NATURAL GAS: 40 RIGS CAN MAINTAIN HAYNESVILLE PRODUCTION PLATEAU - SeekingAlpha article - August 7, 2012

by Richard Zeits

The key argument often used by natural gas bulls is that the dramatic reduction in rig counts in the dry gas producing shales will translate into a rapid drop off in supply and lead to the price recovery toward the $5 level, and possibly higher. The Haynesville shale, where the rig count has declined from the peak of over 180 rigs two years ago to approximately 27 currently, is often presented as the most compelling evidence supporting that argument.

The view has been advocated by several prominent industry CEOs, including Chesapeake's Aubrey McClendon and Ultra Petroleum's (UPL) Michael Woodford. During Ultra's 2Q earnings conference call on August 2, Michael Woodford re-iterated his macro perspective on natural gas: "Capital is being withdrawn from natural gas investment as seen in the rig count reduction and pressure pumping softness. Production lags capital expenditures and the decline in production is imminent. We see $4 gas in 2013 and $5 gas in 2014." With regard to Haynesville specifically, he commented: "We have a view that says: production supply is about to shrink pretty rapidly. I think there are some comments out yesterday, with some companies that announced and talked about the Haynesville, that they would see a 10% per quarter reduction in their production. I think it is plus or minus 40% for the year. If you apply that to the 6 Bcf per day of Haynesville production, it is 2.5 Bcf per day of annual rate reduction, so I think we are about to see a drop off in supply." Michael Woodford was referring to the earnings call remarks by QEP Resources (QEP) the night before.

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http://seekingalpha.com/article/786381

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Replies to This Discussion

Permalink Reply by dbob on August 7, 2012 at 11:26

OMG

 

Permalink Reply by Skip Peel - Mineral Consultant on August 7, 2012 at 11:31

I had a similar reaction and was hoping you would poke holes in the analysis.  I did check the LA DNR Haynesville page and the number of wells Waiting On Completion at the end of July was 255.

Permalink Reply by JHH on August 8, 2012 at 2:19

Does that (OMG) mean Oh My Goodness or Obama Must Go?  Just kidding.  saw a t-shirt with the second OMG on it.

Permalink Reply by Skip Peel - Mineral Consultant on August 7, 2012 at 11:56

I would have never thought Berman would be useful??!!  LOL!

Permalink Reply by Spring Branch,mineral owner on August 7, 2012 at 12:03

The price of Nat Gas will likely do whatever will surprise the most people.

Permalink Reply by adubu on August 7, 2012 at 12:09

Skip--- ---Thanks for article and discussion. I hope Micheal Woodford's prediction more accurate.

Permalink Reply by Skip Peel - Mineral Consultant on August 7, 2012 at 12:24

Les B has been telling us that some HA operators could generate profits at $3 and the 9% rate of return for EnCana at $3 HH validates his statements.  A 30% IRR at the well level would seem to indicate that $4 will provide sufficient profit for all the HA operators to sustain a drilling program.  I just hate to think that we might have to wait another year to reach that level.

Permalink Reply by dbob on August 7, 2012 at 12:48

OK, lets start throwing some stones - the wells per rig is too low, particularly on the development side.  bump the # of wells per rig to at least 11 per year on that side, and to 9 per year on the delineation side.

Next up, his assumption, as he notes, of 7.5 mmcf/day 30 day IP is too low.  I think restricted choke rate stuff, even in the less optimal rock, ought to be able to average closer to 10.0 mmcf/day, on average.  Tier II value should also be increased probably 20%, or he should assume a 80% of completions in development mode and 20% in the Tier II rock.

The final nit then becomes the field wide decline rates.  I think his value is too low, but it will take a bit of digging I don't have time to do right now.  My gut is that something closer to 5 to 6.5% per month is about right, rather than the value he portrays, in part because the recent values have been affected by curtailment.  

In any event, if i repeat his analysis with modifications to the values he gives, I get something in the same ball park or possibly slightly lower.  

Permalink Reply by dbob on August 7, 2012 at 14:57

Ok - there are two different field wide decline rates mentioned - 2.5 bcf/day/per year and then the range of 165 mmcf/day to 195 mmcf/day per month - these values equate to 1.98 bcf/day per year to 2.3 bcf/day per year.  Of course, the difference between 2.5 bcf/day per year and 1.98 bcf/day per year, 500 mmcf/day is roughly equivalent to 50 wells per year, or the effort of 4 to 5 drilling rigs.  

As discussed, this analysis is going to strongly favor the dense development model, because costs reductions in minimization of rig movement, centralized infrastructure, and the wet gas side of things.  

Permalink Reply by adubu on August 14, 2012 at 0:43
Dbob can a rig really drill 11 wells in one year ? WOW I thought it took about 60 days or more to down rig, move, up rig and drill a H well
Permalink Reply by tc on August 14, 2012 at 1:27

Yes with pad drilling, they just skid the rig across the pad.  To get the lower well cost needed to be economical at low NG prices, operators need to do pad drilling and zipper fracs or other lower cost completion methods.

 

Below is about Eagle Ford wells, which are a little different from the Haynesville, but it shows how the industry is decreasing drilling time in shale plays.

This week alone, we had three different operators highlight how fast they are drilling wells. EOG Resources and Marathon are both lowering their rig counts because they have dropped their drilling time significantly. Anadarko also announced a record drill time of just 6.8 days in the second quarter. As you can see in the chart above, Marathon has almost halved its spud to spud drilling time in the last ten months. I’m no math whiz, but that means they can drill the same number of wells with half the number of rigs they needed ten months ago.

http://eaglefordshale.com/news/eagle-ford-shale-regional-rig-count-...

Permalink Reply by adubu on August 14, 2012 at 3:31

tc-- is not the Eagle Ford several thousand feet shallower than the Shale in Haynesville---does that make some different in drill time? But as dbob said below they can move every thing and still drill it  in ~33 days--- WOW they have improved their learning curve.

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