EnCana (NYSE:ECA) is still enamored with the long-term potential of the Haynesville Shale and plans to continue development of this play. The company plans an intensive effort over the next few years to drive down costs and improve drilling and completion efficiency.
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Haynesville Shale Summary
EnCana has 350,000 net acres under lease that are prospective for the Haynesville Shale in Texas and Louisiana. The company reported proved reserves of 1.8 Tcfe in the Haynesville Shale at the end of 2010, along with an additional 3.3 Tcfe of probable and possible reserves. (Oil and gas investments can provide unmatched deduction potential for accredited investors. For more, see Oil: A Big Investment With Big Tax Breaks.)

EnCana reported average daily production of 524 million cubic feet of natural gas equivalents per day from these properties in the third quarter of 2011, a 70% increase over the same quarter of 2010. The company expects to increase production from the Haynesville Shale to one Bcfe per day by 2015.

EnCana allocated $980 million in capital for the Haynesville shale in 2011, and expects to drill approximately 85 net wells here during the year.

Other operators active in the Haynesville Shale include Comstock Resources (NYSE:CRK), which reported average production of 200 million cubic feet of natural gas equivalents per day during the third quarter of 2011.

Supply Cost
EnCana has a goal of reducing the company's supply cost to $3 per thousand cubic feet equivalent over the next three to five years. The company defines supply costs as the NYMEX price that yields an after-tax internal rate of return of 9%. (For related reading on the internal rate of return, see Internal Rate Of Return: An Inside Look.)

The company's current supply cost is $3.70 per thousand cubic feet equivalent and reducing this is particularly important given the low prices realized for natural gas.

Resource Hub Model
EnCana plans to lower its supply cost in the Haynesville Shale through the implementation of a resource hub model. This involves better well performance and a lower cost structure achieved through drilling efficiency and optimization of completion activity.

EnCana has already demonstrated improvements in the company's Haynesville Shale operations since entering the play, and has reduced the time to drill wells by 38% and well costs by 30% since 2009.

2012 Plans
In 2012, EnCana plans to drill Haynesville Shale wells with laterals of 7,500 feet along with an increase in the intensity of completion operations. EnCana will also utilize a "slowback" production practice that involves limiting production on new wells to control the surface pressure. The company has found these three practices lead to 10 to 15% higher recoveries on Haynesville Shale wells.

EnCana is also experimenting with different spacing in the Haynesville Shale and has started drilling sections of the Haynesville Shale with six wells instead of the typical eight-well design. The new well spacing will involve a larger fracturing operation that will be more capital efficient than drilling the additional two wells.

EnCana is also using longer laterals in the Haynesville Shale and has drilled one well with an 8,000 foot lateral. The company needed permission from regulators for this well because it crossed over into an adjoining unit.

EnCana estimates that the longer laterals will reduce finding and development costs by 20%, and eventually plans to use 10,000-foot laterals where possible.

Mid Bossier
EnCana is working on the Mid Bossier formation, which is present on much of the same acreage as the Haynesville Shale. This formation produces natural gas and is sandwiched between the Cotton Valley Group and the Haynesville Shale.

EnCana plans to drill 20 wells into the Bossier in 2011 and estimates that the company's resource potential here might be equal to that of the Hayneville Shale.

Chesapeake Energy (NYSE:CHK) has exposure to the Bossier Shale and estimates that it has 190,000 net acres that are prospective for this play. The company is not currently active in developing the Bossier.

EOG Resources (NYSE:EOG) also has exposure to the Bossier and reported several commercial wells here in 2009. The company has now shifted most of its resources away from natural gas development and is not very active here.

The Bottom Line
EnCana is not walking away from natural gas and believes that the company's Haynesville Shale properties are still viable assets in the long term. This may turn out to be a better strategy than rushing into crude oil plays based on short-term considerations. (For related reading, see Peak Oil: What To Do When The Wells Run Dry.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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