A Brash Forecast on When Haynesville Gas Production Rolls Over

It is a shame Bill Murray pursued acting as a career rather than oil and gas. Otherwise, the movie Groundhog Day might have displayed a twist to its love story plot—one that included the recurring nightmare of collapsing natural gas prices as warm winters, too much supply, and weak demand conspire to create sub-$3 gas.

But this latest Déjà vu all over again in natural gas obscures an oncoming milestone that will unfold over the next six to nine months in the Haynesville shale. Haynesville gas production will peak and recede sometime between mid-year and Labor Day. That rollover could come sooner if weak natural gas prices persist and operators aggressively shut in production.

The brash outlook on an impeding rollover in Haynesville production originates out of several discernible trends in the play. Drilling levels, for example, topped out about mid-year 2010 while completions peaked in the latter half of 2011.

Graph shows average monthly rig count, total Haynesville completions for wells actively producing natural gas, and production (X 100 MMcfed). Rig count peaked in mid-year 2010, completions peaked roughly one year later. Because of precipitous decline rates, production should halt its upward march about mid-year 2012 and roll over thereafter.

Production has yet to peak, but when rig count drops from 100 units to less than 40, and completions fall from nearly three per day to less than one per day, it’s a safe bet that production will follow suit, particularly when that production is comprised of wells that sport a precipitous first year decline curve.

The hard part is not the prediction of a rollover; rather, it’s the timing.

Hart Digital Media estimates Haynesville production in Louisiana at 5.4 Bcf/d. Haynesville production first topped the 1 Bcf/d level in November 2009 and essentially rose five-fold in two years as operators added 1,401 wells to the production rolls in northern Louisiana.

Through November 2011, operators have completed 1,719 wells producing from the Haynesville and a couple hundred more from a variety of formations including the Bossier, Smackover, and Cotton Valley, according to the Louisiana Department of Natural Resources.

The U.S. Energy Information Administration notes that the Haynesville shale supplanted the Barnett shale as the nation’s leading unconventional gas producing play roughly one year ago. For perspective on the challenge facing natural gas, consider that operators drilled 15,000+ Barnett shale wells in its storied history. The Barnett currently features gas production volumes similar to the Haynesville even though the Haynesville has witnessed one seventh of the well total found in the Barnett.

That said, identifying Haynesville-related production is a hazardous endeavor. Most observers simply go with the flow and take the U.S. EIA 914 numbers for Louisiana production. Statewide, Louisiana produced 9.1 Bcf/d as of November 2011. That production will likely exceed 9.5 Bcf/d before the roll over occurs.

A review of U.S. EIA 914 numbers suggests that the Haynesville is actually a subset of the state’s total production. Pre-Haynesville, Louisiana natural gas production was persistently consistent in the 3.5 to 3.9 Bcf/d level.

Assuming Louisiana base production remained consistent any growth statewide in the Haynesville era can be accorded to the Haynesville itself. In November, that difference amounted to 5.4 Bcf/d on a 9.1 Bcf/d statewide number. The Haynesville may very well near 6 Bcf/d (absent shut ins) as the rollover event horizon approaches.

Graph breaks out an estimate of Haynesville production in total Louisiana gas production volumes reported in the U.S. EIA 914 report. Haynesville production began registering in early 2009, roughly one year after operators such as Chesapeake touted the discovery.

Haynesville Particulars

Chesapeake Energy’s brash prediction two years ago that the company would have 60 rigs turning to the right in the Haynesville was ironically prescient. The numeral “6” is involved, though in this case the number actually represents the sum total of rigs Chesapeake will employ in the Haynesville by midyear 2012.

And that is significant since Chesapeake has drilled more Haynesville wells than the next two operators combined. The Louisiana Department of Natural Resources shows Chesapeake with 552 Haynesville formation wells classified as currently producing. It amounts to 32% of all Haynesville wells.

Well count is highly concentrated in the core Louisiana Haynesville with four operators representing 70% of completions.

In fact the Haynesville play is highly concentrated. The Top Four operators represent 70% of the 1,719 wells actively producing gas from the Haynesville formation as of November 2011, the last month for which data is available.

In comparison to the Top 4, the remaining 20 operators are a distinct minority in well count. But, in a Groundhog Day burst of irony, the near-term future of the Haynesville depends on what the “Other” players do since Chesapeake, EXCO, BHP-Billiton, and EnCana have shaved 46 rigs out of the play’s activity—roughly 72% of the drop in rig count versus the 2011 peak.

The First Cut is the Deepest

The Haynesville and Marcellus shales remain the primary stimuli to rising gas production in the Lower 48. Onshore gas production (ex Alaska) grew to 72.6 Bcf/d in November 2011, according to the U.S. EIA. Production levels rose an astounding 6 Bcf/d, or roughly 10%, over November 2010.

The most recent EIA 914 report shows production virtually the same for all onshore markets with the exception of Texas, up 1.33 Bcf/d over the last year, Louisiana, up 2.1 Bcf/d during the same period, and up 3.47 Bcf/d in the “other states” category, which includes Pennsylvania. The Pennsylvania Department of Environmental Protection has not yet released production data from the last half of 2011. However, the state was producing 2.4 Bcf/d as of June 2011 and that production had grown roughly 1 Bcf/d during the first six months of 2011.

So the only surprise is both the magnitude and speed of the gas price collapse in 2012. Indeed, the setback in natural gas prices even rattled some of the Majors’ shale plans. In January, Shell, who is also a Haynesville player, announced it is transitioning 2012 capital spending from dry gas to liquids rich shales with a budget of $3 billion, which is on the low end of the $3 to $5 billion the company has spent domestically in recent years.

Similarly, Canada’s Talisman Energy Inc. will shave $400 million out of North American capex in 2012 as it reduces drilling in the Marcellus shale from 11 rigs to 6, and reduces drilling in the Montney Shale. Conversely, Talisman will increase spending in the liquids rich Eagle Ford from $350 million in 2011 to $500 million in 2012.

Elsewhere, Noble Energy and CONSOL Energy will defer drilling on 23 planned Marcellus shale wells in 2012 as CONSOL cuts $200 million out of its original $1.7 billion capital spending program. The two had just signed a JV agreement to develop the West Virginia Marcellus in August 2011. Unlike a majority of joint venture arrangements, the Noble/CONSOL agreement held a provision that would postpone gas drilling in the event natural gas prices dropped below $4.00 per MMbtu.

The magnitude of the gas shock has also prompted some operators to unilaterally shut in production. Announced natural gas shut ins to date include Chesapeake, which plans to shut in 500 MMcf/d (and could go to 1 Bcf/d), and ConocoPhillips, which will shut in 100 MMcfed in North America.

Not all cuts are production related. Morgan Stanley threw in the towel on gas pricing in February, cutting its 2012 gas price forecast 30% to $2.70 MMbtu.

Contact the author Richard Mason at rmason@hartenergy.com.