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Devon's Haynesville Gas in Place Estimated at 73 Tcf

Devon Energy Corp., the biggest natural gas producer in the Barnett Shale, estimates that the natural gas in place from its half a million net acres of leasehold in the Haynesville Shale is around 73 Tcf. The company, which wants to add up to 100,000 more acres in the Haynesville play, also has taken a bet on the emerging Horn River Basin in British Columbia, where it now has around 100,000 net acres.

More drilling and testing are needed to gauge the potential of Devon's 483,000 net Haynesville acres in East Texas and northwestern Louisiana, exploration chief Steve Hadden told energy analysts during a conference call last week. Hadden was hesitant about providing detailed information about initial production (IP) flow rates or the site of Devon's well tests. However, positive results from early drilling indicate a mega load of gas could be readied for exploration and development, he said.

"You haven't heard much about Devon's Haynesville leasehold, which became a hot topic a few months ago," Hadden said, referring to the claim by Chesapeake Energy Corp. -- and others -- that the shale could be a game changer for the industry. Chesapeake has estimated that its half a million acres in the play hold around 20 Tcfe potential (see NGI, Aug. 4).

"Instead Devon has concentrated on testing the play, looking at the cores, and like our work in the Barnett, understanding the unconventional reservoirs," said Hadden. "We've drilled thousands of tight gas wells, more than 3,000 in the Barnett, and we're not ready to share everything we've learned." Devon also wants to acquire more acreage.

"There's more to come," Hayden told analysts. "East Texas and North Louisiana are a powerful part of Devon's strategy...The early estimates...for the net acreage are 73 Tcf in place. But it's obviously very early, and we want to fully test it before we...characterize our findings."

Devon plans to drill its first horizontal well in the Haynesville Shale before the end of September. "We have four vertical wells now on production, and in the second half of 2008 we'll continue to evaluate the acreage and accelerate our development," said Hadden.

The "majority" of Devon's Haynesville leasehold is held by production or fee acreage, he noted. "We're not feeling under too much pressure from the clock in terms of lease terms. We're pushing hard to keep leasing, and we have a goal to add as much as another 100,000 acres. And you've got to remember that of the 483,000 acres, that's only about 64% of Devon's total ares in East Texas and North Louisiana."

With a rush of gas production likely within a few years, Devon's management team was asked during the conference call about domestic pipeline takeaway capacity -- and whether more should be readied. One new project was unveiled Tuesday by DCP Midstream Partners and M2 Midstream LLC (see related story).

"As it relates to the Haynesville, this is an emerging play, and we have high hopes for Haynesville, but it's still emerging," said Darryl G. Smette, senior vice president of marketing and midstream. "There are a lot of unknowns there yet. There is 8 Bcf of takeaway capacity on the mainline, with 7 Bcf subscribed and 1 Bcf of available unsubscribed. In talking with the pipelines, the current numbers suggest 1.6 Bcf/d [from Haynesville] over the next two years, maybe 2.5 [Bcf/d] within 48 months.

"If that occurs...if it's successful, then we'll have to look at greenfield projects out of that area. Those would take 24-48 months to complete. We're actively looking at those projects now...There's a lot to happen in the Haynesville yet, but we feel we have it covered."

Devon isn't sure how quickly the Haynesville Shale will develop, said Smette. "It's very early in the play. Other parties have seen or suggest it will be a very robust area, but there's still a lot of work to do. Our people are constantly looking at this project, but we have a lot of work to do as an industry. Assuming the work is successful, we'll probably need greenfield projects two to three years down the road."

Growth in the Barnett Shale, where Devon is producing around 1.1 Bcf/d, will continue to rise for the foreseeable future, said Hadden. He dismissed recent comments that suggested Barnett's gas output would peak in the next year and plateau in the next two to three years (see NGI, Aug. 4a; Aug. 4b).

"Recent comments on the fieldwide production might be early," Hadden said. "This is not Devon's view. We believe our production will nearly double to as much as 2.3 Bcf/d. We have 7,500 drilling locations and more than 10 years of drilling inventory in the Barnett. In select areas of the play, we've had long horizontals with outstanding results. Two wells in Johnson County [TX] have had IP rates in excess of 5 Bcf/d."

Devon's exit rate from the Barnett Shale in 2Q2008 reached nearly 1.1 Bcfe/d, making the company far and away the top Barnett producer. Devon brought on line 189 new wells in the play during the period, and it plans to drill more than 650 wells total by the end of 2008.

The Barnett's gas output rose 7% sequentially from 1Q2008, and gas production was 34% higher than in 2Q2007, Hadden noted. "We expect to have net production of 1.2 Bcfe/d by year-end. Our net production will continue to grow for the foreseeable future."

Devon also ramped up production from three "high-rate" wells in the Groesbeck area of East Texas during the quarter -- IP rates averaged 16.2 MMcf/d from each well. Two long-lateral horizontal wells also were drilled in the Woodford Shale in Coal County, OK; IP rates from the two wells were 7.1 MMcf/d and 6.7 MMcf/d.

Combined production from all of Devon's continuing oil and gas operations rose 4% in 2Q2008. Production totaled 643,000 boe/d, up from 618,000 boe/d in 2Q2007. Devon drilled 494 wells in the quarter, with an overall success rate of 98%. Total gas output, net of royalties and excluding discontinued operations, reached 229.9 Bcf, up from 212.3 Bcf in 2Q2007. Total U.S. gas production jumped to 176.5 Bcf, up from 154.8 Bcf in the prior-year period. U.S. onshore gas output led the way in the quarter, rising to 162.3 Bcf from 135.9 Bcf in 2Q2007.

Production in 2008 now is estimated to be 240-244 million boe, which is 2 million boe higher than the company forecast in May. Most of the production growth will come from U.S. onshore areas, said Hadden. He noted that the Haynesville Shale's estimated reserves are not included in this year's guidance, nor are the possible production gains from the Horn River Basin.

The Oklahoma City-based producer's quarterly profit jumped 44% on higher production and historically high commodity prices. Devon's earnings in 2Q2008 increased to $1.3 billion ($2.88/share) from $904 million ($2.00) in the year-ago period. Adjusted earnings rose to $3.39/share. Sales of natural gas, oil and natural gas liquids from continuing operations jumped 65% to $4 billion; total revenue rose 21% to $3.55 billion.

CEO G. Larry Nichols did not participate in the conference call because of the death of his father and Devon's cofounder, John W. Nichols, 93, who died earlier this month. John Nichols began his career as an auditor for Oklahoma City-based oil and gas producers.

As a certified public accountant, John Nichols registered the world's first public oil and gas drilling fund with the Securities and Exchange Commission. His investment fund raised more than $1.4 million within a few months, and using the seed money, he and F.G. "Blackie" Blackwood in 1941 established an oil company to explore the northeast corner of New Mexico's San Juan Basin.

Nichols and his son Larry founded Devon in 1971. Their first acquisition was five natural gas wells southeast of Dallas. Devon went public in 1988 and Nichols retired in 1999. Devon today is considered the largest independent oil and natural gas producer in the United States, with operations extending through Canada and overseas. It also is Oklahoma's largest publicly traded company. At the end of 2007 Devon had proven reserves of 2.5 billion boe and an enterprise value of $59 billion.

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