Haynesville Shale a Key Producer in U.S. Natural Gas Industry

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U.S. interest in renewable energy sources like natural gas has increased as oil prices continue their steep climb.

Natural gas futures on the New York Mercantile Exchange (NYMEX) yesterday (Thursday) rose 2.48% to $4.42 per million British thermal units (btu) after the U.S. Energy Department reported a smaller than expected storage increase.

A recent Money Morning Mailbag installment addressed how rising natural gas demand has turned investors on to shale gas, the unconventional gas found in tight shale rock formations.

The U.S. Energy Information Administration (EIA) estimates that the United States has 862 trillion cubic feet of recoverable shale gas resources. Many U.S. companies have excelled at developing drilling technology to retrieve hard-to-reach shale gas, and have become attractive opportunities for individual investors.

The following reader wanted to know more about a U.S. shale gas supply that recently made headlines in the natural gas industry.

Question: What can you tell us about the Haynesville shale play in Louisiana?

Emmit P.

The Haynesville Shale formation in March took the lead as the most productive U.S. natural gas field, topping the Barnett Shale in Texas. The U.S. Energy Information Administration reported Haynesville produces about 5.5 billion cubic feet (bcf) of natural gas a day, while Barnett produces about 5.25 bcf.

The Haynesville Shale is in northwestern Louisiana, western Texas and southern Arkansas. It has more than 1,000 wells already producing record levels of natural gas, and more than 900 more permitted and awaiting drilling or currently being drilled. Industry leaders have said there will be about 10,000 wells drilled to fully develop the area.

Haynesville has had a booming effect on Louisiana's economy.

"The amount of money pumped into the economy from this thing is pretty extraordinary," said Dr. Loren Scott, professor emeritus at Louisiana State University.

According to a report released by Scott last month, the Haynesville shale in 2010 contributed to $16.3 billion in business sales and household earnings, 57,637 jobs, $338.8 million in local taxes, and $573.5 million in state taxes.

The Haynesville Shale region has higher drilling costs because its natural gas fields are dry. They are deeper than most and don't offer simultaneous oil production.

To get to the gas, companies need to use horizontal drilling. A well is drilled to the shale layer and then turned to enter horizontally into the formation. Then drillers use hydraulic fracturing to set off small explosions and fracture the surrounding rock before pumping a mixture of water, sand and chemicals into the well to release the gas.

The high cost of drilling in Haynesville led Louisiana to create a horizontal drilling tax relief program. It exempts companies from paying taxes on extracted gas for the first two years of production or until the value of recovered gas equals the cost of the well drilling, whichever comes first. It's designed to attract oil and gas operators to the more expensive Haynesville Shale formation.

Some analysts argue Louisiana could reap even richer receipts from drilling if it repealed the severance tax incentive, but Scott thinks the tax exemption keeps companies interested in Haynesville. If the government were to kill it, drillers would be inclined to head to other shale gas reserves.

"[O]ur study shows that for every one dollar given up through the incentive program, the state gained $2.94," Scott wrote the report. "However, if you take away the incentive, the state actually loses money in even the most conservative scenarios. By eliminating the incentive program, it's likely that the pace of exploration and drilling would fall off significantly and we would expect existing companies to either move to more profitable areas or wait for the price to rise. In either case, it's not good for state or local governments, employers or employees."

Despite its expensive drilling costs, Haynesville's estimated total reserves are key to the U.S. natural gas industry. Companies that keep land interests in Haynesville will be able to reap profits as natural gas becomes more vital to U.S. energy usage.

The biggest acreage holders in Haynesville include Petrohawk Energy (NYSE: HK), Chesapeake Energy Corp. (NYSE: CHK), and a joint venture between EXCO Resources Inc. (NYSE: XCO) and BG Group PLC (PINK ADR: BRGYY).

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