Haynesville shale play economic analysis

Unconventional gas resources in the U.S. are abundant, but their development is capital intensive and subject to technologic risk, geologic uncertainty, and gas price volatility. In the Haynesville shale, wells are characterized by high initial production rates and rapid decline, and it is the tradeoff between these conditions and high investment that define the profitability of the play. The purpose of this paper is to examine the economic viability and sustainability of the Haynesville shale play. We characterize the operating envelope under which Haynesville wells are economic and describe the profit space based on a technical review of production and cost characteristics in the region. We explore two-variable factor models using type curves and construct before and after tax functional relationships. The majority of Haynesville wells fail to break-even on a full-cycle basis at prevailing gas prices. For $6/Mcf gas, average producers are expected to generate pre-tax returns between 1 and 11.5% for 1 to $0.5/Mcf operating expenses and $7.5 million capital expenditure. P10 wells are expected to generate a pre-tax return of 52 to 25% for $7.5 to $10 million capital expenditures and post-tax returns of 40 to 20%. We show that gas prices in the first year of production are an important determinant of well profitability. (C) 2012 Elsevier B.V. All rights reserved.