I remember very clearly early in 2008 when Chesapeake Energy unveiled its massive new acreage position in a previously unknown shale play called the Haynesville. Natural gas was in the $10 range and it was a great moment for Chesapeake shareholders.
Of course we all know what happened next. A great recessions destroying demand and the huge new supply of natural gas from the Haynesville and other shale plays flooding the market combining to crush natural gas prices.
Yesterday I saw a note that could signal some light at the end of the tunnel. Credit Suisse reported the following on falling rig counts working on the Haynesville:
“Haynesville Rig Count Falling Fast
1) Haynesville Rig Count Continues to Slide. The Haynesville rig count continues to decline and is now down 38 rigs or 18% from the end of April to a current 173 rigs. Importantly, drilling in the Haynesville ‘core’ (Bossier, De Soto, Red River, Bienville and Caddo counties in Louisiana) is declining rapidly as well, down 27 rigs or 22% from the end of April to 98 rigs.
Regionally, we find the Louisiana Haynesville rig count down 19 rigs or 14% to 118 rigs while the East Texas Haynesville rig count is now at 55, down 19 rigs or 26% over the same time period. Rigs are declining due to low gas prices and continued ‘lease capture’. The fall in the Haynesville rig count and other ‘dry gas’ areas are major reasons for our more bullish $5.25 per MMBtu 2011 price outlook (see our recently published notes “Natural Gas: 11 Logically Bullish Gas Market Factors” from 10/27/2010 and “Natural Gas: Another Look at 11 Logically Bullish Gas Market Factors” from 11/10/2010).
â– The Haynesville May Be the Biggest U.S. Gas Field. The growth in the Haynesville over the past two and a half years has been truly remarkable and it is reported that production has risen from nil in early 2008 to ~4.5 Bcf/d (it took the Barnett nearly 10 years to grow to ~5.0 Bcf/d). Haynesville growth has been the primary reason for the depressed state of gas market over the past 12-18 months in our view as it has represented all of the growth in the lower 48 market (up 4.4 Bcf/d from end of 1Q08) and has offset some conventional declines. The declines thus far in Haynesville drilling (and we expect more are on the way) should help to slow growth and begin to reset the gas market.
â– Haynesville Production Declines Will Take Time. To be sure, we do not expect Haynesville production to decline very much right away due to the fall in drilling activity as a result of large well completion backlogs and the implementation of restricted rate programs (for recovery rate optimization). Restricted rate should partially offset some of the rig count declines by smoothing the play's base decline rate. Some operators have noted flat production for 6 months or more when running wells at ~8 MMcf/d vs. the 15 to 20 MMcf/d initial capability. However, we believe we will begin to see some production declines in the second half of 2011.
There has been a lot of drilling done by CHK and the other Haynesville players in order to HBP their acreage. This is slowing and will undoubtedly help reduce supply.
The last time I heard Tom Ward of Sandridge Energy speak he also specifically pointed to the Haynesville as the reason for depressed natural gas prices. Interestingly though, as of last week he is not any more optimistic on natural gas prices than he was before despite the dropping rig count. Here are some of his rather honest observations from a presentation in Woods county at the end of October as summarized by Lynn L Martin.
On the economics of current natural gas prices:
“Nobody is making any money with natural gas at $3 or $4”
On starting up Sandridge Energy:
“Had somebody told me in 2006 that we were going to have $4 gas or less in 2010 I would not have made the investment to create Sandridge”
On the Sandridge Energy balance sheet and the company transformation to an oil producer:
“We had a decent amount of debt when natural gas was priced at $8.00, but it was too much debt if natural gas was going to be priced at $4.00. Our young company, which went public in 2007, survived because we had hedged our gas through 2010, and that gave us some wiggle-room through a troublesome period.
On Why Natural gas is so weak:
“He does not believe natural gas prices are going to move upward any time soon because of the over-drilling and over-production in the Haynesville-Shale area. There are 126 rigs drilling for natural gas in Louisiana …..until we see a rollover of the rigs in the Haynesville, we will not see a change in natural gas prices”
On How Horizontal Drilling is changing oil production:
“I did not envision back in 2006 when Sandridge was formed how the whole world was going to change in how we drilled for oil and gas”
“Horizontal drilling permits the re-drilling of land where vertical oil wells have been depleted or are of marginal production, so Sandridge is eager to drill in old field areas that were developed decades ago. In such areas you have confidence that you have a reservoir of oil available, there are thousands of log books from vertical wells accumulated over decades that you can look at to see where production has occurred vertically. Also you are looking at limestone rock that has a good permeability. The horizontal technique looks like a hockey stick where the driller goes down vertically and guides the drill bit to a horizontal track where unrecovered oil resides. In these old areas we are making a well that will produce five to eight times better than a vertical well, but you don’t have to spend five to eight times as much money drilling the horizontal well.”
If you notice in Ward’s comments he was looking for a rollover in the rig count in the Haynesville before there is any hope for an improvement in natural gas. According to the Credit Suisse not above on rig counts we may be close to that point.
One play that is benefitting greatly from the horizontal drilling revolution is in Western Canada where there is a huge amount of unrecovered oil in the Alberta Cardium. For a company that has locked down a large position in this play but has yet to benefit from it in either its production or reserve numbers consider Canadian oil producer Petrobakken which I have written about here: http://www.gurufocus.com/news.php?id=114090
Of course we all know what happened next. A great recessions destroying demand and the huge new supply of natural gas from the Haynesville and other shale plays flooding the market combining to crush natural gas prices.
Yesterday I saw a note that could signal some light at the end of the tunnel. Credit Suisse reported the following on falling rig counts working on the Haynesville:
“Haynesville Rig Count Falling Fast
1) Haynesville Rig Count Continues to Slide. The Haynesville rig count continues to decline and is now down 38 rigs or 18% from the end of April to a current 173 rigs. Importantly, drilling in the Haynesville ‘core’ (Bossier, De Soto, Red River, Bienville and Caddo counties in Louisiana) is declining rapidly as well, down 27 rigs or 22% from the end of April to 98 rigs.
Regionally, we find the Louisiana Haynesville rig count down 19 rigs or 14% to 118 rigs while the East Texas Haynesville rig count is now at 55, down 19 rigs or 26% over the same time period. Rigs are declining due to low gas prices and continued ‘lease capture’. The fall in the Haynesville rig count and other ‘dry gas’ areas are major reasons for our more bullish $5.25 per MMBtu 2011 price outlook (see our recently published notes “Natural Gas: 11 Logically Bullish Gas Market Factors” from 10/27/2010 and “Natural Gas: Another Look at 11 Logically Bullish Gas Market Factors” from 11/10/2010).
â– The Haynesville May Be the Biggest U.S. Gas Field. The growth in the Haynesville over the past two and a half years has been truly remarkable and it is reported that production has risen from nil in early 2008 to ~4.5 Bcf/d (it took the Barnett nearly 10 years to grow to ~5.0 Bcf/d). Haynesville growth has been the primary reason for the depressed state of gas market over the past 12-18 months in our view as it has represented all of the growth in the lower 48 market (up 4.4 Bcf/d from end of 1Q08) and has offset some conventional declines. The declines thus far in Haynesville drilling (and we expect more are on the way) should help to slow growth and begin to reset the gas market.
â– Haynesville Production Declines Will Take Time. To be sure, we do not expect Haynesville production to decline very much right away due to the fall in drilling activity as a result of large well completion backlogs and the implementation of restricted rate programs (for recovery rate optimization). Restricted rate should partially offset some of the rig count declines by smoothing the play's base decline rate. Some operators have noted flat production for 6 months or more when running wells at ~8 MMcf/d vs. the 15 to 20 MMcf/d initial capability. However, we believe we will begin to see some production declines in the second half of 2011.
There has been a lot of drilling done by CHK and the other Haynesville players in order to HBP their acreage. This is slowing and will undoubtedly help reduce supply.
The last time I heard Tom Ward of Sandridge Energy speak he also specifically pointed to the Haynesville as the reason for depressed natural gas prices. Interestingly though, as of last week he is not any more optimistic on natural gas prices than he was before despite the dropping rig count. Here are some of his rather honest observations from a presentation in Woods county at the end of October as summarized by Lynn L Martin.
On the economics of current natural gas prices:
“Nobody is making any money with natural gas at $3 or $4”
On starting up Sandridge Energy:
“Had somebody told me in 2006 that we were going to have $4 gas or less in 2010 I would not have made the investment to create Sandridge”
On the Sandridge Energy balance sheet and the company transformation to an oil producer:
“We had a decent amount of debt when natural gas was priced at $8.00, but it was too much debt if natural gas was going to be priced at $4.00. Our young company, which went public in 2007, survived because we had hedged our gas through 2010, and that gave us some wiggle-room through a troublesome period.
On Why Natural gas is so weak:
“He does not believe natural gas prices are going to move upward any time soon because of the over-drilling and over-production in the Haynesville-Shale area. There are 126 rigs drilling for natural gas in Louisiana …..until we see a rollover of the rigs in the Haynesville, we will not see a change in natural gas prices”
On How Horizontal Drilling is changing oil production:
“I did not envision back in 2006 when Sandridge was formed how the whole world was going to change in how we drilled for oil and gas”
“Horizontal drilling permits the re-drilling of land where vertical oil wells have been depleted or are of marginal production, so Sandridge is eager to drill in old field areas that were developed decades ago. In such areas you have confidence that you have a reservoir of oil available, there are thousands of log books from vertical wells accumulated over decades that you can look at to see where production has occurred vertically. Also you are looking at limestone rock that has a good permeability. The horizontal technique looks like a hockey stick where the driller goes down vertically and guides the drill bit to a horizontal track where unrecovered oil resides. In these old areas we are making a well that will produce five to eight times better than a vertical well, but you don’t have to spend five to eight times as much money drilling the horizontal well.”
If you notice in Ward’s comments he was looking for a rollover in the rig count in the Haynesville before there is any hope for an improvement in natural gas. According to the Credit Suisse not above on rig counts we may be close to that point.
One play that is benefitting greatly from the horizontal drilling revolution is in Western Canada where there is a huge amount of unrecovered oil in the Alberta Cardium. For a company that has locked down a large position in this play but has yet to benefit from it in either its production or reserve numbers consider Canadian oil producer Petrobakken which I have written about here: http://www.gurufocus.com/news.php?id=114090
