New Frontiers: the Haynesville natural gas bonanza reaches middle age

— In this week's Oilgram News New Frontiers column, Starr Spencer takes a look at the Haynesville Shale.

It was just a few years ago that it was just about the hottest thing around. Heck, they even made a documentary about it. Now, it seems to have lost some of its luster. But only for now, because there are still plenty of people who think it has a vital role in the energy future of the US.

According to the US Energy Information Administration, production from the upstart Haynesville Shale natural gas play in Northwest Louisiana/East Texas, which just celebrated its third birthday, has overtaken the stalwart Barnett Shale in North Texas that just a short time ago was the country's swingin'est gas field.

Despite its prominence, not only do analysts believe the Haynesville has temporarily peaked -- at least until new markets for gas open up to soak up an existing US supply overhang and spur more gas drilling -- but they also foresee an exodus from the field starting this year.

The EIA, statistical arm of the US Department of Energy, said in mid-March that the giant Haynesville field was turning out roughly 5.5 Bcf/d of gas compared to the Barnett Shale's 5.25 Bcf/d, citing Bentek Energy as its source. Bentek is owned by Platts.

"It took nearly a decade of shale-focused drilling to reach 5 Bcf/d at the Barnett," EIA said in a press bulletin. "That threshold was surpassed at the Haynesville in less than three years" due to technology efficiency gains.

But gas isn't really the hot commodity right now; oil is. At well over $100/b, operators have flocked to those plays. Analysts say the Haynesville's recent output climbs stem chiefly from obligation: E&P companies must drill their acreage during the required three-year lease terms to hold it. And since the Haynesville is just three years old -- trailblazer Chesapeake Energy unveiled it in March 2008--the stampede of operators that entered the play in the months afterward will wind up their drilling there later this year.

At that point, they have little incentive to keep producing gas, given its relatively low price at just over $4/Mcf. The result should be far fewer Haynesville rigs by year-end than the roughly 150 working there now. That is down from 170 rigs in early October 2010.

So apart from the companies ramping up production in gassy fields, who even thinks about Haynesville and Barnett anymore?

The answer: a lot of forward-thinking people. Just as in 2008 when rising crude and therefore gasoline and diesel prices prompted a widespread clamor to step up use of renewable fuels, it's deja vu all over again in 2011. And the call is coming from a diverse set of sources.

Operator Chesapeake, along with legendary Texas oilman T. Boone Pickens, have long been enthusiasts for the potential of natural gas to power the US and even export overseas. But others also have recently stepped up their efforts in the fray. Honda, for one.

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The Japanese automaker offers the only natural gas-fueled car in the US, the Honda Civic GX. The car, launched in 1998 and initially offered only to fleet buyers, a few years ago began to be offered in dealer showrooms in four states: Oklahoma, Utah, California and New York. But starting with 2012 models, the GX will be offered nationwide, Honda spokeswoman Jessica Fini said. "We've sold about 2,000 units a year," which is relatively small compared to overall sales volume, Fini said. But with national exposure, "we do expect an increase."

Sources agree natural gas is plentiful any way you slice it: last week EIA unveiled a study saying the US holds at least 862 Tcf of recoverable gas -- 40% more than previously estimated. EIA also estimated more than 6,600 Tcf of recoverable global supply. But it remains to be seen how to get those volumes into cars and trucks.

Many US cities already use natural gas to fuel municipal buses and even some school buses. And with the price of the fuel so low relative to gasoline and diesel -- sources say at least 30%-40% less on an equivalent basis -- substantial savings could be realized by opting to "filler up" on natural gas. But an entire infrastructure based on gasoline and diesel over the past century can't be changed overnight.

In addition, even if customers buy natural gas-fueled vehicles, fueling stations are still sparse. But experts believe if somebody builds it, users will come, and that demand for gas-powered vehicles will breed more natural gas fueling stations.

"It's a chicken-and-egg situation," analyst Steve Smith, of Stephen Smith Energy Associates, said. "I think it reaches a point where, if gasoline stays at $4 per gallon, you start to destroy demand," which may make natural gas more attractive.

The US government, which set consumption mandates for biofuels a few years ago, may also jump into the incentives ring for natural gas. Last week four members of Congress introduced the NATGAS Act of 2011 -- New Alternative Transportation To Give Americans Solutions. The bill provides tax credits for purchase of natural gas-run vehicles; payment of up to 50% of the cost of installing natural gas pumps to a maximum $100,000; and also offers $0.50/gal to the fuel seller.

"Industry is in an interesting spot now," Madison Williams analyst Andrew Coleman said. "On one hand, companies can find gas very cheaply, and on the other hand, they can't make money unless the price is a lot higher."

--Starr Spencer in Houston