Will the Haynesville Shale ever matter again? This is a question that has been asked day in and day out by many since production in that play peaked in 2011. Over the last 5 years when crude was trading at over $80, associated gas production was forced higher. As liquid plays took the limelight from dry gas plays there seemed to be limited options for the gas production in the Haynesville. However, despite the recent low gas price environment, there are now signs that life may be coming back to the dry gas play that has been edged out over the past few years.
Looking at the graphic below, we see that in the face of natural gas prices falling by 25% in 2015, well activity has made a push up to 18 wells per month during that same period.
The upswing is being piloted by one company, Chesapeake Energy. Despite having significant acreage in some of the top plays operating in this commodity price environment, such as the Eagle Ford, Utica and Powder River Basin, Chesapeake has chosen to prioritize Haynesville development. In doing so, Chesapeake is hoping to show that the Haynesville can become relevant again, using ‘enhanced completions’ and lower well costs as the proof that is much needed. (Note that Chesapeake reports having 387,000 net acres in this play, an amount that is second only to the acreage owned in the Utica).
Using BTU Analytics’ economics model to run wellhead sensitivities at points over the past three years, we see that Chesapeake may be on to something. The results show that, even though natural gas price outlooks are falling, the Haynesville is seeing rates of returns that are undeniably trending upwards. This is a direct result of higher initial production (IP) rates (up 18% over the last two years) in addition to well costs that are decreasing.
Even as these rates of return are increasing, a 30% IRR is not necessarily enough to cause other producers with better portfolio options to blindly follow Chesapeake into a Haynesville renaissance. Rather, the actions of Chesapeake demonstrate to us that we are far from seeing the end of the productivity push from producers. Increases in efficiency, partnering up with prolonged periods of sub $60/bbl oil, which could drive down the effect of associated gas on the market, may allow the Haynesville to elbow its way back into the picture. Additionally, it’s important to keep in mind the Haynesvilles’ proximity to Henry Hub (along with the ample take away capacity) as opposed to the gas coming from the Northeast, where transportation costs are going to be higher, when thinking about the LNG exports that are primed to begin in the Gulf Coast area over the next few years. Time will tell, but for the Haynesville, this could be a new beginning.
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