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Permalink Reply by Hopeful About Natural Gas on August 4, 2011 at 8:50

http://www.reuters.com/article/2011/08/03/us-shale-gas-ma-idUSTRE77...

 

AL,  I just saw this story in Reuters that seems to speak to your question. This article points to the need for export facilities for LNG. It also repeats your concern that cash is the biggest need of these companies. 

 

I am just a novice at this, but it's very likely they have been drilling both to hold leases and simply to generate cash.  I have not seen anyone note your cyclical need for wells to be replaced since they drain so quickly. That is fascinating (and worrisome)  to think about ...

Analysis: Cash-rich shale drillers boost output, cap prices

By Jeanine Prezioso

 

NEW YORK | Wed Aug 3, 2011 4:14pm EDT

 

(Reuters) - Until recently, the nascent U.S. shale gas industry faced a major constraint on its growth, one that was bigger than environmental risk, more vexing than technology, and more challenging than the scrum for new acreage: capital.

 

After some $40 billion of foreign investment in the sector in the last two years, including BHP Billiton's record $15.1 billion plunge last month, that limitation is no longer a factor, analysts say. And as a result, production may grow even faster than previously expected, putting an ever firmer cap on prices.

 

 

Capital-rich companies from ExxonMobil to Royal Dutch Shell have picked up the pace partnering with or acquiring smaller shale producers or parcels of land to gain access to reserves and technology to release them.

 

BHP's purchase of Petrohawk Energy Corp gave it more than one million net acres of land rich in shale oil and gas deposit. The Australian mining giant is expected to expand on Petrohawk's drilling plans, further driving down the natural gas forward curve that has been pummeled by the surge in U.S. shale development in recent years.

 

 

"Two years from now given that Petrohawk was going to grow activity, under BHP, it's likely that activity will be higher, not lower," said David Pursell, a natural gas analyst with boutique energy investment bank Tudor, Pickering, Holt & Co in Houston.

 

 

Shale-related mergers and acquisitions account for 26 percent of announced deals in the oil and gas sector this year alone, according to data from Thomson Reuters.

 

 

The influx of capital has revolutionized the U.S. natural gas market, feeding oversupply and smoothing prices.

 

The technology known as hydraulic fracturing or "fracking" that has let flow a flood of natural gas from dense layers of shale rock thousands of feet beneath the ground has tamed a market once known for 10 percent daily price swings.

 

 

There are some 750 trillion cubic feet of recoverable gas reserves in the U.S., according to a recent government report. The mergers have paid off for many top energy companies acquiring their way in to shale plays.

 

With the prospect of a decades-long bonanza in cheap domestic shale gas production the forward strip for NYMEX 2012 natural gas futures has halved since 2008 at a $9 average to around $4.60.

 

But some analysts say even that may now be too optimistic, if producers eager to start generating cash on their investments push aggressively forward.

 

 

"Really what (BHP's acquisition) does is it probably puts an acceleration on Petrohawk's plans," said Tom Sherman, senior energy analyst with Bentek Energy, an arm of Platts, in Evergreen, Colorado.

 

"We really don't see prices jumping up a whole lot."

 

Bentek's most recent price outlook forecasts an average gas price of $3.80 per million British thermal units through November, rising to the mid-$4 range by winter.

 

 

PRICE UPSIDE?

 

There are, of course, risks that could yet hinder quickening growth. The prospect of tougher federal or state environmental regulations has many producers spooked; a shortage of drilling rigs and trucks to haul waste water could prove material hurdles; and many producers are now shifting their forecast toward shale oil rather than gas.

 

Last week, the U.S. Environmental Protection Agency issued preliminary rules to impose emissions caps on natural gas streaming into the atmosphere from the drilling process.

 

 

State governments continue to develop rules on fracking, attempting to balance economic and environmental concerns.

 

 

Coal-to-gas switching for electricity generation has nearly doubled this summer from last year, another factor that has boosted gas demand, especially during peak times.

 

 

In addition, drilling to hold leases by production begins to drop as those leases expire next year and acquisition interest in oil shale nudges gas off the main stage, said Bob Brackett vice president and senior analyst with Sanford C. Bernstein & Co in New York, who expects prices to rise as high as $7.00 in 2013.

 

 

With the ability to export liquefied natural gas so far off in the U.S., LNG prices fetching double abroad and oil prices at recent triple digits, dry gas shale deals are losing luster.

 

 

"Now it's show me something with some liquids in it or on the west coast of Canada near an LNG export terminal," Brackett said.

 

(Reporting by Jeanine Prezioso;editing by Sofina Mirza-Reid)

 

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Permalink Reply by Skip Peel - Mineral Consultant on August 4, 2011 at 10:31

The transition by the majority of HA/BO operators from retention to full development drilling is counter to the "they will drill one well and go away" school of thought that has been ever prevalent amongst the membership for three years.  What was overlooked was the tremendous debt that companies ran up in a competitive race to lock up a world class asset with little or no appreciation for the shale gas paradigm that was unfolding across the country and the world.  The supply has not only outpaced the demand, it has outpaced global market structure.  The next few years will be lean ones and M&A will continue to shift shale reserves to larger companies with longer investment time horizons.  CNG and LNG will capture some significant percentage of vehicle fuel usage over the next 5 to 10 years.  More so globally than domestically.  LNG export will ramp up and there will be a contest to establish international market share.  Shale reserves represent the new golden age of energy exploration, production and consumption.  It will take years to develop and become established but it will drastically alter the  geopolitical energy balance and benefit U. S. consumers and corporations.

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Permalink Reply by Les Bamburg on August 4, 2011 at 14:30

Skip, it is doubtful CNG/LNG will make capture a significant share of the transportation market within 5/10 years given the infrastructure needs.  It is more likely natural gas will make inroads into the power and industrial (global) markets as these are much easier conversions.

 

By the way I would not characterize "drill one well and go away" as being prevalent among the membership.  Instead I think the question was more about how the various operators would conduct their development strategy.  We are seeing what most believed would occur.  ie Operators would fully develop 1-2 sections at a time as they moved into pad drilling mode.

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Permalink Reply by Skip Peel - Mineral Consultant on August 4, 2011 at 14:47

Your opinion is so noted, Les.  We'll disagree on the one and wait to see the accuracy of the other.

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Permalink Reply by ALongview on August 4, 2011 at 15:01

I tend to think that LNG could be more import than we tend to give it credit for but only time will tell. Les, once pad drilling starts, how long does it take to fully develop a section? Will they develop the Haynesville and the Bossier at the same time or come back for the Bossier in your opinion.
Skip, it looks like Sabine Parish is busy, any opinions on Haynesville/Bossier wells in Sabine County? Chesapeake has made a few good ones.

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Permalink Reply by Skip Peel - Mineral Consultant on August 4, 2011 at 15:28

ALongview, I must admit to not being up to speed on current development in Sabine County.  My last rig report shows only one rig drilling, CHK Richards Gas Unit.

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Permalink Reply by Les Bamburg on August 4, 2011 at 16:29

AL, if you review EnCana's and Exco's activities in DeSoto Parish you can track the pad development to see how long it takes to develop an area.  Drilling times are around 40 days so 8 wells would take 160 days with two rigs.

 

Most operators look to be drilling Haynesville Shale only but EOG was doing a combination of both. 

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Permalink Reply by Hale Yayuh on August 4, 2011 at 16:33

CHK is the biggest leaseholder and you won't see them develop their sections until gas goes way up. Straight from their horse's mouth. And that might be 20 years.

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Permalink Reply by Skip Peel - Mineral Consultant on August 5, 2011 at 1:34

CHK LA. Alternate Unit Well Applications(the second application is for 53 wells):

 

http://ucmwww.dnr.state.la.us/ucmsearch_070611/UCMRedir.aspx?url=ht...

 

http://ucmwww.dnr.state.la.us/ucmsearch_070611/UCMRedir.aspx?url=ht...

 

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Permalink Reply by Hale Yayuh on August 5, 2011 at 1:50

Wow, I find this most interesting. How does one reconcile this with several public statements made by Aubrey in the past few months? Something along the line of "Other than to HBP leasehold, we will not drill any more HA wells until natural gas rises to at least $6.00/mcf.

Although, these are not permits, so, it doesn't mean they are about to drill until such time as they do file permits. Which could be a long time.

I was just about to ask anyone if they know of CHK developing leasehold ANYWHERE. Because their strategy seems to be expand, expand, expand. They are aggressive beyond belief. I couldn't see how it could be possible for them to develop much existing leasehold, what with their unbelievably large leaseholds all over the USA.

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Permalink Reply by Skip Peel - Mineral Consultant on August 5, 2011 at 1:59

CHK has partners in all their major plays that provide them with drilling carries which stretch their development budget.  I don't think that CHK would apply for these unit wells without the intention to follow them up with permits in the near future.  They will likely assign some their contract rigs currently drilling in the LA. Haynesville to these alternate unit wells.  And shifting a portion of their rigs to full development while the others continue to drill lease retention wells.  All major HA/BO operators are getting into a phase of testing different development designs, EnCana - cross unit laterals, El Paso - 107 acre spacing, etc.  These two applications doesn't necessarily mean than CHK is moving to full development drilling over their entire leasehold.  Only that they will test their full development designs in these sections.

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Permalink Reply by Les Bamburg on August 5, 2011 at 2:51

Skip, Plains bought themselves out of the drilling carry for the Haynesville Shale and no not recall Chesapeake ever having one for the Barnett Shale.

 

Most operators (Questar, El Paso, EnCana, Exco) are beyond the "testing" phase and are in development mode.  Operators will always develop a few sections at a time rather than initiating full development across their entire leasehold. 

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