Shaletech: Haynesville-Bossier Shales:
M. Jay Allison cuts to the chase when assessing the current prospects for him and his contemporaries in Northwest Louisiana and far East Texas, telling investors on Nov. 3, “What a great time to be in the natural gas business, especially in the Haynesville.” As CEO of pure play Comstock Resources, Inc, Allison’s bullish bent reflects the unique position of operators in the Haynesville and overlaying Bossier shales to capitalize on the generational improvement in natural gas fundamentals over the past couple of years.
The continuing high-price expectations and the Haynesville’s direct access to an increasingly globalized natural gas industry were enough to entice Southwestern Energy Co. to shell out more than $4.5 billion late this year to expand its gassy footprint from the Appalachia basin, and, in the process, removed two players from an active roster now dominated by a handful of operators. Seesawing spot gas prices on Louisiana’s Henry Hub benchmark hit a nearly 13-year high of $5.51/MMBtu in October, according to the U.S. Energy Information Administration (EIA), which expects prices to average $5.53/MMBtu through February 2022, before dropping to an average of $3.93/MMBtu for the remainder of next year.
“We expect that the prices should moderate the way the strip is backwardated. That said, I mean the backwardation that you see out into 2023 and even into 2024 still delivers a pretty great price for natural gas, relative to our portfolio,” said Domenic Dell’Osso, the newly inaugurated CEO of Chesapeake Energy Corp.
Though operators insist they continue to prioritize capital discipline over unrestrained growth, Haynesville production is projected to reach an all-time high of 13,889 MMcfd in December (Fig. 1), according to EIA guesstimates. Much of that production is earmarked as feedstock for the Gulf Coast’s still growing liquefied natural gas (LNG) export sector (Fig. 2) and destined for gas-hungry Asia and Europe, where, according to BP CFO Murray Auchincloss, third-quarter prices were up as much as 85%, compared to the previous three months.
“This reflects a tight LNG market, driven by strong Asian demand growth, LNG supply outages, depleted European gas storage and uncertainty of our Russian pipeline imports. We expect gas markets will remain tight during the period of peak winter demand,” he said.
Haynesville-Bossier drilling activity, meanwhile, has held at a steady 46 rigs for most of October and November, according to Baker Hughes, topping out at a 2021 high of 49 active rigs in early May. As of Nov.5, the Louisiana Department of Natural Resources (DNR) had issued 360 drilling permits in the Haynesville this year, up modestly from the 296 new-well authorizations approved during the same 2020 timeframe. In the delineated 10-county Haynesville section of East Texas, the Railroad Commission (RRC), that state’s chief regulator, had authorized 273 horizontal drilling permits as of Nov. 16, compared to 238 permits issued last year. Of the 2021 permits the RRC approved in District 6, a combined 130 were extended to privately held companies Rockcliff Energy, LLC and Sabine Oil & Gas Corp.
Listed as the operator on 90 drilling permits, Rockcliff plans to close out 2021 with 58-61 gross wells put on line, compared to 44 new producers in 2020. While the company has provided no year-end 2021 production estimates, 2022 guidance calls for output of between 1,1000-1,200 net MMcfed. Rockcliff, which at last count controlled a 280,000-net-acre East Texas leasehold, closed out 2020 with net average production of 690 MMcfed. Sabine, a division of Osaka Gas USA Co, has not responded to requests for an update on current activity or production targets.
Two for one. In the Louisiana fairway, emboldened by the twin acquisitions of firmly entrenched players, Southwestern made a high-octane entrance in the Haynesville this summer, quickly establishing itself as one of the play’s leading operators. Two months after staking a claim in the play, the company was averaging six rigs and around two completion crews, and plans to connect 15 to 20 wells to sales this year.
In September, Southwestern closed the $2.7-billion acquisition of Indigo Natural Resources. The Houston-based operator followed up on Nov. 4 with an estimated $1.85-billion deal to buy Blackstone-backed GEP Haynesville, LLC, which is expected to close by year’s end. “With the expanded exposure to LNG, the LNG corridor and the growing demand centers along the Gulf Coast, this (GEP) acquisition will further improve the company’s overall basis differentials and increase our margins,” President and CEO Bill Way said upon announcing the company’s second acquisition of the year.
With the two transactions, Southwestern controls 269,000 net acres from which year-end 2021 production is targeted at roughly 1.7 Bcfd. The company drilled two wells, completed four wells and turned five wells on line in the third quarter, with production averaging 1.0 Bcfd. The five new producers flowed from Middle Bossier wells with an average initial production rate of 24 MMcfd. The “highly economic” Middle Bossier wells were completed with 6,326-ft lateral reaches, on average.
Competition for the largest Haynesville producer tightened with Chesapeake’s $2.2- billion acquisition of Plano, Texas-based Vine Energy Co. in November. Chesapeake, which emerged from Chapter 11 bankruptcy in February, says the Vine asset will nearly triple Haynesville production, from the 531 MMcfd delivered in the second quarter to 1,581 MMcfd (Fig. 3).
Looking ahead, Chesapeake, which now holds a commanding 348,000-net-acre Haynesville-Bossier leasehold, plans to average five to six rigs in 2022, including continuation of Vine’s three-rig and two- completion crew program. The Haynesville is included in Chesapeake’s Gulf Coast business unit, where 60 to 70 wells are slated to be drilled and turned in-line next year at an estimated cost of $1,000-$1,100/lateral ft.
Dell’Osso, who was named CEO in October, has not ruled out additional acquisition opportunities, providing they meet the company’s stringent criteria. “As you think about those other opportunities that are there, if we can achieve greater scale in a basin where we know we have had success, and where we have an opportunity for synergies on top of all those non-negotiables, then sure we will think about further M&A,” said the company’s former CFO. “But, these non-negotiables (criteria) create a high bar.”
Elsewhere, as expected, BP finally got around to exploiting the 193,000 net Haynesville acres acquired in the sweeping 2018 acquisition of BHP Billiton’s U.S. shale holdings. In the second quarter, the company’s U.S. onshore entity, BPX Energy, drilled what CEO Bernard Looney said was “our first well in the Louisiana Haynesville in 10 years.”
Specifically, he was referring to three new drills completed with 8,000-ft lateral reaches in the second quarter that have since gone on the books at an 80% rate of return. While BPX has not disclosed how many wells it intends to drill and/or complete, or 2021 production targets, CFO Auchincloss said the company “will gradually ramp up the activity and make sure that we get a decent size dividend out of it each year. We have a very strong resource base there.” The Louisiana DNR has BP listed as the operator of record on 10 drilling permits issued up to Nov. 5.
Tackling inflation, emissions. Comstock, for its part, is running a five-rig program and drilled 55 operated wells over the first nine months of 2021 at average lateral reaches of 8,554 ft, while participating in an additional 26 non-operated wells. By the end of the fourth quarter, the company will have connected around 78 gross (56 net) wells to production. The Frisco, Texas, company controls 323,000 net acres, which delivered cumulative third-quarter production of 128.9 Bcf, up year-over-year from just over an aggregate 102.5 Bcf. Comstock expects average fourth-quarter production to range from 1,420 to 1,450 MMcfd.
In November, Comstock solidified its pure play position with the liquidation of interests in 68.3 net (442 gross) non-operated Bakken wells for $154 million. The proceeds will be used to whittle down a year-end drilled-but-uncompleted (DUC) inventory of 15.5 net (20 gross) wells. “The reason we have the DUCs is that in 2020, we went for probably two-and-a-half months without fracing a well, and we had four rigs drilling wells,” said Allison. “So, you have a situation that kind of compounds over what we look like at the end of 2020, going into 2021. We have five rigs in 2021. So, we just never got caught up on the DUCs.”
Given the activity levels, Allison says the days of rock-bottom drilling costs are likely at an end for the foreseeable future. “They’ve been so low for so long, but we’ve worked that inflation number in our 2022 budget internally. We’ve got a 10% inflation factor in those numbers. And that’s a pretty big inflation number,” he said.
In a related development, Comstock signed an agreement in November with independent methane emissions auditor MiQ “to certify our natural gas is in accordance with the highest environmental standards,” said Allison. Beginning early next year, the company also will be deploying BJ Energy Solutions’ 100% natural gas-fueled frac spreads in its Haynesville developments. The BJ TITAN fleet is designed to reduce overall carbon dioxide (CO2 ) emissions by 25%, compared to standard diesel-powered frac spreads.
Comstock is certainly not an outlier, when it comes to efforts to reduce emissions in the gas-rich Hayesville. As low-carbon pressures intensify and environmental, societal and government (ESG) issues take on more weight within companies, shrinking one’s environmental footprint ranks high in basin-wide business decisions.
“It’s extremely prudent for us, and our entire industry, to ensure that we minimize any methane emissions, and we’re all over that,” said Robert Turnham, president and COO of Goodrich Petroleum Corp. “Certainly, it adds cost into the business, but it’s prudent. And by the way, the more you spend on that, the less that goes into the ground, which is bullish for commodity prices.” After adding roughly 4,500 net acres and associated production in Caddo and Bossier parishes in the third quarter, Goodrich holds a comparably modest 32,000-net-acre Haynesville position in Louisiana and Texas. Third-quarter production averaged around 166,000 Mcfed, up 7% sequentially over the second quarter.
Integrated LNG model sets Tellurian apart
Tellurian Inc. is distinguishing itself in the Gulf Coast liquefied natural gas (LNG) export community, even though the first shipment from the planned Driftwood terminal near Lake Charles, La. is not expected until at least 2025.
The nascent LNG shipper is unique in that it also functions as a pure-play operator, controlling some 9,708 net acres in the nearby Haynesville, with 21 operated wells at last count and a self-owned gas gathering system. Running a one-rig program, Tellurian expects to exit 2021 with production of roughly 70 MMcfd, increasing to around 220 MMcfd by the end of 2022 with 12 to 14 new wells on the boards.
The genesis of Tellurian’s integrated model was the November 2017 acquisition of producing and undeveloped North Louisiana acreage held by Texas-focused Rockcliff Energy Operating LLC. In keeping with a strategy to procure 15 Tcf of natural gas, Tellurian says it is in talks with upstream counterparts to expand the Haynesville footprint, including opportunities to invest in non-operated wells.
Meanwhile, Tellurian began early construction activities in July at the Driftwood export terminal on the west bank of the Calcasieu River, south of Lake Charles. Once completed, the terminal will have an initial LNG processing capacity of around 11 Mtpa, requiring some 550 Bcf/year of natural gas feedstock. The company says it has sold all necessary purchase commitments for Driftwood Phase One.
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