Haynesville gas production, drilling retreat continues, bucking broader US trend

New York — Contrary to other US basins, gas production from the Haynesville has continued declining this summer as low prices and a bearish market outlook have slowed drilling activity to its lowest level in over three years.

Through late July, Haynesville gas production averaged 11.9 Bcf/d for the month, having fallen 1.2 Bcf/d, or about 9%, from its record-high average of nearly 13.1 Bcf/d in May, data compiled by S&P Global Platts Analytics showed.

Lower production has accompanied historic weakness in US gas prices this spring, particularly at the Henry Hub – a key destination for much of the Haynesville's production.

Month to date, cash prices there averaged $1.68/MMBtu. In mid-June, the benchmark price index fell to just $1.38/MMBtu – its lowest in nearly 22 years, S&P Global Platts data showed.

Weak forwards prices are offering producers little incentive to continue drilling. On July 23, balance-of-the-year prices at the Henry Hub settled at an average $2.07 – well below the half-cycle breakeven price for an average producer, estimated around $2.50/MMBtu by Platts Analytics.

Drilling activity

Low gas prices this year have accelerated a decline in the Haynesville rig count that began in early 2019. Currently, the basin is home to just 33 rigs, down from nearly 70 in January 2019, data from Enverus Drillinginfo showed.

While reductions in 2019 were likely efficiency-driven, the downward trend in rigs this year has been steeper and has accompanied low prices that have remained stubbornly below $2 since mid-January.

Other indexes of drilling activity have simultaneously declined to more than three-year lows recently.

In June, Haynesville producers drilled just 29 wells and completed only 28, the lowest since early 2017, data from the US Energy Information Administration showed.

Outlook

Persistent cash and forward price weakness at the Henry Hub has challenged even the most efficient producers in the Haynesville this year. According to Platts Analytics, half-cycle, post-tax internal rates of return are currently estimated around 9% to 10% for an average producer in the Haynesville.

With forwards traders pricing in a sub-$2/MMBtu market at the Henry Hub through October, production and drilling activity in the Louisiana-Texas play will likely stagnate this year.

Current forecasts show gas output rebounding little more than 300 to 400 MMcf/d, possibly reaching an average 12.4 Bcf/d by the fourth quarter, according to Platts Analytics data.

A strong rebound in US LNG export demand could quickly reshape the outlook for gas prices at the Henry Hub, however, potentially giving producers renewed incentive to resume drilling by autumn.

In late March, US feedgas demand hit record highs at over 9.6 Bcf/d. This month, demand has averaged less than 3.4 Bcf/d, with the Gulf Coast export terminals among the hardest hit by recent cargo-lifting cancellations.

By the winter months, recently completed liquefaction capacity could quickly boost export volumes to new record highs at over 11 Bcf/d, Platts Analytics data shows.