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Wet Gas and Marcellus Won’t Crowd Out Everyone: NE LA Cotton Valley Hits the Gas

Over the past three years production growth out of the Marcellus and associated gas produced from liquids drilling offset declining dry gas production out of the areas like the Haynesville and Rockies.  With approximately half of US natural gas production coming from liquids plays relatively insensitive to the gas price, only the low-cost Marcellus was needed to balance the market, essentially putting a cap on natural gas prices.  Operators in other dry gas plays haven’t been able to complete with ‘free’ gas from plays like the Eagle Ford and cheap gas from the Northeast, setting up an infrastructure building frenzy to support Northeast production growth, and the transportation needed to bring that gas to supply markets, primarily in the Southeast and Texas.

But some dry gas producers are finding assets that can compete in a $4.00/mcf gas environment.  In Louisiana, one area is bucking the trend of decline, Northeast Louisiana.  The growth in NE Louisiana is due to the efforts of one operator, Memorial Resource Development (MRD), drilling horizontal Cotton Valley wells in Lincoln Parish.


Why is this area growing?  Returns.  Memorial has reported average well costs near $8.0 million and using an average initial production rate  in line Memorial’s recent results (15 MMcf/d), BTU Analytics estimates a pre-tax IRR of 81% for these Cotton Valley wells.   This compares favorably to the dry Marcellus, where BTU Analytics estimates a 40% IRR at $4.00 gas.


However, using an average of initial production results over the past two years, BTU Analytics estimates that IRRs for a horizontal well in Northeast LA are approximately 16% based on average IP results over the past two years from state reported data (9 MMcf/d) and an $8.0 mm well cost.

While Memorial is helping drive Northeast LA production higher the overall Louisiana production out look remains on a downward trend at current drilling activity.


Will other operators follow suit with Memorial and invest in additional Cotton Valley drilling and drive production even higher competing with Marcellus & Utica for LNG demand?  Will oil results in the Tuscaloosa Marine Shale finally become consistent and drive up associated gas production in Southern Louisiana?

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Kathryn Downey Miller is President of BTU Analytics where she leads the firm’s consulting and analytics groups in delivering market advisory services to clients across all sectors of the industry. Additionally, Kathryn oversees strategic planning, financial budgeting and analyst development for the company. Prior to founding BTU Analytics, Kathryn built market expertise in a diverse set of prior industry roles, including buyside investment research at an energy focused hedge fund, energy market fundamentals consulting at Bentek Energy, investor relations strategy consulting for E&P companies and investment banking at Citigroup. She speaks frequently at industry events on North American energy markets and is a CFA charterholder.

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