Replies to This Discussion

Permalink Reply by Les Bamburg on November 25, 2008 at 5:22

David, actually because Haynesville Shale is some of the lowest cost gas to develop and has the highest netbacks, other production regions will be impacted first.

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Permalink Reply by P.G. on November 25, 2008 at 5:28

He's right though!
The drilling companies have flooded the market with the gas they've already drilled from other sources or fields.
Without more markets for the gas, I doubt if we'll see much scrambling to get those wells drilled here other than OGs holding on to the leases they've paid for.

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Permalink Reply by Grillin' - MmmMmm on November 26, 2008 at 8:07

Actually, even with the higher netbacks, HS gas is not the cheapest gas...by far. Only if the wells are already drilled. If they are not, then Marcellus is much much cheaper as the wells are cheaper and the netbacks are higher. Plus the gas that is already onstream in the GOM is much much cheaper. Drilling in the HS is not economic at prices below $5 or $6. Other basins have threshholds in the $2 range due to the cost of drilling thos wells. Fayetteville is a better bargain at this point. I'll see if I can find the lastest CERA report and link it.

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Permalink Reply by Les Bamburg on November 26, 2008 at 9:46

Mmmarkkk, my comments were based on drilling new wells since US production cannot be sustained without some level of drilling activity. Also, it was somewhat based on gas that can be developed today. Marcellus Shale is still in the evaluation phase and with the various water and land issues will take some years to enter the development phase. Fayetteville wells are cheaper but it is a toss-up whether HS or FS is lower cost on a $/Mcfe basis. Bottom line is drilling activity in the various shale plays will take priority over other basins such as the Piceance, Permian, Anadarko and South Texas which is the reason companies are shifing rigs away from those areas.

I believe (but haven't run the numbers) that the Haynesville Shale can be developed at prices as low as $4/Dth because lease costs are sunk.

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Permalink Reply by Grillin' - MmmMmm on November 28, 2008 at 3:22

The $4 scenario doesn't work, I've run the numbers. Biggest problem is the huge royalty rate. 25% royalty takes a big chunk out of the revenues. Then you've also got the large capital expenditures. Puts a big cramp in trying to get a decent return on investment.

There are actually reports that show the HS not being economic below $6 gas but I believe part of that is taking into account the crazy bonus money but a big part of that was reduced flow rates due to lack of pipeline capacity. But there is a lot of HBP acreage to drill and a lot of cheap land cost as well, plus as you said, once you spend it is sunk.

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Permalink Reply by The_Baron on November 28, 2008 at 5:35

I've heard that the breaking point is anywhere from $4.50 to 6.00/mcf.

Leaseing costs, while important, shouldn't be as big as a burden as you might think, as the cost will be split among multiple wells per unit (petrohawk says seven to eight parrallel north-south laterals per section, CHK has given simaler estimates)

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Permalink Reply by Grillin' - MmmMmm on December 1, 2008 at 2:55

Actually, at $25,000 per acre and assuming 8 wells per 640 acres (80 acre spacing), the lease bonus adds up to $2 million per well. That's a lot!! Plus the royalty rates of 25% put a heavy burden on revenue when compared to the abundance of 12% and 16% royalty lands in other parts of the country that are HBP. If drilling and operating costs come down off of their peaks (which I think we are starting to see) then you may see the $4.50 scenario work but I'd generally focus on a $5-6 if I were a betting man, with only a little bit of betting on $5!

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Permalink Reply by The_Baron on December 1, 2008 at 4:27

We will see what happens to the henry hub prices when all this HA gas comes online.

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Permalink Reply by The_Baron on December 1, 2008 at 5:28

You may be right. But it will take some time for that to happen.

Permalink Reply by Grillin' - MmmMmm on December 1, 2008 at 8:33

Agree on the regulations. The HH price diff is nice but the Appalachia gas sells at a high premium to HH. But they fight regulation. In the end, we'll see. Short term will be driven by holding leases and where they can lay down rigs for least impact on leasehold and rig contracts.

but they will shut down some drilling, which is needed to get the price back up and the supply in line with demand.

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Permalink Reply by The_Baron on December 1, 2008 at 4:26

I agree that a bonus of 25k/acre is a lot. When I calculated the breaking point, I ysed the stated average of $5000/acre or $400,000 per well with eight wells per 640 acre unit.

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Permalink Reply by P.G. on November 25, 2008 at 5:40

Petroleum as well.
Those Arabs will lose their death grip over supplies if folks had a choice of fuels.
While competition wouldn't be good for any specific form of energy or producer, it would certainly stabilize our economy. Large price spikes have seemed to precede downturns of the past. It would be nice for us if our truck shipping industry would embrace NG as the preferred fuel.
Be nice to not have to pay out the nose for french fry grease for a change!

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