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Haynesville Rig Count Down, But It's Still a Prolific Play

It's well documented by now that due to low natural gas prices a number of producers and oilfield service companies have been switching drilling efforts and asset buildup from the primarily dry gas Haynesville to "wetter" [that is, richer in crude oil and natural gas liquids (NGL)] plays such as the Eagle Ford and Marcellus. But quite a few in the industry see Haynesville as remaining a strong shale resource and eventually strengthening. It may take a few years, but many expect gas prices to eventually begin making up for ground lost to the soaring crude market.

There's no denying that Haynesville drilling experienced one of the biggest slides in rig counts over the last year while most other plays have seen substantive percentage increases (albeit on much smaller starting numbers in some instances). According to NGI's Shale Daily Unconventional Rig Count, for the week ending April 22, Haynesville/Bossier Sands activity was down to 138 rigs, or 28% fewer than the 192 a year earlier. Only Arkoma-Woodford had a bigger yearly percentage drop of 52%, and that was based on a decline from 29 to 14 rigs.

However, Raymond James & Associates analysts see one compensating factor in an "all-time high level" of uncompleted Haynesville wells awaiting a tie-in to pipelines, so they don't expect an immediate drop-off in incremental supply as the rig count drops (see Shale Daily, April 5).

There are complications, for instance, in a shortfall in available completion services. Cameron Horwitz, associate in oil and gas equity research at Houston-based Canaccord Genuity, sees the demand for drilling and completion equipment and midstream infrastructure gradually overwhelming the oilfield service companies (see Shale Daily, Oct. 22, 2010). Horwitz perceived both wet Eagle Ford and dry Haynesville as generating the most producer complaints about the lack of services availability. The Marcellus also has some issues in that area, he added.

It's not a mirage. Reporting a cut in Encana Corp. production guidance for 2010 (see Daily GPI, Oct. 21, 2010), CEO Randy Eresman said constraints on completion services, particularly in its Haynesville play, have hindered the addition of some production volumes that Encana had previously forecast for the last half of 2010. And Comstock Resources has cited the limited availability of high-pressure pumping services as a reason for "significant delays" in completing its Haynesville or Bossier Sands shale wells in North Louisiana (see Shale Daily, Oct. 21, 2010). As a result, and also due to relatively low prices of dry gas, Comstock said it was likely to focus more strongly on its liquids-rich Eagle Ford Shale drilling program in South Texas in 2011.

And more than a year ago Raymond James analysts perceived a growing bottleneck at the Perryville Hub in northeast Louisiana as a possible hindrance to Haynesville takeaway capacity starting this year (see Daily GPI, Dec. 1, 2009). They believed at the time that Perryville could handle the shale gas now, but beyond 2011 it could face a problem with too much gas flowing into versus out of the hub. Two proposed pipeline projects, Enbridge Inc.'s LaCrosse Pipeline (see Daily GPI, Nov. 16, 2009), and the Haynesville Extension, by Enterprise Products Partners LP and Duncan Energy Partners LP (see Daily GPI, Nov. 18, 2009), could alleviate some of the oversupply by moving Haynesville output toward the southeast instead of eastward to the hub, the analysts said.

Production Remains High

It's not as if the big drop in rig activity has depressed Haynesville production. Instead, the Energy Information Administration cited Bentek Energy data as showing that Haynesville is surpassing the Fort Worth Basin/Barnett Shale region of North Texas in natural gas output. The two plays currently are neck and neck in output, but all signs are that Barnett will soon bow to Haynesville in total shale gas production (see Shale Daily, March 22). Barnett is the granddaddy of shale resources, having been the top producer for about a decade, while Haynesville didn't begin a serious ramp-up until around the mid to late 2000s.

But Gene Powell, publisher of the Powell Shale Digest newsletter, said he spotted some legacy/non-Haynesville production in Bentek's analysis and remained a Barnett loyalist. "We know the Barnett Shale gas production will be surpassed by other shale formations in the future; we just would like it done from actual well production data reported to state agencies and not 'estimates,'" he wrote in his newsletter.

Devon Energy in Oklahoma City, the seventh largest Haynesville producer based on net acreage (see chart), still considers Haynesville a "very good asset" in its portfolio despite having shifted all of its activity there to more lucrative oily plays, such as Cana-Woodford in western Oklahoma, where it is running 23 rigs, and also Granite Wash in the Texas Panhandle and the Permian Basin, spokesman Chip Minty told NGI's Shale Daily. The shift occurred gradually, and at this point Devon is not engaged in any Haynesville drilling. Unlike some other companies, Devon has no problem with procuring midstream services, he said.

Basically, it will take a big jump in prices to rebound Haynesville rig activity and entice Devon to resume drilling there, Minty said. Over the long term of four to five years Devon is "very optimistic about gas prices," especially with soaring power generation demand, but in the interim through about 2013 it expects prices to remain relatively soft, he added.

Petrohawk Energy is one of the producers announcing a shift in focus from Haynesville to the oilier Eagle Ford Shale in South Texas, where it is the fourth largest acreage holder (see Shale Daily, Nov. 4, 2010). CEO Floyd C. Wilson said, "We project that Petrohawk will be the first large operator in the Haynesville Shale to meet its [held by production] leasehold capture goals, in mid-2011, and the first to have significant and meaningful flexibility to rebalance the program at that time. Despite weak gas prices, our lease-capture drilling activity in the Haynesville Shale is generating significant value by adding low-cost proved reserves and setting the stage for decades of low-risk development activity."

In January EXCO Resources said Haynesville represented most of its 2010 production growth to a total of 112 Bcfe (see Shale Daily, Jan. 27). "The increased production highlights the success of our Haynesville Shale drilling program, where we produced 19 Bcf (206 MMcf/d), representing 59% of our total production during the fourth quarter 2010 compared with 4.3 Bcf (47 MMcf/d), or 23% of our total production, in the pro forma fourth quarter 2009," EXCO said. Noting that East Texas/North Louisiana is its largest division in terms of production and reserves, the company added, "Currently, our emphasis is on exploitation of our acreage in the Haynesville Shale play, where we hold approximately 76,000 net acres."

EXCO COO Hal Hickey said the company expects its Haynesville drilling level to remain flat through the rest of 2011 unless gas prices go lower, in which case it likely would cut back on rig contracting. EXCO has no problem with midstream services, he said, because it has equity interests in some of the service providers. He agreed that only a big price increase could cause the Haynesville rig count to rebound.

Teri Viswanath, until recently an analyst with Credit Suisse, is another who expects Haynesville production to remain fairly high because it still has overall strong output in comparison to conventional gas fields (see Shale Daily, Nov. 15, 2010). The Barnett Shale in North Texas may be getting close to peaking in production because it was one of the first shale plays to attract producer interest, Viswanath said, but she thinks Haynesville activity will keep rising because of rising takeaway capacity.

CenterPoint in for Long Term

Thanks primarily to long-term contracts with two big producers, CenterPoint Energy is among those who perceive no letup in Haynesville operations, said Greg Harper, group president of midstream pipelines and field services. The company expects this to continue over the long term, he said, adding, "We like our Shell and Encana contracts" because "besides volume commitments, they also have acreage dedications covering our service area."

CenterPoint attached 183 wells to its gathering lines in 2010, which it considered a pretty active year, Harper said, and other wells were waiting to be attached during that period. The company doesn't know yet if such business will be as strong this year, but when asked about some producers talking about a shortfall in Haynesville availability of gathering tie-ins and other midstream services, he told NGI's Shale Daily that CenterPoint is "keeping up" with its tie-in requests.

And regarding Haynesville's big drop in rig count, Harper said one mitigating factor is the development of drilling multiple (four to eight) wells from one pad, so "one rig doesn't necessarily equal one rig any more." He suggested that a "well count" is a better indicator of drilling levels than the rig count.

CenterPoint doesn't know when at this point, but it will make further additions to its Haynesville midstream infrastructure, he said. It expects to take gathering volumes to their maximums over the life of its contracts.

Last May CenterPoint Energy Field Services announced new 15-year contracts with a Shell subsidiary and Encana Corp. that will grow capacity of its expanding Haynesville gathering and treating network to 1.5 Bcf/d and possibly eventually to 2.8 Bcf/d (see Daily GPI, May 4, 2010). Under the agreements CenterPoint acquired existing facilities from the two producers and expanded them to gather and treat up to 580 MMcf/d. The system in portions of DeSoto, Red River Sabine and Natchitoches parishes is known as the Olympia Gathering System.

And last month CEO David McClanahan said in an earnings conference call the first 700 MMcf/d phase of the Magnolia Gathering System was complete except for well connects, and that construction of the Olympia Gathering System and a 200 MMcf/d expansion of Magnolia were on schedule and on budget (see Daily GPI, March 7).

Enterprise Products Partners is another service company that sees Haynesville business remaining vibrant. Chris Skoog, senior vice president of Natural Gas Services and Marketing, said according to statistics that Enterprise has compiled, it found that the play's rig count has held fairly steady in the 140 area since December. The three parishes in which the company is mainly focused (Red River, DeSoto and Sabine) account for roughly 70% of Haynesville drilling, he said, "so we're in the heart" of primary Haynesville activity. It's off its peak, but Enterprise perceives no significant dropoff so far in 2011, he added.

400 Wells to be Completed

Also, there is a backlog of about 400 wells still awaiting completion, so the upstream business should remain brisk, Skoog said. And in the southern portion of the play, a significant number of leases still need to be drilled to satisfy held by production requirements, he said.

Enterprise and Duncan Energy Partners are in the process of extending their existing Acadian Gas System by 270 miles into the Haynesville basin to allow moving up to 2.1 Bcf/d of shale gas to planned interconnects with interstate pipelines in central and southern Louisiana and provide access to more than 150 end-use markets along the Mississippi River corridor between Baton Rouge and New Orleans. The Haynesville Extension will also give shippers access to Enterprise's Napoleonville, LA, salt dome storage cavern and the ability to make physical deliveries into the Henry Hub and to benefit from more favorable pricing points from there, the company said. The extension is expected to be completed in September.

In May 2010 Enterprise purchased the State Line and Fairplay gathering and treating systems in northwest Louisiana and East Texas from subsidiaries of M2 Midstream, adding to Enterprise's midstream services available to production from the Haynesville/Bossier shales and the Cotton Valley and Taylor Sands formations.

Regency Energy Partners owns a 49.99% interest in the RIGS Haynesville Joint Venture, which owns the Regency Intrastate Gas System, a 450-mile intrastate pipeline in North Louisiana serving Haynesville producers. Other assets in the area include the Haynesville Expansion Project and the Red River Lateral. Regency also has acquired Zephyr Gas Services, a Houston-based field services company based in Houston that has gathering, processing and compression segments in high-growth areas, including both the Haynesville and Eagle Ford shales (see Daily GPI, Aug. 10, 2010).

Regency's 40-mile Regency Liquids Pipeline in North Louisiana moves up to 7,500 b/d of NGLs from the company's Dubach plant in Lincoln Parish and Lisbon plant in Claiborne Parish to the Black Lake Pipeline in Webster Parish for further delivery downstream to the giant fractionation complex in Mont Belvieu, TX.

While the company continues operations in the Eagle Ford and Permian Basin, "we believe the Haynesville Shale will continue to have long-term potential as one of the premier dry gas plays in the United States," according to Shannon Ming, Regency senior vice president of finance and investor relations.

Chesapeake Energy CEO Aubrey McClendon said in February (see Daily GPI, Feb. 24), "[W]e believe drilling for natural gas will continue to decline for the remainder of this year and into 2012 as acreage becomes held by production, or HBP, especially in [the] Haynesville [shale]. The marginal cost of natural gas in the United States has been largely ignored as the industry races to hold acreage...as part of the land grab of 2008...As HBP ends, the land grab should stop."

But Charles Stanley, CEO of QEP Resources, noted last month the big gain in drilling efficiency his company had achieved in Haynesville (see Daily GPI, March 11). "When we started in [the Haynesville Shale] several years ago it took us over 66 days to drill a well from the surface down to about 17,400 feet. During 2010 we averaged a little under 40 days to drill the same well to the same total depth." Not only did this benefit well construction but also completion efficiency, he said, "and as a result our completed well costs have come down from over $10 million in 2009 to $8.5 million in the latter half of 2010."

As of last Thursday Haynesville-North Louisiana and Haynesville-East Texas prices averaged $4.14 and $4.21, respectively, according to NGI's Shale Price Indices (SPI). They were down 4 cents and a penny from the previous day but respectively a dime and 12 cents higher than week-earlier levels. Haynesville-East Texas pricing was a close match for that in the Barnett ($4.22) and Eagle Ford ($4.21) but trailed Fayetteville ($4.24) and Marcellus ($4.44-49). Haynesville-North Louisiana numbers topped those in the Midcontinent's two Woodford plays along with Granite Wash and all three Rockies shales, which had slipped below $4.

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