Replies to This Discussion

Permalink Reply by kittycatmama on November 29, 2010 at 4:33

Has anyone seen Encana's 2011 budget?

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Permalink Reply by Robert Duke on November 29, 2010 at 10:27

Yes, I would love to know more about the thinking that is going on inside Encana on this one. I am presuming the wells recently permitted in RR Parish as an 8 well "gas factory" are primarily proof-of-concept on the technology and cost factors in this area - seems I have seen they have gas factories up and running in some of the mountain states already.

But I am wondering if there is some way that they can build up the gas factory infrastructure, still save all the money, yet develop the unit over a longer period of time. Basically, at least it seems to me, all-or-nothing development of units is a bit of a disaster for the landowner. If his unit gets developed, he gets the gas price at that point in time for the bulk of the gas his unit will produce, which almost certainly will be less than say over 10-15 years. If his unit does not get developed, then he gets nothing for a very long time (well, he has his unit HBP by 1 well, which did great for 1 year, and then tapered off fast).

An intermediate solution is split-unit development, which I would hope is how it will all get done - ie., two gas factories serve each unit, with 4 wells in each gas factory per unit. If you were then to put in half the wells at a time in each gas factory, you could phase in your development in one unit in 4 chunks.

I expect Encana will be monitoring their bottom line, and it is possible there will be various risk / reward angles to a slower buildout in a single unit; it sure as heck seems disadvantageous, on average, to the landowners though to do all-or-nothing unit development.

Anybody actually have any insights to what the company is thinking of doing, past proof-of-concept?

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Permalink Reply by Big Daddy, bcnr on November 29, 2010 at 14:42

Amen to that Jay. I would rather see higher prices with all this production. I've seen 7 wells permitted with 2 completed in one section. Indeed a mixed blessing.

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Permalink Reply by kittycatmama on November 29, 2010 at 16:11

Any idea when Encana posts their next yr. projections? NOV. or DEC.? I think that will tell all of us a lot. Same with Chesapeake

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Permalink Reply by Robert Duke on November 29, 2010 at 19:28

Thanks, interesting information. It looks to me like most of the alt wells going in by Encana right now are mostly central core, in the area 14N-11W to 14N-14W, some also in 15N. Are they having problems with these wells not yielding as anticipated? (I am guessing not, but I have not been plotting production up there). I suppose they may be working out the technology of the gas platform where they know it will pay off. Anything they can do of course, for marginal areas N, S, or E in LA would be great. It sounds to me like hydraulic fracturing is still very much undergoing optimization. Any good information anywhere about the state of the art and future plans, or is it all pretty much proprietary?

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Permalink Reply by Les Bamburg on November 30, 2010 at 4:17

Robert, operators always intended to develop the Haynesville Shale with ~ 8 wells per section (unit) because each well drains about 80 acres. That is the reason you see a distance of ~ 660 ft between laterals because that equates to an 80 acre spacing (660' * 5280'). Where both Bossier Shale and Haynesville Shale are present you may eventually see up to 16 wells per section.

Regarding EnCana, they have simply implemented three pilots of their "gas factory" development plant - T14N-R11W (Sections 27 & 34); T14N-R14W (Sections 4 & 9); T15N-R14W (Sections 26 & 35).

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Permalink Reply by Robert Duke on November 30, 2010 at 4:59

Hi Les,
Thanks. I do understand the basic 8 wells/unit "plan of record", based on anticipated ability of a single horizontal run to drain an area of shale. The interesting thing to me here from Electro is it sounded, at least to me, like Encana has some reason to believe that if they do the whole unit at once, they may get a better fracture in some types of shale, perhaps in lower porosity shale on the margins for example (N Caddo arguably being on the margin, I would think). I have been thinking all along that if gas factories drop the per well costs substantially, then they make the margins more economic at lower gas prices, at least for the driller who of course has to defray his investment cost, so in that way gas factories also could increase drilling on the margins, but this "better frack" angle is new.

So I indeed was curious about this topic mostly because it seems to me that doing the unit all at once is mostly a losing situation for the mineral owner - you get 1/3 of your money in one year (assuming the 85% decline curves), and this turns out in general to effectively be less money due to tax rates. It is also less money if you have a unit that gets drilled in the near term, due to depressed gas prices. On the other hand, if you don't get drilled early, you may end up waiting a decade with very little income (eg. they drill 1 well now to HBP, then wait forever to bring in the next 7, or 15 if you are in a stacked portion of the play).

So because complete unit develop has disadvantages for the mineral owner, I have been thinking of ways it can be done in a phased manner, while still getting the economies of shared infrastructure. So for instance, it is my understanding that one gas factory tends to service two units, 4 wells per unit, as a simple consequence of geometry (ie., you can do complete horizontal runs to the N in one unit and complete runs to the S in the adjacent unit to the south. Then, if you only drilled half the wells at initial pad build, you could still lay in infrastructure in a shared manner, but phase in a unit at 4 spaced times through the lifetime of development of the play; doing it this way, both the driller and mineral owner benefits from improving prices, and also from the potential for improvements in fracking methods over time. But I understand that the driller potentially loses some benefits due to more movement on/off site, reuse of frack fluid, unutilized shared infrastructure capacity, etc.

So anyway, this phased development, while ideal in some ways, may be less likely if one thing the gas factory does is more effectively shock the heck out of the shale. I am just trying to get as much info to be able to make predictions about what is apt to happen, all the while realizing that the probability of the predictions having high accuracy is nil :-)

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Permalink Reply by Les Bamburg on November 30, 2010 at 5:29

Robert, Electro's statement probably doesn't apply to the area in question since that is in the core of the play.

Each operator has their own philosophy for the optimum development approach. EOG has already indicated they prefer to fully develop each section as they drill rather than a phased development. It appears EnCana will follow suit but we shall see since the current activity are "pilots".

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Permalink Reply by Robert Duke on November 30, 2010 at 9:36

I guess I still don't see any advantage to doing more than 4 wells x 2 in 2 adjacent sections at a time (ie., one gas platform at a time, not 2 at a time in 2 adjacent units); could be there are other infrastructure issues away from each gas platform, but I would still be inclined to think there are risk reduction and optimization of process over time benefits. I recognize my view is somewhat subjective...

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Permalink Reply by adubu on November 29, 2010 at 10:38

the CEO Miller along with T Boone Pickens presently has a "takeunder" bid of $20.50 per share for XCO which Miller said in July the company NAV was 25-37 per share. IMO a Steal and will have to increase bid to 28-31 to take it private. BG of the UK will probably bid on it. They love the assets of XCO

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Permalink Reply by HMI on November 30, 2010 at 7:21

Doesn't it seem a bit ironic that the landowners who were/are in the "core area" of the play with the most gas stand to have it drained the fastest and at the lowest prices vs. those areas of the play that are said to likely have to wait to be built out until gas prices are higher to make them "economical"? The landwners on the fringe of the play are likely to get a higher price per mcf of gas than those in the core area. I understand the "why", simply the economics of things, but it just seems a bit ironic.

They don't seem to be shy about drilling all those wells at $4.00 gas. Are they in the leasehold that cheap? Are their costs of drillings the wells that much less? Is it the sheer volume of the wells helping them recover the costs? Seems a good bit different story than CHK is talkng about ...needing $6.00 /$7.00 gas to be able to come out on some of their leasehold.

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Permalink Reply by Bacon on November 30, 2010 at 7:51

I can tell you that Encana got in real cheap in RR parish as they started leasing 4 or five years ago.

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