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Hardy Haynesville shale hangs on

Even without high-value NGLs to compensate for depressed US gas prices, the prolific Haynesville play is still going strong. Shaun Polczer reports from Lufkin, Texas

THE Haynesville Shale just can’t get any respect. Sitting atop a swath of Louisiana and Texas, it is easily North America’s largest unconventional play, but also one of its most economically challenging in the face of depressed natural gas prices.

Haynesville is one of the big six shale plays that have accounted for more than half of the US’ new gas production since 2006. Oklahoma-based Chesapeake Energy made the initial Haynesville discovery in spring 2008 – and, since then, it has gone on to become a pillar of US gas supply.

In February, the Haynesville eclipsed the Barnett Shale as the top US unconventional gasfield, pumping 5 billion cubic feet a day (cf/d) – more than exporter Australia’s total output in 2010. Now it’s even bigger, with year-end production approaching 8 billion cf/d, despite a 40%% drop in drilling. It took 10 years and 10,000 wells to achieve those output rates in the Barnett: Haynesville did it in three years, with a third as many wells.

Like the Barnett – but much larger

The Haynesville, in northeastern Texas and Louisiana, was the ideal lookalike to the Barnett, the US’ original unconventional-gas play. For almost a decade, Dallas’ Barnett shales were the incubator of the technology that would lead to North America’s unconventional renaissance and the unlocking of other huge shale deposits. The Haynesville is similar to the Barnett, but an order of magnitude larger – its wells come on at significantly higher initial production rates and recover three to four times more gas over a 20-year time span.

While attention focuses on liquids-rich deposits, such as the Eagle Ford, the Haynesville has been forced to take a back seat because its dry-gas production doesn’t have the high-value natural gas liquids (NGLs) to compensate for a lower North American gas price.

It wasn’t always so. Just three years ago, the Haynesville was the darling of the shale-gas revolution. With gas prices hovering around $10/million British thermal units (Btu), Haynesville wells came on like rockets, producing 6 million cf/d, or more. Higher drilling costs – around $9 million a well – were more than offset by higher production rates and prices. Given the healthy margins, it was assumed the Haynesville could remain competitive if prices fell to $6 or even $5/million Btu. But nobody bargained for prices below $3.50/million Btu.

Rising costs, falling prices

To make matters worse, costs have risen even as gas prices have fallen. The price tag for newer Haynesville wells has jumped to $12 million in the deeper, more prolific areas of the play, says Calgary-based Investment Technology Group, formerly Ross Smith Energy. It remains to be seen whether the higher initial production rates are enough to overcome the added financial outlay, a margin that is rapidly narrowing as gas prices sag.

Some of the larger producers – Devon Energy, Chesapeake and Calgary’s Encana – are claiming break-even returns in the mid-$3/million Btu range, but they’re effectively giving the gas away. The lack of markets prompted plans for gas exports. BG Group hopes to lift liquefied natural gas (LNG), produced from its Haynesville acreage, through a planned export plant at Cheniere Energy's exiting Sabine Pass LNG-import terminal.

It’s a bitter irony, but that’s the new reality that success at Haynesville helped bring about, creating a huge supply glut even as the technology that made it possible has matured. Rising costs and falling commodity prices may have all but killed the golden goose, but there are reasons why the Haynesville may yet prove to be the US’ comeback kid.

A big driver of early development in all the large shale plays, including Haynesville, was the need to drill wells to retain land rights, sparking a drilling rush even as gas prices fell. There was no choice; players had to drill, or risk losing the billions spent to buy land. The Haynesville became the most active shale play in the US almost by default.

A slowing surge

The initial surge has begun to slow and gas rig counts are finally falling after three years of breakneck activity. The number of working Haynesville rigs peaked at 180 earlier this year and has since dropped to around 100, says Baker Hughes. But production has continued to rise as producers complete a backlog of new wells, which are usually drilled in batches.

Haynesville wells come on strong and then decline by about 73% in the first year, before levelling off at stabilised rates that continue for decades. Producers have counted on that initial flush of production to pay out well costs and fund new drilling, but it’s become a vicious circle of diminishing returns as gas prices continue to fall.

If there’s a silver lining, it’s that operators now have time to catch up with building the pipelines and processing infrastructure needed to sustain growth. A recent tour of a Haynesville drilling site showed a single well on a pad designed for eight. Chesapeake, the operator, plans to revisit the location when prices improve to drill the additional wells.

That assumes prices will improve, eventually. But Chesapeake chief executive Aubrey McClendon admitted recently that there is no clear consensus as to when that will happen – whether it’s months or years away. Meanwhile, the company is deliberately outspending its cash flow to keep drilling in the hope that the day is near.

Maintaining such a large drilling inventory represents an opportunity for low-cost expansion when gas prices eventually rise. Drilling all those infill wells – thousands of them – will keep this play going for decades, no matter how low prices go.

The target of choice

While the Haynesville is the obvious target of choice, several other unconventional zones in the area are prospective for both oil and gas. By drilling earning wells, producers also gain rights to those other potentially productive rocks.

The deep Bossier Shale lies uphole, it’s impossible to miss and it’s practically free if production is established from the Haynesville. And the Bossier could be even bigger than the Haynesville, with wells in the nearby Amoruso field testing initial rates as high as 50 million cf/d. In 2007, it seemed the Bossier was the next big thing, when Encana paid $2.55 billion to buy acreage from Leor Energy, including a 50% interest in the Amoruso field.

But it produces the same dry gas. Consequently, Encana has scaled back its Bossier drilling to focus on the more established Haynesville.

In a bid to source more oil and liquids, there are rumours of a deeper oil target that could improve the overall economics of the play. The aptly named Smackover formation is a widely dispersed petroleum source rock and a proved producer in Arkansas. Several smaller firms are trying to extend it past the Louisiana state line into Haynesville territory. Although it doesn’t solve the immediate problem of low gas prices, the speculative upside is sufficient reason for producers to find the Haynesville attractive. But, for now, the focus continues to be regaining the high ground on costs, even as margins are squeezed.

Catch-22

The Catch-22 is that it requires even more land, more wells and more infrastructure to gain the required economies of scale. And, inevitably, more production to overcome the lower returns. Whether full-cycle costs can be pushed below $3/million Btu without further flooding the gas market remains to be seen.

One could argue the play is already overcapitalised and value destruction is taking place by continuing to sell so much gas so cheaply into an oversupplied market. Others would say the new economic realities are forcing producers to be more innovative and efficient, which has in turn benefited consumers and set the industry up for a rebound when prices improve.

But it’s a fine line between strategic positioning and poor capital discipline. Inevitably, something has to give; either demand picks up or supply has to fall. The wonder-world of natural-gas powered trucks and cars is still several years away and further production growth from unconventional plays across the US will only add pressure to already weak markets. Ironically, given the sudden abundance of gas, producers could be forced to sell assets, shut wells or move to higher return basins such as the Eagle Ford.

In that sense, the Haynesville has become the underdog. In the US, everybody loves a contender and as Haynesville shows, there’s always hope for better days.

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