Pipeline running thru forest

The Haynesville shale is primarily located in the ArkLaTex Basin and, as the basin name implies, spreads over northwest Louisiana, northeast Texas and slightly into southwest Arkansas. With a resource potential of some 150 trillion cubic feet of gas (roughly 60% of the Barnett shale), an early-stage superior recovery factor and other geological characteristics rivaling the best shale plays, the Haynesville has established itself as an extremely promising gas shale for some producers.

Currently, most of the production comes from Caddo, De Soto, and Red River parishes of Louisiana, but this core designation is likely to expand as the play continues to be exploited beyond the current hot spots. Production could be significantly bolstered by an additional geological play, such as the Lower Bossier shale, which lies about 200 feet above the Haynesville shale formation. As the play matures and reaches its maximum potential, a major concern is sufficient midstream infrastructure.

The key question: Can regional pipeline development keep up with production capacity, or is the region prone to a flow bottleneck that will keep regional gas prices low?

Too fast, too soon?
Commercial development of the Haynesville shale did not begin until early 2008, but the ramp-up rate has exceeded every other shale play to date. Rig counts in the play have soared from four in February 2008 to 175 in August 2010, almost double the number of rigs operating in the region a year ago. Even during the economic downturn of 2009, there was only a slight drop-off in rigs operating in the area.

With oil commodity prices strong, some companies plan to move rigs into the more liquids-rich Eagle Ford play. Nevertheless, drilling in the Haynesville will remain robust, and a steep drop-off in activity is unlikely. Company estimates put current production at some 2.4 billion cubic feet per day. That figure could grow by at least another 25% by year-end, as backlogged wells are completed and new ones come online.

Until now, pipeline capacity has nearly paced upstream development in the play, but the extraordinary growth rate of Haynesville production, if sustained, will require substantial new development of infrastructure.

Favorable location
The geological characteristics of the Haynesville shale, though key, are not the only reason it has emerged as one of the most promising plays. The Haynesville shale’s location in the ArkLaTex Basin, a historical hotspot for oil and gas activity, is also an advantage.

First, the regulatory environment, including lead times to asset lease contracts and well permits, is relatively favorable. Technical expertise unique to shale plays, such as fracing and proppant management, has been easily imported from the maturing Barnett shale.

Most important, immobile infrastructure, including pipelines and underground storage, which has exorbitant up-front costs and requires years to build, already exists in the Haynesville. It is evenly dispersed with well-placed interconnects to provide a flowing route for produced gas through some of the most liquid market hubs (Carthage, Perryville, Henry and the Houston Ship Channel) in North America.

Conversely, the Haynesville shale’s location has some disadvantages. Due to its rapid growth and competition from other midstream resources targeting eastern-demand regions like Florida, the Southeast U.S. and the Mid-Atlantic states, competition from other gas plays can easily stall the migration of Haynesville gas unless additional dedicated intrastate and interstate pipelines are constructed.

Midstream infrastructure
Gas coming from the Haynesville generally flows in the direction of the Perryville hub and from there toward Midwest and eastern U.S. markets. Inherently, there are three major segments where a disruption, due to the lack of pipeline capacity, could interrupt the flow from wellhead to market.

At the outset, the play could lack the necessary gathering systems to collect and process the gas into the respective interstate or intrastate pipelines. Second, a bottleneck could occur due to insufficient interstate or intrastate capacity to flow the gas toward the market hub. Lastly, gas from other producing regions could displace Haynesville gas and prevent it from reaching desired markets.

The Haynesville’s fairly high carbon-dioxide content requires treating to achieve downstream pipeline-delivery specifications. However, the gas is dry and relatively low in natural gas liquids (NGLs) compared to other shale plays, so fewer cryogenic or absorption plants are needed. Also, due to the fact that the Haynesville is an over-pressured reservoir, there will be a greater need for treating facilities earlier in the production life-cycle to handle the higher volumes. Compression plants would not be a necessity until later in the life-cycle.

Rapid growth in the Haynesville has prompted numerous essential gathering-system expansions over the past couple of months. These are recent major projects:

• Olympia Gathering System Centerpoint Energy Field Services (CEFS) signed a 15-year agreement with Shell subsidiary, SWEPI LP, and Encana Corp. in April 2010 to provide gathering services for up to 580 million cubic feet (MMcf/d). The system will be in service by December 2010, with a possible future expansion of 520 MMcf/d.
• Magnolia Gathering System
CEFS signed a similar agreement in September 2009 to provide gathering services of up to 700 MMcf/d. The system will be in service by September 2010, with a possible expansion of 200- to 300 MMcf/d.
• Regency Logansport System Regency Energy Partners LP completed a gathering system in August 2010 that added some 480 MMcf/d of capacity to increase the total capacity to 710 MMcf/d.
• TPF II Gathering System Tenaska Inc. began the construction in April 2010 of a high-capacity gas-gathering system with total capacity of 1,000 MMcf/d. It will be in operation in second-half 2010.
• ETML Gathering System Eagle Rock Energy Partners LP plans to expand its system, mainly in Nacogdoches and San Augustine counties, Texas, by 300 MMcf/d.

Gathering contracts in the Haynesville shale are mainly fee-based, depending primarily on the volumes gathered and treated. Revenue is not directly affected by the wetness of the gas, unlike keep-whole or percent-of-proceeds contracts, where the gatherer’s proceeds come from the sale of stripped liquids or a percentage of the gas and liquids sold on the market, respectively. Nevertheless, a percentage of all gathering volumes (about 1% to 1.5%) usually are retained as a usage component or due to compressor efficiencies. The sale of any excess retained gas could positively impact profitability.

The Tiger Pipeline
The initial 2007 and 2008 Carthage-to-Perryville pipeline expansion projects were designed primarily to move gas from East Texas sources and the growing Barnett shale areas. As the Haynesville play has developed, and other producers have sought markets for their volumes, several expansions and compression changes have been proposed for both interstate and intrastate pipelines.

Initially, two main projects were competing for take-away capacity from the Haynesville shale: Enbridge Inc.’s LaCrosse Pipeline and Energy Transfer Partners LP’s (ETP) Tiger Pipeline. In July of this year, Enbridge withdrew its pre-application for the project due to insufficient marketing support.

Energy Transfer’s 175-mile, 42-inch line will start from an interconnect with Houston Pipeline Co. in Panola County, Texas, and move eastward toward the Perryville Hub in Richland Parish, Louisiana. It will have an estimated capacity of 2 billion cubic feet per day with further expansion capability, and will connect with seven interstate and one intrastate pipeline for ultimate delivery to Midwest and eastern markets.

Although most of its gas supply will be sourced from the Haynesville shale, some flows will include gas from traditional East Texas plays, the Fort Worth Basin and the Bossier and Deep Bossier developments. The pipeline is expected to be in service by March 2011. As of August 2010, construction was on schedule to make the start date.

Beyond Perryville, there is considerable pipeline capacity taking gas to the northeastern and Midwestern markets, but there is also a lot of competitive gas flowing from regions other than northeast Texas and northwest Louisiana. As a result, there will be significant gas-on-gas competition.

In anticipation of increased production from the Haynesville shale, Enterprise Products Partners LP is extending its Acadian gas pipeline northward to pick up Haynesville gas and move it southeastward in Louisiana to access pipelines serving eastern markets, as well as interconnecting with Enterprise’s Acadian system, which serves Mississippi River corridor markets. The new pipeline extension, including 270 miles of 36- to 42-inch pipe with an approximate capacity of 1,800 MMcf/d, could be expanded to 2,100 MMcf/d. To date, Enterprise has executed agreements for nearly the full capacity and plans to start laying pipe in January 2011.

Overall, with the current state of low gas prices and higher oil and NGL prices, some unconventional gas producers are refocusing their attention on shale plays with more liquids, such as the Eagle Ford and Bakken shales. However, production in the Haynesville is economic at current prices and could easily exceed 4,000 MMcf/d during the next five years.

Producers will continue to play a more vibrant role regarding midstream operations in the Haynesville than in other regions. Mergers-and-acquisitions activity is likely to continue for gathering and processing as smaller players dispose of their assets to the bigger and more established players.