Tuesday, April 21, 2009

Haynesville Sizzle or Fizzle: Let’s be fair!

When I read some of the comments posted on this web log to a friend yesterday, he said, “Anything that gets this much flak, must be close to the mark.”

I have received dozens of e-mails and a half-dozen posted comments on this web log about the Haynesville Shale. Many of the e-mail authors strongly disagree with my opinions about the Haynesville, but are respectful and professional. In contrast, the authors of many web log postings who disagree with me are often disdainful, caustic and even vulgar, not only about my opinions but also about my professional qualifications. Some indignantly demand that I disclose the wells (be patient inquisitors—a list of wells follows as Figs. 1 and 2) that I used in my evaluation—I wonder if these same people issue similar demands to the companies that make pronouncements that the Haynesville Shale has 250 Tcf of reserves when there are fewer than 50 wells with any production so far, or that an average well will produce 6.0 Bcf when none have yet produced more than about 3.0 Bcf and most, considerably less.

To be fair from my side, readers have sent me data on Haynesville Shale production that was not available to me when I did my research and published my World Oil column and the previous web posting. That new information modifies my view of the Haynesville play somewhat, and requires an update to my observations and conclusions. Also, there is now a month or two of additional production history since I did the research for that work.

Based on this information, approximately 59% of Haynesville wells may have ultimately recoverable reserves of 0.5-2.0 Bcf (16 wells), while 41% may produce 2.0 Bcf or greater (11 wells), according to my analysis. The mode of 27 wells is 1.5 Bcf and the mean is 2.2 Bcf. These reserve projections are approximations, and are only intended to provide a range of possible outcomes for wells with too little production history to accurately project.

For those reservoir engineers who disparage my qualifications to pick a trend line through data points on a graph (something that apparently is beyond the capability of those with advanced degrees in science unless their degree is in reservoir engineering), I hope that you have never picked a top unless your degree is in geology.

The crucial issue about the Haynesville Shale play, however, is not rates and reserves, but cost. As I explained in “Haynesville Sizzle could fizzle”, threshold economics for the Haynesville Shale require netback gas prices of $8.50/Mcf, and minimum reserves of 2.5 Bcf/well. This is because drilling and completion costs are from $7.5-9.5 million. It is simple algebra once the costs are known.

I have studied the 10-K SEC filings by the major players in the Haynesville play. These are public documents prepared by the operators. With most operating costs between $2.50 and $3.50 per Mcf, rates and reserves simply do not matter at current gas prices of $2.50 netback in the Haynesville. When capital expenditures are added, it costs most operators about $7.50/Mcf to find, develop and operate in the play. While some operators are currently hedged at higher prices, this is a short-term situation, and no one will take the other side of a hedge at more than $7.50/Mcf today or at any time in the foreseeable future.

If you don’t believe me, you should read reports by Credit Suisse, “The True Cost of Shale Gas” (April 2009), and by Bernstein Research, “Why the Haynesville Won’t Work…at $4, $5, or $6/Mcf gas” (April 2009).

I am more optimistic now, based on new information, that the Haynesville Shale may be different from most other shale plays. If operators can substantially reduce cost, and if gas prices improve to levels during the first half of 2008 (average $10/Mcf Henry Hub), some percentage—perhaps 25-50%--of wells in this play may become commercial, but it’s really not about EUR as much as it is cost and gas price.

I have been fair in admitting that new information has modified my view of the Haynesville Shale play. I acknowledge that rates are extremely impressive for several wells, and that some wells have already produced more than 1.0 Bcfg.

For those who disagree with my views on this play, I ask that you be fair too. Look at costs, and not just rates and reserves. If the marginal cost to produce gas is more than $7.50/Mcf (which all operators admit and many state in public presentations–for example, Range Resources’ “IPAA 2009 Oil & Gas Investment Symposium”), then no one is making money on this play today regardless of impressive rates and strong reserves. Unless prices rise above levels they have reached during only 15 months over the past 10 years (or 20 years, for that matter), none of the wells in the Haynesville Shale play is likely to be commercial (Fig. 3).

I am not a gladiator. I don’t perform in my columns and web log waiting for thumbs up or down from readers to validate my methods or conclusions. I put my work in a public forum to share what I observe, and to generate a dialogue that may help us all move closer to the truth. I return every e-mail message that I get, because the people who write them want to engage in the conversation, and deserve my time and respect. For those who prefer to comment anonymously on this web log, I welcome your views also. I encourage you to join the conversation as peers and not as blood-sport spectators looking for entertainment at the Coliseum.























13 comments:

Anonymous said...

An ex-Petroleum Engineer's view: It's not as if this question wouldn't yield to analysis. Publically available production data can be used to develop a Monte Carlo analysis of the Hayesville play and solve this on an expected value basis. So - DO IT. Answer the question on an EV basis. This would also help in determining appropriate lease bonuses.

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Actually the Haynesville Shale is a lithologically heterogeneous, often organic-rich, mudstone. The composition of these mudstones varies greatly depending on position on geographic location and stratigraphic position

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