Shales are strong producers, getting better over time

There are unique challenges in building a large-scale shale gas E&P, says Richard Stoneburner, President and COO of Petrohawk Energy Corporation.

Much like the shale plays the company seeks, Petrohawk’s evolution has been rapid. In mid-2006, they merged with KCS Energy, which included 10,000 acres in the Fayetteville Shale—the company’s first foray into shale.

 “We went into the Fayetteville as a second or third mover and it was expensive,” says Stoneburner. “We accumulated positions in the Haynesville and Eagle Ford in 2008 as first movers, but still had competition, so it was expensive as well. When you work in shale gas you need to be clever, bold, aggressive, and have a lot of capital.”

 For Petrohawk, much of the capital has been raised through divestment of non-core assets totaling $1.4 billion. Today, the company holds 2.75 tcf of proved reserves with 32 tcf of risked resource potential and about 340 million barrels of condensate or oil potential.

 “We doubled proved reserves last year,” he says. “The asset base we have, particularly in the Haynesville and Eagle Ford, is top of the class for the reserve potential and is higher than anybody else in those plays.”

The Finish Line

 Many forecasters agree that the short to mid-term for natural gas prices will be relatively low, around the $4 to $5 range. Stoneburner says that the company’s plan for weathering the next few years includes a mid to late 2011 finish line.

 “By 2011, we’ll have most of our acreage held by production—we’ll have a flexibility at that point that will be market driven, rather than capture driven.”

 The company’s capital program is driven by lease capture requirements. Because Petrohawk is ahead of schedule in its Haynesville lease capture program, Stoneburner says the company was recently able to reduce its budget by $100 million. 

“We have some nice acquisitions of high condensate yield and oil potential in the Eagle Ford play, and with that we wanted to re-allocate some of our gas budget to a liquid style portfolio,” he says. “Our modeling suggests we’ll have $50 million more revenue with the new budget.”

He added that since Petrohawk’s budget is dictated by lease capture, hedging is vital. For 2010, the company is hedged at 70 percent with a $5.85 floor.

The Right Spot

 If you do your homework and find the right position, it’s hard to pay too much for acreage in the large shale gas plays, says Stoneburner.  The Eagle Ford and Haynesville shales are similar in nature in that they’re both fairly deep and higher pressure, which Stoneburner says equates to more gas potential. From the top to the bottom of the formation, he says, it’s all effective pay zone.
 

“In the Haynesville, we assume a 65 percent probability of success; in the Eagle Ford, we assume an 80 percent probability of success; and in the Fayetteville we assume about 50 percent because our acreage is on the fringe,” he says. “Our rate of return in the Fayetteville is about 20 percent; the Haynesville is 60 percent, the Eagle Ford Hawkville dry gas is about 110 percent, and the high-condensate Eagle Ford Blackhawk is about 1100 percent.”

 The company dominates when it comes to results in the Haynesville, says Stoneburner. Petrohawk holds 368,000 net acres under lease with the average leasehold cost about $5,000 per acre—inexpensive considering some $20,000 to $30,000 lease rates during the 2008 land rush. In the second half of 2009, the estimated well cost was $8.5 to $9.5 million with an average initial production of 18.1 Mmcf per day.

 Among the challenges in the Haynesville is reducing well costs.

 “Our development costs equated $2.02 per mcf, but that was a $10.7 million well,” he says. “This year we can drill at $9 million per well, and next year in the $8-8.5 million range.”

 In the Eagle Ford, Petrohawk was initially without competition. The company holds 360,000 net acres total, with 225,000 in oil and condensate window.
 

“We like to say that we went from first idea to 10 tcf in 10 months,” he says. “It’s a consistent area with very little faulting and pretty much productive from tip to tail.”

 Petrohawk’s average leasehold cost in the Eagle Ford is $400 per acre with an average well cost of $4.5 million to $5 million. The average initial production for 11 wells to date is 8.9 Mmcf per day with a gas to oil ratio of 6:1 and 10.5 Mmcf per day with a gas to oil ratio of 15:1. Since the drilling pace is not dictated by short primary terms since the leases contain continuous drilling clauses, Petrohawk has been working on tests of stimulation theory in the Eagle Ford.
 

The company completed two wells with 18 stage fracs, using more frac fluid. The result is strong initial production rates with shallower pressure and production declines. The Dora Martin 1850 #1H has an initial production of 8.8 Mmcf per day and an average first-30-days production of 8.1 Mmcf per day. The Henderson-Cenizo 877 #1H has an initial production of 13.2 Mmcf per day with an average first-30-days production of 10.4 Mmcf per day. These rates are 35 to 75 percent higher than the average of the first seven wells in the Eagle Ford.

 “We’re finding that shale reserves improve over time—we get smarter and learn how to treat the wells and produce them better and more efficiently,” he says.