Seeking Alpha October 29, 2012
It has been a frustrating few years for investors who are long natural gas either directly or through producers.
I believe we may be close to finally getting some support for prices as production from the Haynesville shale starts to roll over.
And I for one say that it is about time!
One thing that we know about shale gas and shale oil production is that the wells come on very strong and then the rate of production declines very quickly.
After one year, the level of production drops by 65% to 80%. After two years, it drops another 35%. If producers stop drilling wells, the level of production is going to drop very quickly.
In the Haynesville Shale in 2012, the industry has pretty much stopped drilling:
From a peak of 180 in 2010, the number of wells active in the Haynesville hasn't dropped, it has plummeted. As of the most recent update, the Haynesville rig count stands at just over 20, as producers such as Chesapeake Energy (CHK) have finally stopped drilling.
Despite this rig count decline, production has been stubbornly flat:
I believe that we are on the verge of Haynesville production rolling over and this drop in rigs showing up. The CEO of Ultra Petroleum (UPL)agrees and estimates that Haynesville production could drop 10% per quarter at the current rig count level.
That would mean a 2.5 billion cubic feet per day reduction over the course of a year for the Haynesville Shale, which would make a significant difference to the supply and demand relationship for the entire country.
I admit to being surprised that the Haynesville production hasn't started declining prior to now. I believe the reason it hasn't is that there is a delay between when a well is drilled and when it is actually placed on production.
Therefore, the Haynesville production we have seen so far in 2012 is more indicative of the number of drilling rigs that were working in 2011, which in 2011 averaged 130 (started at 160 and ended at 100). In 2013 and in the final months of 2012 we are going to see the impact of the number of drilling rigs active in 2012 which has seen a decrease from 100 to 20.
So while I'm not about to pound the table about now being the time to get exposed to natural gas (UNG) investments, I am willing to suggest that things are about to get a little bit better.
Supply and demand is pretty elastic - I'll wager a 6 pack of your favorite domestic beer available from walmart that Haynesville production declines less than .5 bcf/day in 2013.
For LA at the close of September there were 188 Haynesville wells waiting on completion, 29 drilling and 63 permits not spud. Potentially that's a lot of gas and represents 12% of the well currently listed as producing. I'll try to remember to post the November numbers here when they are available. However I would suggest to jffree1 that dbob at least include imports in his wager offer.
Ok, I'll add
imports from walmart or other grocery stores in the regional market.
Skip, I posted this because it sounded so optimistic. I thought we all could use a drop of sunshine. But really, if there is such a big inventory of wells not yet completed then I have to agree with dbob. I don't see supply "plummeting" the way they described unless we have an epic winter with all of New England snowbound for months on end.
dbob, hmmm... a sucker bet, I think.
It's disappointing but real. I still see new Haynesville Shale permits every week by the same operators. EXCO may be a special case but ECA, Shell, CHK and BHP just don't make sense.
What Jay called Exco a while back keeps coming to mind... crackheads.
What's special about ECXO? It seems they just dropped off the map?
EXCO hasn't dropped of any map although many of us wish they would. And I wouldn't use the term "special". I think "crazy" or "frustrating" is a better fit. EXCO has HBP'ed its leasehold long ago but they keep drilling horizontal Haynesville wells. As Jay said they act like they're on crack and can't stop. They have 50 well permits to date and are on pace to permit or spud 60 wells this year. They act like they don't have anywhere else to drill other than the Haynesville. The inventory of wells Waiting On Completion and the level of continued drilling by EXCO are prime reasons that Haynesville production has not declined as many expected it would.
Thanks Skip. They hold lease on a lot of undrilled acres here in east texas... (Panola-Harrison) I'm guessing their lease will expire in december before they drill.
Exco has stopped drilling HA in Tx. but they are still drilling ALT Unit wells in La..
Yes the production comes online strong, WHY? I feel the big reason is because of the pressure used to frac the formation, have to bleed off that pressure which carries the trapped gas in the tight formation. then once that pressure is down, the normal rate of flow will take place That was never told to the big investors when this shale was first drilled and fractured. Then the big investors were not oil/gas people but Money people that saw a chance to make big dollars.