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Commodities 2021: Strong Haynesville well economics buoy outlook for drilling, production

Highlights

Henry Hub Calendar-21 curve trading in $2.70s/MMBtu

Haynesville half-cycle IRRs average 13% in November

Drilling returns to pre-pandemic level as rig count hits 47

New York — With Henry Hub gas priced in the upper $2s/MMBtu through 2021, strong drilling economics in the Haynesville play are making it the shale gas industry's most likely candidate for production growth in 2021.

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As of late December, the Calendar-year 2021 forward curve at the Henry Hub continued to trade in the mid-$2.70s/MMBtu – down about 40 cents from an annual high in late October at $3.15/MMBtu, S&P Global Platts' M2MS data showed.

Despite the recent decline, data from S&P Global Platts Analytics suggested that even modestly lower gas prices at the Henry Hub could support robust drilling economics in the Haynesville.

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In November, the rolling 12-month forward curve at Henry Hub averaged just $2.69/MMBtu. Over the same 30-day period, though, half-cycle internal rates of return in the Haynesville averaged about 13%, making the Texas-Louisiana play the third-most profitable drilling location in North America behind the Permian Delaware and the Permian Midland.

Assuming benchmark gas prices remain roughly around that level next year, a continued ramp-up in Haynesville drilling would spur significant in-basin production growth, likely outpacing gains in associated gas production from the Permian Basin.

Drilling, production

In late November, rig count in the Haynesville climbed to 47, its highest since Jan. 1, data published by Enverus DrillingInfo showed. That month alone, producers in the Haynesville added seven drilling rigs, making the it the only North American shale basin to fully restore drilling activity to pre-pandemic levels.

After bottoming out at just 31 rigs in May, the slow but steady ramp-up in Haynesville drilling activity over the summer has already begun lifting production there. In November, output averaged over 12.5 Bcf/d – up about 700 MMcf/d from an annual low in August, when producers turned out just 11.8 Bcf/d on average, Platts Analytics data showed.

Following November's steep build in drilling activity, the Haynesville now appears poised for growth in 2021.

A recent forecast from Platts Analytics showed Haynesville production growing by nearly 30% from December 2020 to December 2021. Over that same period, dry and associated gas production from most other North American shale basins is expected to contract. In fact, only the Marcellus and the Permian are expected to see net gains in gas production over the next 12 months, with significantly smaller volumetric gains that amount to growth rates of around 5% to 10%, annually.

Midstream outlook

In addition to the Haynesville's comparatively strong well economics, recent and upcoming pipeline expansion projects there should also allow production to grow unconstrained in 2021. According to Platts Analytics, the ongoing midstream buildout will preemptively debottleneck producer access to the premium Gulf Coast market, improving optionality and end-market price outcomes

Most recently, Gulf South initiated service on its Index 99 Expansion project in August, helping to address potential takeaway constraints linked to Haynesville production growth. The 22-mile pipeline provides up to 750 MMcf/d in firm transportation service from the East-Texas Haynesville to existing interconnects with Transcontinental Gas Pipe Line's Station 85 in Alabama and Sabine Pipeline's Henry Hub interconnect in Louisiana.

The Gulf South project joined the already operational 1 Bcf/d Louisiana Energy Access Project, or LEAP, which earlier in 2020 began offering producers serviced by the Blue Union Gathering System access to a new 150-mile, 36-inch pipeline corridor to the Gulf Coast.

A third project under development by Midcoast Energy, the 1 Bcf/d CJ Express, will also expand market access from the Haynesville with its own separate startup coming potentially by the first quarter of 2021.