The Haynesville shale is primarily located in the ArkLaTex Basin and, as the basin name implies, it spreads over Northwest Louisiana, Northeast Texas and barely through Southwest Arkansas. With a resource potential of some 150 trillion cubic feet of gas (roughly 60% that of Barnett), in addition to an early-stage superior recovery factor and other geological characteristics that rival the best shale plays, Haynesville has established itself as the most promising gas shale, among some producers.

Currently, most of the production comes from the 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 coming out of the area could be significantly bolstered by an additional geological play, such as the Lower Bossier shale prospect, which lies about 200 feet above the Haynesville shale formation. As the play matures and reaches its maximum potential, a major concern will be centered on the necessary midstream infrastructure.

The question is, 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?

The commercial development of the Haynesville shale did not start until early 2008, but the ramp-up rate has exceeded every other shale play at the moment. Rig counts in the play have risen from four in February of 2008 to 175 in August of 2010, almost double the number of rigs that were operating in the region a year ago. Even during the economic downturn of 2009, there was only a slight drop off in the number of rigs operating within the area.

It is a known fact that some drilling operations are undertaken to hold acreage or satisfy cost-carry agreements, and well completions could be delayed for a variety of reasons. Yet, despite a backlog of well completions, production ramp-up has still been remarkable.

Some companies plan to migrate some rigs toward the more liquids-rich Eagle Ford play, but 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, which could possibly grow by an extra 25%, at least, by year-end as the backlogged wells are completed in addition to new ones coming online.

Until now, pipeline capacity has just about kept up with upstream development in the play, but the extraordinary growth rate of Haynesville production, if sustained, will require substantial new development of gathering and midstream infrastructure.

Favorable location

The geological characteristic of the Haynesville shale, even though key, is not the only reason for establishing the play as one of the most promising. Haynesville, by virtue of being located in the ArkLaTex Basin, a historical hotspot for oil and gas activities, is in an advantageous position compared to some other shale plays.

First of all, 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.

Also, regional operators have more familiarity and better experience with the movement of essential shale E&P machinery.

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

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

Midstream infrastructure

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

At the outset, a play could lack the necessary gathering systems to collect and process the gas into the respective interstate or intrastate pipelines. Secondly, 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 possibly displace the Haynesville gas and prevent it from reaching the desired markets.

Gathering systems are often constructed concurrently with the completion of new wells in a gas field and are expanded on an as-needed basis as the production profile of the field changes or increases. Processing and treating facilities related to the field depend on the characteristics of the produced gas.

Haynesville’s fairly high carbon-dioxide content will require treating to achieve downstream pipeline delivery specifications. However, the gas is dry and relatively low in natural gas liquids (NGL) compared to other shale plays, so less cryogenic or absorption plants will be needed. Also, due to the fact that Haynesville is an over-pressured reservoir, there will be a higher need for the treating facilities earlier in the production lifecycle, due to higher volumes, but compression plants would not be a dire necessity until later in the lifecycle.

Rapid growth in the Haynesville has prompted numerous essential gathering system expansions over the past couple of months, but here are the most recent major projects underway:

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

Meanwhile, 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 whereby 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 the profitability of any gathering project.

The Tiger Pipeline

The initial 2007 and 2008 major 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 began to develop, and other producers began to seek markets for their volumes, there have been several proposed expansions and compression changes on both interstate and intrastate pipelines to keep up with the burgeoning productivity.

The lead times for infrastructure required for gathering gas from the wellhead are not as lengthy as the longer delay in constructing a major intrastate or interstate pipelines to move the gas from the production area to a market hub (Perryville, in this case). Therefore, due to the time lag, it is up to midstream developers to secure firm contracts and anticipate the production level potentially coming from the play.

Initially, there were two main projects competing for take-away capacity from Haynesville: Enbridge Inc.’s LaCrosse Pipeline and Energy Transfer Partners LP’s (ETP) Tiger Pipeline. In July of this year, Enbridge withdrew its pre-application with the Federal Energy Regulatory Commission for its 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, Louiisiana. It will have an estimated capacity of 2 billion cubic feet per day with further expansion capability and make connections with seven interstate and one intrastate pipeline for ultimate delivery to Midwest and eastern U.S. markets. Although, most of its gas supply will be from the Haynesville shale, some flows will include gas from the 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 offering a different solution by extending their 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 per day, could be expanded to 2,100 MMcf per day. 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 to shale plays with more liquids such as the Eagle Ford and Bakken. However, E&P activity in the Haynesville will continue to be dynamic and gas volumes will increase, at least in the short term. Production in the region is economic at current prices and could easily exceed 4,000 MMcf per day during the next five years.

Pipeline infrastructure in the region has created some opportunities for midstream players to expand their operations. The timing of projects will be crucial and midstream-project sponsors will compete for firm commitments in transporting gas out of the play. Depending upon the pace and the success of the play’s development, there still could be a bottleneck at Perryville for Haynesville gas flowing towards the Northeast and Midwest.

Producers will continue to play a more vibrant role regarding midstream operations than in other regions. Mergers-and-acquisitions activity will likely continue for gathering and processing as smaller players dispose of their assets to the bigger and more established players that can utilize economies of scale to increase revenues as most of the contracts are based on throughput volumes.