The Haynesville Shale play needs $6.50 gas prices to break even. With natural gas prices just above $2/Mcf (thousand cubic feet), we question the shale gas business model that has 31 rigs drilling wells in that play that cost $8-10 million each to sell gas at a loss into an over-supplied market.
We first evaluated the Haynesville Shale in 2009 and the conclusion then was the same as it is today: the average well by top operators will produce about 4 Bcf and is not commercial at gas prices below $6 or $7 per Mcf. The play has two insurmountable geological problems. First, the shale is not brittle and, therefore, does not respond well to hydraulic fracturing. Second, the reservoir is over-pressured and compacts when gas is produced.
We have heard fairy tales from operators over the years about how they will improve the miserable performance of Haynesville Shale wells. These included choking back production, re-fracking old wells and, recently, drilling 10,000 foot laterals. None of these approaches worked because bad geology cannot be improved with expensive technology.
We evaluated well performance for the 5 biggest producers in the play based on cumulative gas production and the number of producing wells
Table 1. Key operators in the Haynesville Shale play based on number of producing wells and cumulative gas production. Source: Drilling Info and Labyrinth Consulting Services, Inc.
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We did standard rate vs. time decline-curve analysis by operator and by year of first production to forecast average well reserves (an example is shown in Figure 1).
Figure 1. Example of Haynesville Shale decline-curve analysis showing standard log of rate vs. time, rate vs. cumulative production and log of rate vs. log of time plots for a group of XTO Energy wells with first production in 2011. Source: Drilling Info and Labyrinth Consulting Services, Inc. (click image to enlarge)
The matches of decline-curve forecasts and production histories were generally excellent providing good confidence in resulting estimated ultimate recoveries (EUR). The decline trends were consistently hyperbolic with relatively low b-exponents (0.4-0.6) reflecting higher decline rates compared with other shale gas plays.
BHP has the best well performance with 5.4 Bcf (billion cubic feet of gas) per average well and Chesapeake has the worst with 4.2 Bcf per well among the evaluated companies (Table 2). Break-even gas prices vary from a low of $5.29 per Mcf for BHP to a high of $6.82 per Mcf for Chesapeake. The average EUR for all evaluated companies is 4.3 Bcf and the average break-even price is $6.57 per Mcf.
Table 2. Summary table of weighted average well EUR for the Haynesville Shale companies evaluated, the number of wells used in the analysis, and the break-even gas price per Mcf based on their respective EUR (ECA=Encana and CHK=Chesapeake). Source: Drilling Info and Labyrinth Consulting Services, Inc. Related: Besides Europe, Saudis To Capture Russian Market Share In China
Economics were based on the lowest drilling and completion cost ($8.6 million) that we could find, standard operating expenses and production taxes, and an 8% discount factor (Table 3).
Table 3. Haynesville Shale break-even economic assumptions and break-even prices and percent of Haynesville wells for a range of EURs. Source: Labyrinth Consulting Services, Inc. (Click to enlarge)
At $6 gas prices, only 17% of Haynesville wells break even (Table 3) and approximately 115,000 acres are commercial (Figure 2) out the approximately 3.8 million acres that comprise the drilled area of the play.
Figure 2. Haynesville Shale EUR map showing the commercial area at $6/Mcf gas prices (>5.5 Bcf) in yellow and orange. Source: Drilling Info and Labyrinth Consulting Services, Inc. (click image to enlarge) Related: Natural Gas Companies Slammed By Low Prices
The Haynesville Shale play is a commercial failure. Encana exited the play in late August. Chesapeake and Exco, the two leading producers in the play, both announced significant write-downs in the 3rd quarter of 2015.
And yet, Chesapeake is operating 6 rigs and Exco is operating 3 rigs in the play (Table 4).
Table 4. Haynesville Shale rig count for key operators. Source: Drilling Info and Labyrinth Consulting Services, Inc. (click image to enlarge)
What we see in the Haynesville Shale play are companies that blindly seek production volumes rather than value, and that care nothing for the interests of their shareholders. The business model is broken. It is time for investors to finally start asking serious questions.
By Art Berman and Lynn Pittinger
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