With weak commodity prices still around (though gas has been trading within $0.25/MMBtu of $3 after 16 year lows of sub $2 gas in March, April, and May of this year), operators are still trying to do everything they can to generate as much cash as they can. For some, this means exiting plays and consolidating acreage. For others, acquisitions are in the game plan, as they try to increase their presence in areas that are perceived as the best for a price environment like the one we are experiencing now. Recently, Chesapeake (NYSE:CHK) announced that they would be exiting the Barnett, as well as renegotiating gathering commitments with their midstream providers around their Midcon assets. What do lower gathering costs mean in the bigger picture?
Let’s focus on another basin where Chesapeake announced restructured gathering costs, the Haynesville. Chesapeake is one of the biggest producers in the Haynesville, and just last year they were able to renegotiate gathering rates in the Haynesville down, to realize cost savings of approximately $0.20/Mcf. This change in gathering costs raises an interesting question: did the reduction cause the Haynesville to become economically competitive with both the wet and dry regions of the Northeast? Using BTU Analytics’ proprietary economics model, and a small tweak to gathering costs, the following shows how the Haynesville compares to the Northeast both before and after adjusting gathering costs.
The above graphic shows the results, but needs to be examined carefully before reaching any conclusion about the ability of southeast gas to compete with northeast gas. The Haynesville reduced scenario uses a $0.20 cent gathering cost compared to the old scenario. At first glance, it may seem as though the Haynesville is just as competitive as the Northeast from a wellhead perspective, though lagging a bit behind the dry parts of the area (Appalachia NE). Factoring in differentials would add relative strength to the Haynesville, given that stacked rates in the Northeast would lead to transportation costs of anywhere from $0.40-$1.00/MMBtu just to get the gas to the southeast. However, it is important to realize that this is a distribution, which means that it is more telling (and less resistant to change) for areas with a larger sample size. Appalachia SW has nearly 10 times the number of wells in this sample than the Haynesville, which means additional wells in the Haynesville will have a stronger affect on shifting the distribution than additional wells in Appalachia SW.
The Haynesville results also come from a smaller sample of operators, with only a few major players (such as Chesapeake, BHP and EXCO), while the Northeast has a much bigger pool of producers. The small number of operators (and operators that are either hurting or have much more attractive plays) reduces the potential for a quick rebound in drilling, leading to continued uncertainty in the Haynesville. But the 7% change in the number of economic wells given this gathering cost change gives insight in to how the economics of Chesapeake’s Midcon assets may change after the restructuring of those gathering costs is finished.
To get a deeper look into the economics of other plays in the country, as well as a look on the assumptions driving the economics model, be sure to check out BTU Analytics’ E&P Positioning Report, as well as sign up for our complimentary webinar on the report.