Haynesville rig count crests as low gas prices bear down on producer margins

An apparent slowdown in drilling activity in the Haynesville Shale this spring could signal the end of a production surge there that comes as low gas prices continue to eat away at producers' profit margins.

Over the past four to five weeks, the number of active drilling rigs in Haynesville has retreated to just 81 from 86, which was a more-than-10-year high, data from S&P Global Commodity Insights shows.

While weekly fluctuations in a basin's rig count typically have a more protracted impact on production, the recent and sustained drop—which is also observed in Baker Hughes rig data—could signal the start of a more enduring trend.

Since late March, gas production in the Haynesville has rocketed to record highs, topping 16.2 Bcf/d earlier this month. The new production records represent the culmination of a steady buildup in drilling activity since late 2021, when rising gas prices rekindled more widespread drilling interest in the Texas-Louisiana basin.

Now, though, as US gas prices languish near $2/MMBtu, the higher cost of drilling in Haynesville is making the basin's production push look less sustainable in the current market environment.

For years, comparatively higher well costs in the Haynesville weighed on the basin's growth outlook as many producers opted instead for lower-cost drilling options in Appalachia, but beginning around 2016-2017, many producers began returning to the basin after unlocking new technology that helped to lower drilling costs. Even now, the breakeven gas price required for the highest-quality core-acreage wells is about $3/MMBtu, according to a recent estimate from S&P Global. By comparison, NYMEX Henry Hub prompt-month futures continue to hover around $2/MMBtu, with most of the 2023 curve still pricing below $3/MMBtu, S&P Global data shows.

Storage

High gas storage levels in the US South Central region this summer could add to the pressure on Haynesville gas production. As of March 31, inventory levels in the South Central were estimated at 921 Bcf as the summer injection season gets underway. At its current level, regional storage is already 256 Bcf, or nearly 40%, above the five-year average, according to data from the US Energy Information Administration.

By this summer, brimming gas storage levels across the US Gulf Coast could keep storage injection demand limited, pushing more supply into the spot gas market and potentially pressuring gas prices and production from the nearby Haynesville Shale.

In a recent investor note, RBC Capital Markets analyst Scott Hanold noted anticipated market pressures this summer from generally high US gas storage levels, which were projected to crest near 4 Tcf this fall. "We expect some periods of forced curtailments as storage fills in the fall," he said.

In a separate investor note from Goldman Sachs commodities research, lead analyst Daniel Moreno agreed, saying, "The ongoing storage surplus, particularly in the South Central region will likely continue to pressure cash markets and the front of the curve in the near term."

Moreno also said he sees general market pressure, and low gas prices in particular, eliciting a supply response this year with some producers already announcing activity cuts in fourth-quarter earnings. Noting the recent drop in Haynesville rig count, Moreno said Goldman Sachs expects further declines to be forthcoming.