A massive land rush is currently on in South Texas’ Eagle Ford Shale, North Dakota’s Bakken Shale, Wyoming’s Niobrara Shale – in areas across the continental US, oil and gas operators are scrambling to get in on unconventional natural gas production.
Although the industry knew that the US was flush with shale gas for years, the technology was lacking and unable to tap it effectively. Now, with improvements in horizontal drilling, fracturing and acidation, shale developments are bringing a boom of jobs to areas that were once depressed. The number of drilling rigs operating onshore the US is consistently up, and pipeline construction projects abound in efforts to get this production to market.
Ahead of the curve, Houston-based Mainland Resources (OTC:MNLU) got in on Haynesville Shale – before there was a rush. The company’s CEO took some time to speak with PennEnergy about its current projects, future growth and its take on shale production.
“It helps to be in the right place at the right time,” revealed Mainland Resources CEO Michael Newport. “We just happened to put a buy on a Hosston/Cotton Valley prospect which included development drilling from an existing Hosston Cotton Valley field.”
Formed in 2008, the Haynesville Shale-focused company is developing natural gas leases in Louisiana and Mississippi. After an announcement by Chesapeake Energy that the area could hold up to 160 trillion cubic feet of natural gas – interest in the Haynesville Shale skyrocketed.
“The Haynesville Shale play took off as we were leasing additional acreage,” Newport added. “We were not able to complete putting it together because the acreage price went from $200 to $15,000 an acre. I went to Petrohawk and did a deal whereby they carried us to the pipeline for the first well and paid 80% of the second well for a 60/40 split whereby Petrohawk had 60% and was the operator. Mainland retained all rights above the base of the Upper Bossier.”
Over the last two years, Mainland Resources and Petrohawk have drilled five successful Haynesville Shale wells. Then, Mainland Resources upped the ante, betting that it could drill and develop shale in Mississippi.
“We sold our rights below base of the Upper Bossier for $28 million to Exco,” Newport said.
Future Growth – Betting on a Winner
The company just spud a 22,000-foot-deep Haynesville/Bossier well, the Burkley Phillips No. 1 on its Buena Vista prospect in Western Mississippi and Eastern Louisiana – just north of Natchez, Mississippi.
“This is the first well Mainland Resources has operated,” he said. “This will take 5 to 6 months to drill, and we will wait on the results of the well to determine our development strategy.”
The 22,000 foot Haynesville Shale test will allow Mainland the opportunity to evaluate several potential shallower formations. Furthermore, in the event the Buena Vista Haynesville Shale project is successful, Mainland could have as many as 225 net drilling locations to the Haynesville alone on the 17,500 acres. This would be in addition to its 70 net drilling locations located on the Hosston/Cotton Valley rights they reserved in their sale to Exco in DeSoto Parish Louisiana.
“We will also incorporate onshore oil projects into the drilling plans as we feel this is a very important part of our strategy for the next two to three years,” Newport revealed.
Current Natural Gas Prices Smother US Shale Excitement
On the other hand, the company really isn’t looking to expand past the Haynesville Shale.
“We will not attempt to get into other shale plays as their reserves and economics are questionable at this time,” Newport said. “We feel our Haynesville/Bossier Shale project has potential to be better than what has been seen in the other shale plays.”
Newport said that he feels that most shale drilling right now is being performed to meet lease requirements, rather than for commercial benefit.
“We do not believe companies are making money in the shale plays at the current price of natural gas,” Newport added. “I believe companies are only drilling acreage they have to drill before it expires.”
The depressed price of natural gas in the US is undermining exploration and development operations, although analysts predict that the gigantic natural gas reserves embedded in the US shale plays will transform natural gas into a global commodity, much like oil is today.
“We have seen companies enter into the Eagle Ford Shale project in South Texas as it has oil production included with the gas,” he explained. “Oil is currently at a much better price than natural gas.”
Some shale plays do have associated oil production. The Eagle Ford and Bakken Shale plays are extremely attractive for this reason. Nonetheless, cyclically traded natural gas shows signs of picking up beyond the last year’s correction that took it to nearly $5 on the Henry Hub.
Additionally, rather than import LNG, the US may very well become an international exporter of natural gas. Currently, Cheniere Energy is working to transform its Sabine Pass LNG receiving terminal with two liquefaction trains each capable of processing 1 billion cubic feet per day of natural gas. The company may add another two trains in the future.
For more information about shale plays in North America, including key challenges, development prospects and drilling details, as well as a forecast through 2020, read PennEnergy's Unconventional Gas Report today.
