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Haynesville gas to compete for demand in US south

01 Jun 2017 20:24 (+01:00 GMT)
Haynesville gas to compete for demand in US south

Houston, 1 June (Argus) — Rebounding natural gas output from the Haynesville shale has added a nearby supply option for growing demand in the southern US.

Gross production from the Haynesville, a gas-rich formation deep underneath parts of east Texas and northern Louisiana, has increased each month since November 2016 as producers such as Chesapeake Energy, Comstock Resources and Exco Resources deployed rigs to exploit advanced drilling and completion techniques and capture higher profits. Haynesville output in April hit about 6.2 Bcf/d (176mn m³/d), up by about 3pc from year earlier, and production there shows no immediate signs of slowing.

The US Energy Information Administration (EIA) sees production rising by another 4pc this month and the energy consulting firm BTU Analytics predicts 1 Bcf/d of growth over the next 12 months.

The potential surge in Haynesville output pits those supplies against gas production from the Permian basin in west Texas and southeastern New Mexico and the Marcellus shale in Pennsylvania and West Virginia. Those fields will compete to feed power plants in the southeast as well as export terminals and petrochemical facilities on the US Gulf coast. The Haynesville may even have a leg up on the Marcellus and Permian because it is closer to that emerging demand and does not face the pipeline constraints that could hinder near-term production growth elsewhere.

"We are going to have a potential battle" as Haynesville production ramps up, more gas from the Marcellus makes its way to the southeast and the associated gas from Permian basin oil wells comes on line, Kathryn Downey Miller, a partner at BTU Analytics, said. But she noted a mix of production from all three regions will likely be needed.

The Haynesville, once the top producing US gas field by volume, was largely abandonedas US gas prices collapsed and producers pursued more lucrative opportunities in oil-rich fields in the Permian Basin and the Eagle Ford shale in south Texas. Gross output from the Haynesville peaked in November 2011 at more than 10.5 Bcf/d but had dropped to a 2016 low in March of about 5.9 Bcf/d.

Even then, producers were becoming more upbeat on the Haynesville's prospects. Innovations in drilling such as longer laterals and pad drilling, where multiple wells are drilled from a single location, plus lower service costs, allowed the Haynesville to begin competing for more capital. Wells in the most prolific sections of the Haynesville now break even at $2/mmBtu and more average wells are profitable at prices near $3/mmBtu, according to some analyst estimates.

Spot gas prices at locations near the Haynesville such as Columbia Gas Mainline, Texas Gas Transmission zone 1, and Trunkline zone 1A each have averaged above $3/mmBtu in May, a year-over-year increase of roughly 65pc. Those indexes, like most supply locations, usually trade at a discount to the Henry Hub. But that discount expanded last month to about 11¢/mmBtu from an average of 7¢/mmBtu a year earlier, a sign of rising output.

Future Haynesville supplies could face challenges as developers deal with rising service costs resulting from a boom in drilling. Prices for pressure pumping, a key well completion technique, are on the rise and could weigh on Haynesville wells.

Demand for pressure pumping is outstripping supply and will lead to higher completion costs this year and next, according to Tudor Pickering Holt. The investment bank also sees the US rig count rising to near 1,100 units by year-end 2018, a gain of about a fifth from last week's total. An increase of that size could also lift rig pricing.

The Haynesville rig count is already more than double year-earlier levels, according to Baker Hughes.

Halliburton, the largest US onshore service provider, said this month that the rising costs will probably still result in increased output.

"Customers have reconciled that prices are moving up," Jeff Miller, Halliburton chief executive, said at the UBS oil and gas conference last week. "The momentum around pricing continues to move up. The customer urgency is there to meet production targets," he noted.

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Haynesville basis to Henry ¢/mmBtu