Released July 16, 2013 | SUGAR LAND
en
Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Natural gas production from the Haynesville Shale has drifted downward over the last year, pulling down industry expectations about future production in a low-price environment. But one producer, Exco Resources Incorporated (NYSE:XCO) (Dallas, Texas), recently made a big bet on the Haynesville Shale when it paid $288 million to acquire additional producing and developmental acreage.
This is "the perfect bolt-on acquisition," Exco said in announcing the purchase from Chesapeake Energy Corporation (NYSE:CHK) (Oklahoma City, Oklahoma) earlier this month. "This acquisition fortifies our leading position in the core DeSoto Parish. It leverages our extensive experience (there) and our cost-focused development program." The deal closed last week.
The 9,600 acres of land Exco acquired in the transaction produced about 114 million cubic feet of gas equivalent per day (MMCfe/d) in May. Chesapeake has been selling assets over the last year as part of a restructuring necessitated by an overly aggressive expansion. The Haynesville Shale stretches from northern Louisiana to eastern Texas, but production has been greatest in Louisiana's DeSoto Parish.
Prior to this transaction, Exco was the second-largest operator in the Haynesville Shale, with 332 gas wells, or about 15% of the wells in the formation, according to data from the Louisiana Department of Conservation (Baton Rouge, Louisiana). Before selling the assets to Exco, Chesapeake was the leading operator in the formation, with 677 gas wells, or about 29% of the wells in the formation.
"The transaction surprised some people because there have not been a lot of transactions in the Haynesville recently," remarked Jesus Davis, Industrial Info's vice president of research for Oil & Gas Production, Transmission and Terminals industries. "It looks like Exco's doubling down, making a long-term investment to position itself for exports of liquefied natural gas (LNG), construction of ethylene plants along the Gulf Coast, or a renaissance of manufacturing in southern Louisiana."
At the start of the shale revolution, a few years back, Oil & Gas producers had great expectations about the Haynesville shale. At about 75 trillion cubic feet (Tcf) of technically recoverable gas resources, it was the nation's second-largest deposit of natural gas, trailing only the Marcellus Shale, which has more than 400 Tcf in technically recoverable resources, according to the U.S. Energy Information Administration (EIA) (Washington, D.C.), the statistical and analytical branch of the U.S. Department of Energy (DoE) (Washington, D.C.).
The Haynesville produces mostly "dry" gas, with little crude oil or natural gas liquids (NGLs). That wasn't a problem when gas prices were relatively high. Gas prices averaged about $5.88 per thousand cubic feet (Mcf) between 2000 and 2009, peaking at an annual high of about $8 per Mcf in 2008 and occasionally exceeding $10 per Mcf. Gas production rose sharply over the 2008-2011 period, according to EIA.
Click the icon at right to see recent years' actual gas production, and projected future gas production, from the Haynesville Shale.
High gas prices accounted for much, but not all, of that jump in production, Phil Budzik, a research analyst at EIA, told Industrial Info in an interview. "Some drilling and production was mandated by the terms of leases, which required the owner to perform some drilling within three years or lose its rights to the resource."
"A lot of companies rushed in and paid inordinately high prices--as much as $20,000 per acre--to secure acreage in the Haynesville," Budzik said of the Haynesville's "land rush" period a few years back. "What seemed rational at the time (when gas prices were high) seems irrational after the fact. It's really no different from the housing market--prices can only increase by 20% per year for so long before they crash."
What makes the Haynesville different from other shale formations is the depth of the resource, and the higher initial production levels, the EIA analyst said. "Oil and gas in the Marcellus Shale is 5,000 to 7,000 feet underground. In the Haynesville, it's easily twice that far down, but the drilling costs there are four to five times what they are in the Marcellus. Drilling costs tend to rise exponentially, not arithmetically, as you go further underground. And while initial production rates in the Haynesville were twice what they were in the Marcellus, those rates tend to decline faster in the Haynesville than in the Marcellus."
Still, the numbers tended to pencil out for many producers as long as gas prices were high. But their dramatic tumble last year caused many producers to reassess their operations in the Haynesville. Nationally, gas prices averaged about $2.66 per Mcf last year, according to EIA--down more than 50% from their 2000-2009 average. The Haynesville's higher production costs, absence of oil or NLGs, and soft demand for gas from manufacturers convinced some producers to curtail or close their operations in the Haynesville.
Louisiana is well-known as a natural gas-producing state. But less well-known is the significance of the state's natural gas usage, according to Professor David Dismukes, associate director of the Center for Energy Studies at Louisiana State University (LSU) (Baton Rouge, Louisiana). Louisiana ranks third in the country in total natural gas usage and second for industrial gas usage, he wrote in a recent study, "Unconventional Resources and Louisiana's Manufacturing Development Renaissance."
Dismukes has researched the relationship between Haynesville gas production and Louisiana's gas-intensive industrial concerns, notably chemical producers and petroleum refineries. In his report, he wrote there is a "symbiotic relationship between natural gas prices and Louisiana's energy-intensive manufacturing base." The state's manufacturers rely "heavily on natural gas for heat, steam, power generation and most importantly, feedstock purposes. Louisiana's chemical industry is particularly reliant upon natural gas and natural gas liquids since both are used to produce a wide range of goods."
Low-priced gas from the Haynesville could contribute to a renaissance of Louisiana's energy-intensive manufacturing base. But it's hard to find a natural gas price that suits Haynesville producers as well as gas-intensive industries in the Pelican State. Gas producers who can operate profitably in today's price environment are well-positioned to capitalize on manufacturing growth that could bring tens of billions of dollars of new capital investment to Louisiana over the next five to eight years, he added.
It looks like Exco shares Dismukes' upbeat projections for the Haynesville shale and Louisiana's manufacturing base. Today's gas price of about $3.70 per Mcf is approximately $1 per Mcf higher than one year ago. Does that price represent a sweet spot for Haynesville producers and Louisiana manufacturers, one that enables both to operate profitably?
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
This is "the perfect bolt-on acquisition," Exco said in announcing the purchase from Chesapeake Energy Corporation (NYSE:CHK) (Oklahoma City, Oklahoma) earlier this month. "This acquisition fortifies our leading position in the core DeSoto Parish. It leverages our extensive experience (there) and our cost-focused development program." The deal closed last week.
The 9,600 acres of land Exco acquired in the transaction produced about 114 million cubic feet of gas equivalent per day (MMCfe/d) in May. Chesapeake has been selling assets over the last year as part of a restructuring necessitated by an overly aggressive expansion. The Haynesville Shale stretches from northern Louisiana to eastern Texas, but production has been greatest in Louisiana's DeSoto Parish.
Prior to this transaction, Exco was the second-largest operator in the Haynesville Shale, with 332 gas wells, or about 15% of the wells in the formation, according to data from the Louisiana Department of Conservation (Baton Rouge, Louisiana). Before selling the assets to Exco, Chesapeake was the leading operator in the formation, with 677 gas wells, or about 29% of the wells in the formation.
"The transaction surprised some people because there have not been a lot of transactions in the Haynesville recently," remarked Jesus Davis, Industrial Info's vice president of research for Oil & Gas Production, Transmission and Terminals industries. "It looks like Exco's doubling down, making a long-term investment to position itself for exports of liquefied natural gas (LNG), construction of ethylene plants along the Gulf Coast, or a renaissance of manufacturing in southern Louisiana."
At the start of the shale revolution, a few years back, Oil & Gas producers had great expectations about the Haynesville shale. At about 75 trillion cubic feet (Tcf) of technically recoverable gas resources, it was the nation's second-largest deposit of natural gas, trailing only the Marcellus Shale, which has more than 400 Tcf in technically recoverable resources, according to the U.S. Energy Information Administration (EIA) (Washington, D.C.), the statistical and analytical branch of the U.S. Department of Energy (DoE) (Washington, D.C.).
The Haynesville produces mostly "dry" gas, with little crude oil or natural gas liquids (NGLs). That wasn't a problem when gas prices were relatively high. Gas prices averaged about $5.88 per thousand cubic feet (Mcf) between 2000 and 2009, peaking at an annual high of about $8 per Mcf in 2008 and occasionally exceeding $10 per Mcf. Gas production rose sharply over the 2008-2011 period, according to EIA.
Click the icon at right to see recent years' actual gas production, and projected future gas production, from the Haynesville Shale.High gas prices accounted for much, but not all, of that jump in production, Phil Budzik, a research analyst at EIA, told Industrial Info in an interview. "Some drilling and production was mandated by the terms of leases, which required the owner to perform some drilling within three years or lose its rights to the resource."
"A lot of companies rushed in and paid inordinately high prices--as much as $20,000 per acre--to secure acreage in the Haynesville," Budzik said of the Haynesville's "land rush" period a few years back. "What seemed rational at the time (when gas prices were high) seems irrational after the fact. It's really no different from the housing market--prices can only increase by 20% per year for so long before they crash."
What makes the Haynesville different from other shale formations is the depth of the resource, and the higher initial production levels, the EIA analyst said. "Oil and gas in the Marcellus Shale is 5,000 to 7,000 feet underground. In the Haynesville, it's easily twice that far down, but the drilling costs there are four to five times what they are in the Marcellus. Drilling costs tend to rise exponentially, not arithmetically, as you go further underground. And while initial production rates in the Haynesville were twice what they were in the Marcellus, those rates tend to decline faster in the Haynesville than in the Marcellus."
Still, the numbers tended to pencil out for many producers as long as gas prices were high. But their dramatic tumble last year caused many producers to reassess their operations in the Haynesville. Nationally, gas prices averaged about $2.66 per Mcf last year, according to EIA--down more than 50% from their 2000-2009 average. The Haynesville's higher production costs, absence of oil or NLGs, and soft demand for gas from manufacturers convinced some producers to curtail or close their operations in the Haynesville.
Louisiana is well-known as a natural gas-producing state. But less well-known is the significance of the state's natural gas usage, according to Professor David Dismukes, associate director of the Center for Energy Studies at Louisiana State University (LSU) (Baton Rouge, Louisiana). Louisiana ranks third in the country in total natural gas usage and second for industrial gas usage, he wrote in a recent study, "Unconventional Resources and Louisiana's Manufacturing Development Renaissance."
Dismukes has researched the relationship between Haynesville gas production and Louisiana's gas-intensive industrial concerns, notably chemical producers and petroleum refineries. In his report, he wrote there is a "symbiotic relationship between natural gas prices and Louisiana's energy-intensive manufacturing base." The state's manufacturers rely "heavily on natural gas for heat, steam, power generation and most importantly, feedstock purposes. Louisiana's chemical industry is particularly reliant upon natural gas and natural gas liquids since both are used to produce a wide range of goods."
Low-priced gas from the Haynesville could contribute to a renaissance of Louisiana's energy-intensive manufacturing base. But it's hard to find a natural gas price that suits Haynesville producers as well as gas-intensive industries in the Pelican State. Gas producers who can operate profitably in today's price environment are well-positioned to capitalize on manufacturing growth that could bring tens of billions of dollars of new capital investment to Louisiana over the next five to eight years, he added.
It looks like Exco shares Dismukes' upbeat projections for the Haynesville shale and Louisiana's manufacturing base. Today's gas price of about $3.70 per Mcf is approximately $1 per Mcf higher than one year ago. Does that price represent a sweet spot for Haynesville producers and Louisiana manufacturers, one that enables both to operate profitably?
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
