The shift doesn't mean the oil and gas companies are packing and going home, but the slowdown likely will be felt in the coming months, whether it's through the lack of money some royalty owners had hoped for or fewer bucks in area cash registers that have been in overdrive because of activity associated with the shale development.
"At $3 or $4 natural gas prices, it's un-economical to drill those kinds of wells. Storage in the U.S. reached a peak (Thursday) at the highest ever. We have a huge surplus of it and oil prices are high," Louisiana Oil and Gas Association President Don Briggs said. "We are going to see rigs move. But there will still remain a considerable number of rigs to develop the units and leases."
"So although we will see rigs drop off, we will see activity," he added. "It's expected. It doesn't mean it's gone forever."
The biggest Haynesville Shale players — Chesapeake, Petrohawk and EnCana — signaled their plans to slow development of the Haynesville Shale via third-quarter reports to their investors in recent weeks.
And Credit Suisse, a Wall Street analyst firm, notes in its recent by-basin study of shale plays that supply and demand
indicate a tighter market in 2011. "While we see the natural gas rig count beginning to decline in 2011 as Haynesville lease capture is largely completed, production may not fall materially as producers move some to the Eagle Ford, which also produces significant gas, and realize 'pad-drilling' efficiencies as the Haynesville enters manufacturing mode," the report states.
Credit Suisse has lowered the natural gas price forecast to $5.25 per mmbtu from $6 per mmbtu. It forecasts $6 mmbtu in 2012, which is based on the belief that gas markets can "gradually improve on an expected reduction in dry gas drilling as the industry reacts to conserve capital amid weak gas prices."
"If the U.S. is ever going to see greater than $4 mcf gas, we have to slow down. The pace of drilling thus far has been artificial and has flown in the face of market forces. The supply glut has essentially taken seasonality out of gas prices, meaning no summer spikes and no expected spikes this winter," said Joan Dunlap, Petrohawk's vice president of investor and community relations. "In an effort to hold acreage, many producers are drilling at costs higher than their marginal cost of supply, which is unsustainable and even risky considering the condition of the broader economy. It is expected that while activity levels may slow next year, if gas prices react positively, revenues would be unaffected or even go up, which would be great news for royalty owners."
Chesapeake Energy's CEO Aubrey McClendon said during a conference call Thursday that any operator with a choice to drill a gas well or an oil well will go with the oil well. "That's what we're doing. ... We have found a way to find liquids, and we will back down gas drilling over time. Only a third of drilling in 2012 will be gas compared to 90 percent now. If gas prices recover, we can get back in it quickly. "» Oil is three or more times more profitable that natural gas."
Oil rose to around $86 a barrel Thursday on the New York Mercantile Exchange while natural gas rose 3.6 cents to $3.872 mcf.
Chesapeake will continue to actively drill its Haynesville acreage — 530,000 net acres — over the next year so key areas of the leasehold are held by production. That goal is expected to be completed by year-end 2011, said Katie McCullin, media relations coordinator.
The Haynesville Shale may be a victim of its own success.
The shift doesn't mean the oil and gas companies are packing and going home, but the slowdown likely will be felt in the coming months, whether it's through the lack of money some royalty owners had hoped for or fewer bucks in area cash registers that have been in overdrive because of activity associated with the shale development.
"At $3 or $4 natural gas prices, it's un-economical to drill those kinds of wells. Storage in the U.S. reached a peak (Thursday) at the highest ever. We have a huge surplus of it and oil prices are high," Louisiana Oil and Gas Association President Don Briggs said. "We are going to see rigs move. But there will still remain a considerable number of rigs to develop the units and leases."
"So although we will see rigs drop off, we will see activity," he added. "It's expected. It doesn't mean it's gone forever."
The biggest Haynesville Shale players — Chesapeake, Petrohawk and EnCana — signaled their plans to slow development of the Haynesville Shale via third-quarter reports to their investors in recent weeks.
And Credit Suisse, a Wall Street analyst firm, notes in its recent by-basin study of shale plays that supply and demand
indicate a tighter market in 2011. "While we see the natural gas rig count beginning to decline in 2011 as Haynesville lease capture is largely completed, production may not fall materially as producers move some to the Eagle Ford, which also produces significant gas, and realize 'pad-drilling' efficiencies as the Haynesville enters manufacturing mode," the report states.
Credit Suisse has lowered the natural gas price forecast to $5.25 per mmbtu from $6 per mmbtu. It forecasts $6 mmbtu in 2012, which is based on the belief that gas markets can "gradually improve on an expected reduction in dry gas drilling as the industry reacts to conserve capital amid weak gas prices."
"If the U.S. is ever going to see greater than $4 mcf gas, we have to slow down. The pace of drilling thus far has been artificial and has flown in the face of market forces. The supply glut has essentially taken seasonality out of gas prices, meaning no summer spikes and no expected spikes this winter," said Joan Dunlap, Petrohawk's vice president of investor and community relations. "In an effort to hold acreage, many producers are drilling at costs higher than their marginal cost of supply, which is unsustainable and even risky considering the condition of the broader economy. It is expected that while activity levels may slow next year, if gas prices react positively, revenues would be unaffected or even go up, which would be great news for royalty owners."
Chesapeake Energy's CEO Aubrey McClendon said during a conference call Thursday that any operator with a choice to drill a gas well or an oil well will go with the oil well. "That's what we're doing. ... We have found a way to find liquids, and we will back down gas drilling over time. Only a third of drilling in 2012 will be gas compared to 90 percent now. If gas prices recover, we can get back in it quickly. "» Oil is three or more times more profitable that natural gas."
Oil rose to around $86 a barrel Thursday on the New York Mercantile Exchange while natural gas rose 3.6 cents to $3.872 mcf.
Chesapeake will continue to actively drill its Haynesville acreage — 530,000 net acres — over the next year so key areas of the leasehold are held by production. That goal is expected to be completed by year-end 2011, said Katie McCullin, media relations coordinator.
EnCana Corp. officials in late October announced its deferral of about $200 million in capital spending — estimated at $5 billion — until 2011. Most of that is taking place in the Haynesville Shale region because of what company officials termed "unsustainable low" natural gas prices.
Exco Resources, which in October was operating 20 rigs in the Haynesville Shale area, announced this week its third quarter results reflect the continued strength of its Haynesville development. But as the company plans for 2011, it is focused on reducing costs, particularly drilling and completion costs, according to Chairman and CEO Douglas H. Miller.
"The fast pace of drilling that we've experienced up to this point in the Haynesville Shale development has been primarily driven by necessity rather than economic practicality. Considering the fact that natural gas prices are hovering under $4 and the increased service costs to drill a well in the Haynesville, the pace of drilling is expected to level off sometime in mid-2011," said Jodee Bruyninckx, LOGA's North Louisiana director. "Natural gas is a supply and demand commodity and, at present, supply is plentiful. It is not only beneficial for companies to drill these costly wells and produce the natural gas when the price environment is more friendly, it is also beneficial for royalty owners as well. Our companies are highly leveraged in the Haynesville Shale and have a vested interest in seeing these resources developed in a practical, safe and responsible manner."