New Approach To Natural Gas Could Keep Prices Low - Dow Jones

DJ New Approach to Natural-Gas Could Keep Prices Low

By Russell Gold

     The U.S. may have even more--and much cheaper to get--supplies of natural gas than anyone imagined.

     Experimental wells in Louisiana by explorers including Comstock Resources Inc. and Chesapeake Energy Inc. are
proving highly profitable even at today's bargain-basement prices because of the sheer volume of fossil fuels that can
be coaxed out of the ground.

     The trick is applying supersize versions of the horizontal-drilling and fracking techniques that worked
successfully elsewhere to an area that hasn't seen this approach yet. The gains come from extending the lateral
portions of wells by thousands of feet and pumping them full of enormous volumes of sand, chemicals and water to flush
out more hydrocarbons.

     So far, the impressive results have been confined to a small area in a single Louisiana parish near the Texas
border. But if the approach works across the giant Haynesville Shale, which spans 120 miles across both states, the era
of low American gas prices could extend for decades into the future, experts say.

     "There's a large likelihood that the United States will be enjoying a very low gas prices for a very long time,
maybe 20 years," said Mark Papa, who has monitored Haynesville developments as a partner at Riverstone Holdings LLC,
one of the biggest energy-focused private-equity firms in the U.S.

     The field produces 8% of the nation's natural gas, making it the second largest after the giant Marcellus Shale in
the Northeast. Because it is located in Louisiana, near several interstate pipelines, potential export facilities and
industrial consumers, an increase in gas production in the Haynesville has an outsize impact on gas prices across the
entire country.

     The cost of natural gas matters because the fuel increasingly powers the U.S. economy and is a critical to the
Obama administration's push to reduce carbon emissions in electricity generation. American gas consumption has risen at
a 2.4% annual growth rate for the past decade, while demand for coal has fallen by 2.7% and oil by 0.7%, according to
the federal Energy Information Administration. Gas now is used to generate about 30% of U.S. electricity and heat
nearly half of all American homes.

     Domestic natural gas is abundant and inexpensive, largely due to the newer drilling and extraction techniques that
came into widespread use a decade ago.

     The Haynesville Shale was a popular location for energy companies to drill in 2007 and 2008, when U.S. gas prices
briefly topped $13 a million British thermal units. Local governments in Louisiana, flush with tax receipts, handed out
bonuses to employees and built new high-school football fields.

     But the region's gas was buried in deep, hot rocks, making it expensive to produce. When gas prices fell to below
$4 a BTU in 2009, drilling rigs moved elsewhere. Some went in search of oil in North Dakota and Texas; others went
northward to Pennsylvania, where the gas-rich Marcellus Shale was less costly to produce.

     But a few companies never left and kept drilling a handful of wells each year. Recently, Comstock, Chesapeake and
closely-held Vine Oil & Gas LP drilled Haynesville wells that suggest the gas is economic to exploit at today's lower
prices.

     Last month, Comstock officials told investors that it could get a 30% return on its new wells even with gas at
$2.50 a million BTUs. The Frisco, Texas-based company plans to drill more wells in Louisiana's Haynesville than it will
in the oily Eagle Ford Shale in South Texas.

     Comstock shares have tripled since it released news of its new Haynesville wells. "It was a bold move to return to
the Haynesville and I know there were a lot of doubters out there," Kim Pacanovksy, an equity researcher at Imperial
Capital LLC, said on an investor call with Comstock management, "but you're starting to see dividends now, so
congratulations."

     Chesapeake's management also is heralding its Haynesville results. Similar to Comstock, the company is drilling
gas wells with longer horizontal legs and using more sand and water to crack open the rocks. "Applying this technique
has really doubled the area that we can drill in the Haynesville, Jason Pigott, a Chesapeake executive vice president,
told investors.

     The costs to hydraulically fracture wells, the process of pumping water, sand and chemicals into the ground under
high pressure to force out the fossil fuels, have fallen in the past year. This is particularly evident in the
Haynesville, which the U.S. government classifies it as the second-largest gas deposit in America behind the Marcellus.

     "This is a brilliant example of how the cost of supply continues to come down," says Robert Clarke, a research
director at Wood Mackenzie, an energy consultant. Newer Haynesville wells are producing more gas, are larger and are
being drilled more quickly, he said.

     Mr. Clarke cautioned that these experimental lower-cost wells have been drilled in a relatively small area of the
Haynesville and by a small number of companies.

     Mr. Papa, the former CEO of EOG Resources, said abundant, inexpensive gas will have a profound impact on power
generation markets and the overall economy. "The power of the natural gas story on the U.S. economy is still
underrated," he said.

     Write to Russell Gold at russell.gold@wsj.com


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  September 01, 2015 13:19 ET (17:19 GMT)

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