foreign sources.

And even the potential effect of hydraulic fracturing — a decades-old method by which natural gas is released from the shale reserves here and in other parts of the country — on the environment has moved into congressional inquiries.

No one in the industry is ignoring the state and national issues, but closer to home, life continues. And the industry mantra of last year, “The Haynesville Shale is just getting started,” is proving to be a reality.

Natural gas drilling is moving at a rapid pace, and hundreds of new wells are expected to be completed by year’s end. Pipelines filled with natural gas, fresh water and salt water crisscross the region.

As the largest player in the shale exploration and development, Chesapeake’s commitment is further solidified with the start of construction of its Mansfield field office. Land clearing is under way on 52 acres sitting at the intersection of Interstate 49 and U.S. Highway 84.

Temporary modular buildings will be moved on site once it is cleared. Construction of permanent facilities will start shortly afterward, with a projected completion date of mid-2011.

Chesapeake’s Mansfield office will support operational functions in construction, drilling, well completions and productions. Other Chesapeake subsidiaries will also use the new facility to increase operational efficiencies in the multi-parish and multi-county area of the Haynesville play.

“We are very excited to make this significant investment in Louisiana and DeSoto Parish. It clearly demonstrates Chesapeake’s commitment to a very long-term presence in the Haynesville Shale,” said Kevin McCotter, senior director of corporate development.

Drilling Ramping Up

The state’s energy exploration, as measured by operating drilling rigs, is up over the same time last year by a double-digit percentage, according to the state’s natural resources department. The same can’t be said for other states, with the only exception in Pennsylvania, where development of the Marcellus Shale natural gas formation has brought in more rigs, but the total count is still less than half that of Louisiana.

“Louisiana has a long and distinguished history of fueling America, and the fact that we are outperforming every major energy producing state in the nation at this time through increasing drilling rig activity is a sign that the best may be yet to come,” Angelle said in comprehensive review of the state’s energy picture provided to The Times. “This nation is looking to clean-burning natural gas to be a more critical part of our energy supply, and 95 percent of our drilling in Louisiana right now is for natural gas.”

The number of drilling rigs in the United States declined sharply in late 2008 but is inching up. There are still 11 percent fewer rigs operating in the United States compared to last year.

Conversely, Louisiana’s rig count is up from 170 to 197, a 14 percent increase. As of the last count, the rigs running in Louisiana alone made up more than 15 percent of the nation’s drilling activity.

And 10 percent of that is in six north Louisiana parishes: Bienville, Bossier, Caddo, DeSoto, Red River and Sabine. North Louisiana boasts a 40-year-plus high for running rigs, reaching 136 on Feb. 12, according to natural resources officials. DeSoto has the most with 64, and Red River is second with 27.

Rig numbers are expected to grow even more by year’s end. Even smaller companies such as Exco Resources, will boost its count from 11 to 14 rigs.

EnCana has 23 rigs in Louisiana — 16 working Red River Parish, five in DeSoto Parish and two in Sabine Parish — and one in San Augustine, Texas.

“As you might know, EnCana Corporation split at the end of 2009 and our new company is a pure play natural gas company. The Haynesville Shale is a big part of EnCana now and will continue to be an important focus for our company in the future,” West said in an e-mail.

Petrohawk is operating 17 horizontal rigs in northwest Louisiana and East Texas and expects to drill between 110 and 120 operated wells this year.

“In the Haynesville Shale, the large amount of data being gathered is driving long-term planning of this resource’s development that is expected to underpin impressive and sustainable production growth for Petrohawk for years to come,” states the company’s Feb. 1 operations update. “Compared to one year ago, Petrohawk’s view of the overall prospective area of the Haynesville Shale is little changed, with the exception of a larger prospective area in East Texas primarily in Shelby and Nacogdoches counties and a northeast expansion into Webster Parish. Well performance continues to be as expected, with attention being turned to improving performance through better production practices with the goal of adding incremental reserves and enhancing value.”

As for Chesapeake’s rig count, the company is drilling with 38 rigs in the Haynesville Shale and anticipates operating an average of 41 rigs this year to drill approximately 200 net wells.

“We are currently producing approximately 375 million cubic feet equivalent (mmcfe) net per day (550 mmcfe gross operated) and anticipate exceeding approximately 640 mmcfe net per day (970 mmcfe gross operated) by year-end 2010 and approximately 810 mmcfe net per day (1,230 mmcfe gross operated) by year-end 2011,” McCotter said.

Chesapeake and its 20 percent joint venture partner, Plains Exploration & Production Co., have completed 150 horizontal wells.

“We continue to experience outstanding results as evidenced by three notable recent wells completed by Chesapeake in the Haynesville,” McCotter said.

They are:

n The Sloan in DeSoto Parish achieved a peak 24-hour rate of 23.4 mmcfe per day.

n The Johnson in DeSoto Parish achieved a peak 24-hour rate of 18.5 mmcfe per day.

n The Caspiana in Caddo Parish achieved a peak 24-hour rate of 18.4 mmcfe per day.

Lease Prices Go Up

The rising rig counts, especially in north Louisiana, have come with a healthy year for mineral leases in the state — with leases in the Haynesville Shale climbing slowly and reaching an average of $9,200 at this month’s lease sale. In Mansfield, leases went for $12,427 an acre. In December, acreage outside of Mansfield commanded $18,537 an acre.

Greg Albrecht, state Legislature’s chief economist, in a December report, informed the state’s Revenue Estimating Conference, which certifies budget and revenue forecasts throughout the year, that “mineral revenue has been the primary bright spot in Fiscal Year 2010,” according to natural resources officials.

At that December meeting, the Revenue Estimating Conference accepted changes to state budget projections that included an oil price increase of more than $16 a barrel to $69.32 and a severance tax and royalty increase for mineral revenue of $158 million.

The leasing and activity have meant millions of new dollars in property taxes to local governments in the Haynesville Shale area, and local businesses have reaped the benefit of increased activity from the oil and natural gas industry.

The city of Mansfield, the DeSoto School Board, Caddo Parish Commission and DeSoto Police Jury have earned extra revenue in recent months through mineral rights leasing. Royalties are rolling in at least for the Caddo Commission and DeSoto Police Jury.

Red River Parish Assessor Becky Craig said she has never seen such an “exciting and dynamic time” in tax assessment in her parish in more than 20 years in office, with Haynesville Shale activity leading to an increase in tax base of more than 50 percent.

“We do appreciate the efforts of DNR in its unprecedented cooperation with us in getting us real-time information during a time of phenomenal change,” Craig said in a prepared statement.

David Jones, Red River Parish school system Business manager, said in a news release the school system realized $1.5 million in new property tax revenue attributable to the Haynesville Shale. The increased funding allowed the school system to lower property tax rates, catch up on a backlog of deferred maintenance, pay for the changing of school roofs and still provide a one-time pay supplement for parish teachers.

Said Jones: “While this is more of an increase than we anticipated, this is a good problem to have.”

The growth of the Haynesville Shale is already providing many job opportunities for residents of Louisiana. EnCana is partnering with Bossier Parish Community College to start two new programs to help train the future workforce.

This fall, Bossier Parish Community College will start an Oil & Gas Technology Certificate Program as well as a two-year associate degree program focused on training future lease operators.

“In addition, we are working with contractors in assessing their training needs and encouraging them to hire locally,” said EnCana’s West.

A robust energy exploration industry means demand not only for jobs on drilling rigs and with exploration service companies, but for the people who help provide food, fuel, homes, clothing and services to those who work in the industry. “We at DNR and in this state understand that oil and natural gas companies do have a choice about where they will do their business. We want to make sure that we can create an environment that allows industry to do business responsibly, without sacrificing our stewardship responsibilities,” Angelle said.

The Next Frontier

Exco Resources in its annual financial report referred to the Bossier Shale as “the next frontier.”

The Bossier Shale, also called the Lower Bossier Shale, sits atop the Haynesville Shale but doesn’t follow its boundaries. It runs more lateral, stretching from the east in Bienville Parish and westward to east Texas and then dipping from Mansfield and parts south and taking in north Sabine and Natchitoches parishes.

Exploration is in the early stages; however, some companies are factoring the Bossier Shale into their business plan. Petrohawk expects to spud its first Bossier horizontal well late in the first quarter of this year. Data that includes digital well logs and core analysis helped the company generate “an interpretation of the aerial extent of Lower Bossier Shale net gas filled porosity that the company believes should be sufficiently thick to support commercial production from the reservoir,” the February report states.

More tests are ongoing through a joint venture in east Texas. Petrohawk “anticipates that these activities, along with an industry-wide increase in Lower Bossier Shale drilling, should provide support for expansion of the Lower Bossier Shale drilling play.”