Drillers adjusting on low gas price

Last year, the state OK’d a pilot project that allowed Encana Corp. to drill the longest horizontal sections for wells the Haynesville Shale in northeast Louisiana has seen — 7,000 and 8,000 feet instead of the usual 4,600. Encana officials said the longer laterals cut production costs so much the company could make money with natural gas prices of around $3 per thousand cubic feet.

The problem — for Louisiana, Encana and every other energy company and landowner in the Haynesville — is that natural gas prices are now hovering around $2.50 per thousand cubic feet.

“That is a killer,” said Jim Welsh, commissioner of the state Office of Conservation. “When the Haynesville got cranked up in 2008, we were looking at $10 to $12 per mcf (thousand cubic feet). That’s down to $2, I mean, come on.”

Some companies say there’s no reason to spend $10 million or $11 million drilling a well in the Haynesville to produce $2.50 gas when the same investment in the Eagle Ford in Texas or Tuscaloosa Marine Shale in central Louisiana brings in oil worth $100 a barrel, Welsh said.

It costs around $4.50 to $5 to produce a thousand cubic feet of gas in the Haynesville, Louisiana Oil and Gas Association Vice President Gifford Briggs said.

The difference between production costs and prices of natural gas versus oil helps explain why the number of rigs working in the Haynesville is falling.

At the peak in October 2010, there were 148 rigs working in the shale, LOGA records show. Now there are 114.

“You’ve got horizontal rigs, and you’ve got access to these liquids in the crude oil shales; that’s where you’re going,” said David Dismukes, associate executive director of the LSU Center for Energy Studies. “That’s where the big money is.”

Encana spokesman Alan Boras said natural gas prices are the reason that energy companies, Encana included, are spending less on dry gas plays and investing more in “liquids-rich opportunities.”

One of those opportunities is the Tuscalooosa Marine Shale, an oil-bearing formation stretching across the middle of Louisiana. Encana has leased around 270,000 acres in the Tuscaloosa. The Canadian company has 350,000 acres in the Haynesville, and 150,000 to 200,000 acres in the Mid-Bossier, a natural gas formation that lies about 2,000 feet above the Haynesville.

Still, depressed natural gas prices don’t mean Encana will abandon the Haynesville or other shale gas formations.

During the BMO Capital Markets investor conferences in January, Encana Executive Vice President Eric Marsh said the long-term outlook for natural gas remains strong.

“It’s the short term, the next two to three years, that will be the challenge,” Marsh told attendees of the conference.

One reason for the company’s optimism is that the utility industry expects to shut down an estimated 30 gigawatts of coal-fired power generation plants over the next three to four years, Marsh said.

“We think that number is probably at the low end. We think that number could be as high as 60 gigawatts,” Marsh told investors.

Sixty gigawatts is enough electricity to power around 35 million homes.

Dismukes said even 60 gigawatts might be too conservative an estimate.

Utilities could mothball as much as 75 gigawatts of coal-fired generation in the next three to four years, Dismukes said. The amount depends on how rapidly federal regulations, such as cross-state pollution and mercury emissions, are put into place.

Meanwhile, electricity demand is rising in most of the country’s power markets, Dismukes said. The mid-Atlantic and Northeast states are desperate for additional power plants, which will burn gas to generate electricity.

The additional plants and higher electricity usage are expected to increase the demand for natural gas by 2 trillion to 3 trillion cubic feet a year, Dismukes said. The United States is now burning around 22 trillion cubic feet a year.

Marsh told investors that when prices recover, Encana will be ready.

The company’s strategy in the Haynesville calls for longer laterals, some as long as 10,000 feet, and an approach that will allow the company to exploit 4 to 6 square miles of reservoir from a single location, he said.

Encana’s Louisiana Haynesville wells are drilled vertically for 11,000 to 14,000 feet, then horizontally for 4,600 feet or so.

State regulations limit the length of the lateral, or horizontal section, Welsh said. Wells must be drilled inside “units” one-mile, or 640 acres, square. The regulations say the well must end 300 feet away from the unit’s boundaries.

“So if you have two units next to each other, and you own both of them … that’s 600 feet that you cannot produce,” Briggs said.

Putting multiple units together means that Encana doesn’t have to start drilling, stop, pick up and move the entire rig and start over, Briggs said. The cross-unit wells generate tremendous savings as a result.

Marsh said the state’s pilot program allowed the company to drill horizontal sections 7,000 to 8,000 feet long.

Encana believes the longer laterals will allow the company to lower production costs to around $2.75 per thousand cubic feet.

The longer lateral wells also boost production, Marsh said. Encana has a couple of cross-unit wells on the Texas side of the Haynesville producing 35 million cubic feet of gas a day, making them some of the strongest wells in North America.