The rising tide of shale oil from U.S. basins grabbed a lot of attention recently as the heads of OPEC and Saudi Aramco, executives and pundits gathered in Houston for the annual CERAWeek by IHS Markit. In addition, the International Energy Agency and U.S. Energy Information Administration continue to weigh in on the remarkable surge of American oil production and the effect that has on global markets. Traders worry that too much U.S. shale will swamp the price of oil.

But let’s focus on natural gas, another remarkable success story.

High-tech operations have made the Haynesville Shale great again, and they also keep the pedal to the metal in the ever-growing Marcellus region. Better technology and burgeoning global LNG demand makes these wells worth drilling. If you can get a higher rate of return at $2.50 per thousand cubic feet (Mcf) of gas than you did back when gas was $4 or $5, why wouldn’t you drill more now? In the Marcellus, people say a well can be economic at $2.47/Mcf.

Dry gas production there could grow in 2018 to reach 23.5 billion cubic feet a day (Bcf/d)—and by a whopping 58% to 35.6 Bcf/d by 2024. Gas production in the region has doubled since 2012, according to federal government figures. From the Southwest, including of course, West Texas, natural gas output could get to 10.9 Bcf/d this year and rise another 13% by 2024, reaching 12.4 Bcf/d.

Big numbers, all. Bernstein Research analyst Jean Ann Salisbury has called 2018 the year of the gas tsunami.

Demand is the key to handling the tsunami, as executives say in this month’s cover story on the Marcellus. This point was made as well by many speakers at Hart Energy’s first DUG Haynesville conference, held in February in Shreveport, La. Last year, some 14 operators completed about 150 horizontal wells in the Haynesville Shale.

At DUG, Robert Clarke of Wood Mackenzie compared the two huge gas plays. “The Marcellus keeps the Haynesville fringes out of favor,” the WoodMac research director said. “The Haynesville works at $3 but the Marcellus-Utica works at a lower price. Does LNG take it to $4? No. The impact of LNG exports is already priced in—any uplift from LNG is already in the price.”

He said he thinks full LNG utilization in coming years would move the Henry Hub needle by 40 cents an Mcf at most.

“I think $3 is absolutely critical for the Haynesville, which is uniquely competing against other supply regions that have different drivers.” The Permian’s associated gas production is essentially free, a bonus whose levels are derived from oil drilling activity, which is driven by oil price, he explained. In the low-cost Northeast, gas drilling is primarily driven by producers’ access to pipeline capacity, with incremental takeaway coming on strong this year. It is the ultra-price-sensitive Haynesville, therefore, where drilling activity is mostly driven by gas price economics, Clarke said.

Meanwhile, in 2017 the U.S. became a net exporter of natural gas for the first time in 60 years, with net exports averaging about 0.4 Bcf/d, vs. a net inflow of 1.8 Bcf/d the prior year. Quite a switch—an inflection point for the gas industry with major implications up and down the value chain.

A Morningstar Commodities research report on the U.S. LNG outlook said recently the coming combination of more domestic gas demand and more export demand will inject “much-needed bullishness” into the market, although the near-term outlook remains bearish, said director of research for gas and power, Matthew Hong. Henry Hub prices are under pressure, struggling to reach $3 and stay there.

But export projects operating now or already under construction represent 11.8 Bcf/d of new demand between 2018 and fourth-quarter 2019, Hong said.

You have a potential LNG exporter, Tellurian Inc., buying Haynesville properties. You have Tokyo Gas America Ltd. buying into several U.S. shale plays, gas-fired power plants and LNG … and attending DUG Haynesville.

The Haynesville hasn’t caught on with most investors yet, according to David Deckelbaum, speaking to DUG Haynesville attendees. “Several of my clients frankly will not look at gas equities because they’ve been snake bit,” said the KeyBanc Capital Markets director of research. “The Haynesville is resilient down to $2.50 an Mcf, but most gas activity has difficulty earning above the cost of capital below $3.”

The push to focus on returns will solve part of the problem of reluctant investors in time, but what is really needed is more consolidation among E&P companies, he said. “When everyone does the same thing, no one is special. It’s getting harder to differentiate between names” as all operators expand their completions and lateral lengths and report better EURs.

“The Haynesville in my mind should be operated by only one or two big operators,” he said. “Having eight independents in this play doesn’t make sense. The Haynesville has more rigs operated by private companies than public, so there is the potential for a compelling rewrite. It’s a good alternative to the Appalachian Basin.”

Comments