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Gas Production in the U.S. at a Standstill?

Regional Production Analysis Part 3 – Louisiana

July 22, 2015 | By Charles Nevle

In Part 1 of this series we discussed the fact that wellhead gas production rose to average 80.1 Bcf/d by December 2014, an impressive 6.6 billion cubic feet per day (Bcf/d) increase over December 2013. However, since the beginning of 2015 production has failed to breach its December 2014 peak. Part 1 of this series focused on the Marcellus Shale and Part 2 focused on Ohio and West Virginia. In this edition of Get the Point we will focus on production in Louisiana which resides in the Gulf Coast North and Gulf Coast South regions.

Lower 48 Wellhead Production Growth

2015 Year-to-Date Production Growth by Region

PointLogic’s Gulf Coast North and Gulf Coast South regions each have a Texas component and a Louisiana component. Looking at the Louisiana components of both regions show that production in the state declined by 1.0 Bcf/d in 2014 and since the beginning of the year an additional 0.7 Bcf/d loss has been incurred.

Louisiana Wellhead Production

Northern Louisiana

North Louisiana is home, of course, to a large portion of the prolific Haynesville shale play which provides the lion’s share of the production from the region. Production from the six parishes in Louisiana that are primarily Haynesville production (De Soto, Red River, Caddo, Bossier, Sabine and Bienville) made up just shy of 70% of Louisiana’s production in 2014. The percentage was even higher during the peak Haynesville production period of 2011-2012 when output from these parishes made up nearly 80% of the state’s production. Currently, the top eight producing parishes in Louisiana make up just under 80% of the production in the state, with six of these eight parishes considered Haynesville parishes, with the largest, De Soto, making up a third of the state’s production by itself.

Louisiana Gas Production by Parish

In turn, about 80% of the production in the parishes that make up Louisiana-Haynesville are dominated by six producers.

Haynesville Average Daily Wellhead Production 2014

The story of the rise and fall of Haynesville can be tied to producers electing to shift resources and chase greater rates of return in the oil-liquids rich producing areas of the Marcellus, Permian, Eagle Ford and Bakken. What remains of the Haynesville continues to be an interesting story, due to the enormous potential that remains in this play when and if the right economic situation emerges. Many of the existing operators continue to see improving economics from the play as longer laterals, enhanced completions and recompletions lead to higher well estimated ultimate recoveries (EURs) and increase the economically developable acreage.

For example, in a recent investor presentation Chesapeake describes how new stimulation technologies being employed in the Hayesville are doubling their developable area of the play from 90,000 net acres to 184,000 net acers while increasing EUR’s by 25%.

However, the realities of a market awash in gas are difficult to overcome, and despite the strong gains in efficiency being achieved, Chesapeake plans to reduce rigs in the play to three by year’s end from the six rigs that are currently operating. The second largest regional producer, BHP Billiton, has no rigs operating in the area. Total rigs operating in the region stand currently at 10, down from 20 at the end of 2014, a small remnant of the 114 rigs operating in the Haynesville back in early 2011.

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Meanwhile, a noteworthy development is taking place in the shadow of the Haynesville. In the ‘Louisiana Gas Production by Parish’ chart above, take note of the red bar at the top of each column representing Lincoln Parish. This parish is located just to the east of the Haynesville and production here represents the only significant production gains in Louisiana between 2013 and 2014.

Only 16 of the 65 parishes that reported production in Louisiana showed growth in 2014. The total growth for these 16 parishes amounted to 129 MMcf/d. Lincoln Parish comprised 92 MMcf/d of this total. Lincoln Parish is also the only parish in the state to show significant rig growth since the beginning of the year. Total rigs in Louisiana stood at 46 at year end and are now 36. While four parishes have increased rigs by one, Lincoln’s rig count has grown by five, from seven rigs operating at year end to 12 currently.

The story of Lincoln Parish is really the story of one pure-play producer, Memorial Resource Development (MRD), an independent producer focused like a laser on Lincoln Parish, specifically the liquids-rich Terryville Complex of the Cotton Valley formation. In a recent investor presentation, MRD indicated achievable Internal Rates of Return (IRRs) of between 44% and 172% at $50 per barrel of WTI crude and gas prices that are approximate to the current forward NYMEX strip.

Best-in-Class Performance and Economics

Despite the bright spot of production growth in Lincoln Parish, the outlook for northern Louisiana gas production in the near and medium terms looks like a story of continuing declines. Reduced development activity has led to significant declines in production despite very real gains in individual well productivity. The prospect of emerging regional demand led by LNG exports, but also aided by increased regional demand from industrial use and gas-fired power generation, certainly provide a tangible light in the tunnel for the Haynesville over the longer term. The play is blessed with an abundance of pipeline infrastructure, short-haul transportation costs to emerging demand centers, and more importantly open capacity on this infrastructure to allow for increases in production to quickly reach the market as soon as pricing signals a call on this prolific resource.

Southern Louisiana

Of the 36 rigs currently operating in Louisiana, 13, or just over one-third are in Southern Louisiana. The wellhead production aggregation company DrillingInfo breaks Louisiana into 6 onshore districts as depicted in the map below. Roughly 20% of the state’s on-shore production is produced in parishes defined by the districts classified as Lake Charles, Lafayette, New Orleans, and Houma below. These four districts correspond well with what PointLogic classifies as the Louisiana portion of the Gulf Coast South region.

Gulf Coast South Region

Production from the four southern districts depicted above is shown below:

Southern Louisiana Gas Production

The districts other than the area encompassed by the Lafayette district have been, for the most part, on a consistent decline since 2005. The story had been the same for the Lafayette district which declined from producing 788 million cubic feet per day (MMcf/d) in 2006 to 396 MMcf/d in 2010, but since then the district has reversed course and in 2014 produced an average of 512 MMcf/d. Although a 116 MMcf/d increase over four years is not huge, it is counter to what is occurring in the rest of Southern Louisiana.

The production gains have been in St. Mary and Vermillion Parishes increased 113 MMcf/d and 51 MMcf/d from 2010 to 2014, respectively, while the rest of the Lafayette district parishes saw declines of 48 MMcf/d:

Lafayette Regional Parishes Production

St. Mary and Vermillion Wellhead Gas Production

Virtually all of the increased production in Vermillion Parish is from activity by PetroQuest Energy, while Castex Energy leads the production run up in the parish of St. Mary. Two other operators also contributed, although in much lower quantities – Texas Petroleum Investment and Energy XXI. Rig counts for the two counties reached as high as 12 rigs during the second quarter of 2012, but have since dropped to only one rig in St. Mary Parish while none are currently operating in Vermillion. Thus, although production activity had increased in this region over the past few years, a lack of current development clearly will challenge the sustainability of any upward momentum.

Vermillion and St. Mary Parish Rig Counts

Tuscaloosa Marine Shale PlayFinally, one play in the region that is often discussed is the Tuscaloosa Marine shale play. This play spans Louisiana and Mississippi with most of the activity focused on the border of the two states.

This play is primarily considered an oil play though associated gas is produced as well. Several operators own acreage in the region, but production to date has been primarily attributed to just three: Encana, Goodrich, and Halcon.

Although this play has shown a lot of promise, it is important to keep it in perspective when it comes to near and medium term production potential, especially as it relates to gas. Current production from both the Mississippi and Louisiana portions of the play is a paltry 9 MMcf/d. In addition, although rigs operating in the area reached above 15 for a good portion of 2014 there are only 3 rigs currently operating.

In Conclusion…

The story of Louisiana gas production, with the exception perhaps of MRD’s activity in Lincoln Parish, seems to be right place, wrong time. There is tremendous production potential still available in the state and operators there have been very successful at increasing efficiencies through reducing costs, speeding up drill times, and getting more gas and/or oil out of each well. Competition with other extremely prolific plays in the Northeast and Texas in an environment of somewhat constrained demand have not been rewarding these efforts sufficiently to allow increased development, rather the story has been of reduced regional capital expenditures.

However, the region remains poised to regain its glory under the right circumstances, and those right circumstances do seem to be lingering over the horizon. Come 2019, when expectations for strong LNG exports from the Louisiana and Texas border and new demand from the flurry of petro-chemical facilities being constructed, the market in Louisiana will likely be very different than it is today. Until then, the region’s gas production as a whole will continue to struggle.

Stay tuned to part four of this series where we cross the Sabine River into Texas to discuss what we at PointLogic see taking place in the most productive state in the country.

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