Haynesville Break Even Price ~$3

Haynesville rig count crests as low gas prices bear down on producer margins

Author J Robinson Editor Valarie Jackson  12 Apr 2023 www.spglobal.com

Highlights

Haynesville rig count slips to 81 from 86

$2 NYMEX gas undercuts Haynesville breakeven

South Central storage adds to supply pressures

An apparent slowdown in drilling activity in the Haynesville Shale this spring could signal the end of a production surge there that comes as low gas prices continue to eat away at producers' profit margins.

While weekly fluctuations in a basin's rig count typically have a more protracted impact on production, the recent and sustained drop—which is also observed in Baker Hughes rig data—could signal the start of a more enduring trend.

Since late March, gas production in the Haynesville has rocketed to record highs, topping 16.2 Bcf/d earlier this month. The new production records represent the culmination of a steady buildup in drilling activity since late 2021, when rising gas prices rekindled more widespread drilling interest in the Texas-Louisiana basin.

Now, though, as US gas prices languish near $2/MMBtu, the higher cost of drilling in Haynesville is making the basin's production push look less sustainable in the current market environment.

For years, comparatively higher well costs in the Haynesville weighed on the basin's growth outlook as many producers opted instead for lower-cost drilling options in Appalachia, but beginning around 2016-2017, many producers began returning to the basin after unlocking new technology that helped to lower drilling costs. Even now, the breakeven gas price required for the highest-quality core-acreage wells is about $3/MMBtu, according to a recent estimate from S&P Global. By comparison, NYMEX Henry Hub prompt-month futures continue to hover around $2/MMBtu, with most of the 2023 curve still pricing below $3/MMBtu, S&P Global data shows.

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Permalink Reply by Skip Peel - Mineral Consultant on April 12, 2023 at 10:50

I suspect that SP Global has a handle on the Haynesville break even cost if they have no idea how many rigs are drilling Haynesville wells.  Why is this?  SP Global and other industry focused media use "Haynesville" as an "area" (LA and ETX).  What they don't do is differentiate which wells in that "area" are drilling the Haynesville formation.  When they give a Haynesville rig count of 81, they are including wells in that "area" that are drilling formations other than the Haynesville, primarily Cotton Valley.  As you can imagine, this is simply laziness as it is no big deal to know the target formation for all of those rigs.

Permalink Reply by Skip Peel - Mineral Consultant on April 13, 2023 at 10:46

Unless it has changed, the USGS and IEA still think there is Haynesville Shale in south Arkansas.  There is not!!!  In fact there is no Haynesville Shale within approximately thirty miles of the LA/AR border.  This is not hard to discern.  There are plentiful well records that make this plaintively obvious.  Once again, just lazy.

Permalink Reply by Steve P on April 14, 2023 at 10:53

I'm slightly uncomfortable lumping SP global in with the rank and file goverment employees at USGS and IEA.  For the federal government, something  has to happen in order for them to alter their position, so I'm not surprised.  SP Global earns its money "knowing stuff" so that is surprising.  

Permalink Reply by Skip Peel - Mineral Consultant on April 14, 2023 at 11:42

I respect SP Global's opinion of the break even price just not on the number of Haynesville rigs.  The fact is that every natural gas focused operator is losing money, but maintaining cash flow, for all their unhedged production volumes at current prices.

Permalink Reply by Rock Man on April 17, 2023 at 8:00

What is average D&C for Haynesville lateral in NE Texas / NW Louisiana?

I figure it is less than the $25+ Million D&C for the ultra-deep, ultra hot Bossier / HV laterals in Robertson and Leon County (Comstock and Aethon). I wonder what break-even is in that area.

Permalink Reply by Skip Peel - Mineral Consultant on April 17, 2023 at 8:13

Either Comstock is far behind on submitting their well cost or the state is far behind on review, approval and entry in the database.

Here is well with a 10,617' perforated lateral.  Use the link to view the well cost report.

SERIAL WELL NAME WELL NUM ORG ID FIELD PARISH PROD TYPE SEC TWN RGE EFFECTIVE DATE API NUM
252613 HA RA SU54;CHANDLER 2-35-26 HC 001 C332 5096 07 20 002 16N 10W 05/01/2021 17013222320000

https://ucmwww.dnr.state.la.us/ucmsearch/UCMRedir.aspx?url=http%3a%...

Permalink Reply by Rock Man on April 17, 2023 at 8:17

Thanks - wish Texas RRC had requirement for operators to file D&C totals.

Permalink Reply by Skip Peel - Mineral Consultant on April 17, 2023 at 8:17

Here is an Aethon well, 10,351 perforated lateral.

SERIAL WELL NAME WELL NUM ORG ID FIELD PARISH PROD TYPE SEC TWN RGE EFFECTIVE DATE API NUM
252607 HA RA SUI;MOORE 10-15-22 HC 001-ALT A1760 0041 07 20 010 15N 09W 10/24/2021 17013222300000

https://ucmwww.dnr.state.la.us/ucmsearch/UCMRedir.aspx?url=http%3a%...

Permalink Reply by Rock Man on April 17, 2023 at 8:25

Thanks - different ball game in traditional area versus Robertson / Leon Counties

Permalink Reply by Skip Peel - Mineral Consultant on April 17, 2023 at 8:28

A LA operator seeking a severance tax exemption for a "horizontal" or "deep" well must submit a well cost form.  After submittal, review and approval, the exemption period begins for the first 24 months of production or until the well recovers its cost to drill and complete.  The operator, working interests and royalty interests pay their share of severance tax from first production.  Once the operator gets approval they will refund the severance tax for the other two parties.  Severance tax is collected again at month 25 or the month after payout.  At current nat gas prices, it could well be 24 months and those two years represent ~80% of a well's lifetime Estimated Ultimate Recoverable (EUR) reserves.  Not much severance tax revenue for the state at that point.

The severance exemption was an incentive for operators to drill expensive, technically challenging wells when passed in the mid 1990's.  There were few horizontal or deep wells at the time but thirty years later I suspect that outside of stripper wells, horizontal and deep wells account for the vast majority of new wells in LA each year.  The exemption should have been phased out years ago but once you give the industry a profit center it is difficult for politicians to take it away.

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