Forbes

Jesse Bogan, 06.05.09, 7:00 PM ET


DESOTO PARISH, La.­ -- The rumble of drilling rigs and trucks has arrived in forlorn northwest Louisiana, bringing the promise of wealth to an impoverished population who for generations have measured success in a ledger of the Lord's blessings, be it a new grandchild, calf or football championship.

Their lives are being changed by the Haynesville Shale, touted as the largest natural gas field in the continental U.S. About 200 feet thick, the stream of shale lurks two miles under the pastures, trailer homes and piney woods of the region.

The 3 million-acre formation stretches into East Texas and holds some 251 trillion cubic feet of recoverable natural gas. There could be enough gas to satisfy domestic demand for a decade, if market prices can justify going after it (see "Too Much Gas").

It's too early to say exactly how lucrative the Haynesville will be, but with impressive initial recovery rates, the production rush is on. East Texas and Northwest Louisiana have been producing oil and gas for decades, but new technology has made this new, deep play worth trying for. More than $3.2 billion has already been paid to private landowners in bonuses for leases and royalty checks. State and local tax revenues boomed by at least $153.3 million, according to an economic impact study released in April.

It isn't all good news. A well blowout recently sent residents scrambling. There have been fatal accidents. With 2 million to 4 million gallons of water, sand and chemicals used per well to fracture the shale and extract the gas, there are concerns water sources will be strained and contaminated. The drilling rig count nationally has fallen by half as last summer's peak price of more than $13 per thousand cubic feet crashed below $4 this week, with dismal demand intersecting with near-historic supply. Nonetheless, unconventional plays like Haynesville and Marcellus in the Appalachian basin are hopping. Some companies face expirations on costly leases, so they continue drilling to retain hard-fought positions.

Most locals couldn't be happier.

"God has blessed everybody living around here," says DeSoto Parish Sheriff's Sgt. Pat Jones Jr., pointing to each new derrick poking above the tree line as he drives by creeks, wilderness and farmland in his patrol car. "There is no way else to look at it."

Jackpots

It's hard to say when it was discovered, but nobody had heard of the Haynesville Shale two years ago. Before that pulpwood logging was the major industry. International Paper runs a big plant in DeSoto Parish. But following great success with the Barnett Shale, near Fort Worth, Texas, using unconventional horizontal wells and hydraulic "fracking," Haynesville and other shale deposits were thought of as the next hot spots. So there was a rush to lease up land here. Bonuses went from $150 an acre to $30,000 in a few months.

It started taking off a year ago spring. While Jones, a deputy for 22 years, was away turkey hunting, Chesapeake Energy, the largest domestic producer of natural gas and one of the largest lease holders in the Haynesville, with 470,000 net acres, started calling. "I didn't even know who the hell Chesapeake was," he says.

Five companies called Jones in a week before he booked 80 acres with Chesapeake for $4,000 each. It was more than enough to pay college tuition tabs for his children, says Jones. His 90-year-old grandmother booked another 60 acres at the same rate, enough to pay for a room in a nursing home.

Some reportedly made millions. Had Jones waited for the market to crest, he could have fetched $28,750 an acre, like the parish police jurors, or commissioners, scored on 1,000 acres, hoisting in $28.75 million. He's hardly unhappy, though. "It's a gamble, and why get greedy?" Jones says. "I smiled all the way to the bank."

Today, a year later, leasing has calmed but is still active. Eyes are on how the wells perform long term and if the expensive wells will be economical under market prices. For the land owners, the royalty checks are just starting to come in.

The Sweet Spot

Red River Parish, population 9,118, shares the sweet spot of the boom. Sales-and-use tax jumped from $4.7 million in 2007 to $8 million in 2008; in the first quarter of 2009, it's up 303%. Land men and women still pack the small courthouse, scanning property registry logs for leftovers and holdouts. With 2000 per-capita income of $12,119, some residents are getting raises--at a good time. In April, unemployment hit 9.5% here, far higher than the 5.7% rate for the state or the 4.5% during the boom times of 2006.

And while some are concerned about what happens when the rush ends, leading players like EnCana, which in 2008 invested $1.07 billion in the Haynesville, mainly on leases, say the spending has just begun. Operating in the area since 2005, EnCana has a position of 425,000 net acres. In 2009, the company expects to spend $580 million and drill about 90 wells with partner Shell. "This year is about defining and delineating, proving out the opportunity as we go with our drill bit," says Alan Boras, a Canada-based spokesman for EnCana.

The company expects long-term production costs in the Haynesville to be $3.50 to $4.50 per thousand cubic feet, well below its average cost in North America of $5, yet nearly break-even or worse at today's prices. The technical, horizontal wells used to produce the gas currently run a whopping $9 million to drill and complete, with initial production for EnCana at 10 million cubic feet per day. "We see it as being one of the lowest-cost opportunities that we have because there is a large resource in place," Boras says. "The wells have been very encouraging."

The Real Deal?

Ben Johnson, 83, one of the largest landowners in the region--through Nabors Properties, his family has 19,416 acres in DeSoto Parish alone, records show--is close-mouthed about his position, other than to say he is all leased up. The retired oil man is skeptical about all the Haynesville hype. "We've seen enough to know it's real, but how real?"

On a recent visit to his family's office, Johnson wears a orange hunter's cap and is in the company of a friendly little dog. Before selling to Sun Oil Co. in 1977, he was vice president of the family business, Nabors Drilling Co. They drilled 1,200 wells, some to the top of the Haynesville.

Johnson says the pipeline infrastructure is full, though help is on the way from Energy Transfer Partners and CenterPoint Energy Gas Transmission. Additionally, he says, pressure decline rates aren't yet known. "The oldest producing Haynesville Shale well is probably just a year old at best. That isn't enough time," he says. "Everybody is trying to put pie in the sky, but you don't know what the pie is."

Deutsche Bank energy analyst Shannon Nome in Houston says she doesn't think the Haynesville is overblown. "Even though, admittedly, the companies don't tend to press release the 'bad wells,' I've never seen a play that starts out this good fail to improve." She adds that "promising results" were reported this week from areas on the fringe of the play, suggesting there is more to it.

"We are growing production almost without trying," Petrohawk Energy CEO Floyd Wilson said during a June 1 conference call with industry executives. "These wells ... are maybe twice as good as they were a year ago and who knows where they will be in a year or two. The technology is still improving dramatically almost week by week." Costs have fallen from $12 million per well to $9.5 million for Petrohawk, he says.

Production Costs

The boom hasn't come without sacrifice. On Feb. 4, a well-test worker was killed in an accident at a Chesapeake well. Since 2007 there have been five fatalities in DeSoto and Red River parishes alone linked to crashes involving saltwater trucks, which haul a byproduct from the wells, says state Trooper Doug Pierrelee.

After a heavy rainstorm this spring, about 20 cattle died in a pasture next to a Chesapeake well site. According to a joint preliminary incident report from the Louisiana State Police Department and state Department of Environmental Quality, "it was not a gas released, more likely poisoning." The report states that oilfield services giant Schlumberger, which was completing the well, "did spill combustible liquid" on the ground and "they did not report the spill."

The April 28 incident is still under investigation. Schlumberger said through a spokesman that the 600 gallons of leaked fluid was nearly all water and wasn't a reportable amount, and that several other contractors worked on site. The company has not been fined.

Then on May 8 the roar of a blowout in tiny Naborton sounded like a "monster truck," says 5-year-old Tylun Porter, who was playing outside with his siblings at the time. Not sure what the noise was, his grandmother, Judy Hershiser, rushed the kids inside for cover before the police arrived. "We thought something was going to explode and blow everything up," she says. "I didn't really understand what they were saying, but it scared us because they said the word 'gas.'"

No injuries were reported. After evacuating for three days, Hershiser says she came home to find grime all over her car and trailer. She says a representative from Chesapeake dropped by with an envelope with $300 cash in it. The May 10 receipt says the money was a reimbursement for cleaning up.

Ever since, she says she is unnerved by the chance that the well will blow again. Meanwhile, her husband, John, steams about the compensation. Living on a small lot, they haven't leased anything, yet are about a mile from the rig that blew. "Everybody in this neighborhood got a royal shafting," he says, wishing the Haynesville Shale was somewhere else. "I got $300 out of this deal."