Burnham: LNG could save the Haynesville Shale

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LNG exports may bring stability to local natural gas production

Stability is a word that is difficult to attribute to the Ark-La-Tex’s oil and gas industry.  Since its inception in the early 1900s, the oil and gas industry in the region has endured peaks and valleys, and our economy has followed suit.  Until recently, the story of the Haynesville Shale looked to be a similar one.

When the Haynesville Shale was announced in March 2008, the Henry Hub natural gas spot price was $9.25 per MMBtu, peaking at $12.69 per MMBtu that summer.  Due in part to these high commodity prices, the Haynesville Shale, the eighth largest natural gas field in the world, experienced significant levels of development in the years after its discovery and by February 2011 was the highest producing shale gas play in the United States.  However, this surge in development was driven by more than just price. Exploitation of shale plays like the Haynesville became feasible because of advances in fracking and horizontal drilling technologies. Additionally, the Ark-La-Tex has unrivaled takeaway capacity compared to other shale plays, making movement of natural gas to market comparatively inexpensive.  While development in the Haynesville surged, simultaneous development occurred in plays across the United States, resulting in an oversupply which ultimately drove natural gas prices down to $1.61 per MMBtu in March 2016, well below the breakeven point for many shale plays. By August 2016, this price collapse produced a drop in active natural gas drilling rigs in the United States to an all-time low.

Unlike the conclusions of past chapters of Ark-La-Tex oil and gas development, the story of the Haynesville Shale will not conclude with this price slump.  Over the past several years, suppressed prices for natural gas and the relative cleanliness of the fuel source have prompted industry in North America to make significant and widespread investment in infrastructures that consume natural gas. For example, the U.S. Energy Information Administration reports that natural gas is now the primary means of electricity generation in the United States. Now, another upward price pressure is building in the form of foreign demand.

While natural gas prices in the United States presently hover slightly above $3.00 per MMBtu, the price in Europe is $5.35 per MMBtu, and the price in Japan is $7.60 per MMBtu.  These foreign prices are down from average prices in May 2014 of $10.20 and $16.32, respectively.  The price disparities between U.S. and foreign markets have spurred domestic investment in Liquified Natural Gas (LNG) export facilities.  By 2020, the United States is projected to be the third largest exporter of LNG, behind Australia and Qatar.  Continued instability in the Middle East, most recently in Qatar; Australian efforts to lower domestic natural gas prices; and determination in Europe to diversify its sources for natural gas away from dependence on Russia are all geopolitical pressures which place our own natural gas in high demand.

Cheniere Energy already exports natural gas to 22 countries out of Sabine Pass, a terminal on the Louisiana-Texas border, and presently, the only fully operational LNG terminal in the contiguous United States.  However, according to the Federal Energy Regulatory Commission, seven more LNG export terminals are in development, with all but two located in the Louisiana-Texas corner of the Gulf of Mexico.  In close proximity to these terminals and with unrivaled takeaway capacity, low production cost, and plenteous natural gas, the Haynesville Shale is poised to benefit from both increased domestic demand for natural gas and an expanding global market for LNG.

Already, these domestic and international developments have led to an uptick in Haynesville Shale investment in 2017, fueling optimism that stability is on the horizon.

Drew Burnham is an Associate for Cook Yancey King & Galloway