The Haynesville Shale will see an even further drop in activity in 2012, as exploration and production companies seek higher returns and shift more capital to the development of plays that produce crude oil and wet gas.

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Spending Cuts
EXCO Resources (NYSE:XCO) has budgeted $585 million for development and completion activities in 2012, with $453 million to be used to develop Haynesville Shale wells during the year. When EXCO Resources announced its preliminary 2011 capital budget in Dec. 2010, the company allocated $683 million for the Haynesville Shale. The company said that returns in the Haynesville were still acceptable, but the action was taken by EXCO Resources "to manage our cash flow in the current natural gas price environment."

Despite this reduction in spending, the company still has a large program here and will operate an average of 13 rigs in the Haynesville in 2012. EXCO Resource is planning 120 gross wells on either an operated or non-operated basis.

QEP Resources (NYSE:QEP) is also re-allocating a substantial amount of capital away from the development of the company's Haynesville Shale. The company has set a $1.5 billion capital budget for 2012, with 19%, or $285 million, devoted to the Haynesville Shale. In 2011, QEP Resources estimates that its capital budget will total $1.35 billion, with 30%, or $405 million, for Haynesville operations.

Plains Exploration and Production spent $286 million in capital to develop the Haynesville Shale during the first nine months of 2011, and expects to spend an additional $64 million in the final quarter of the year.

Plains Exploration and Production has set a $1.6 billion capital budget for 2012, and has allocated only $182 million for the Haynesville Shale. The company plans to keep spending for Haynesville Shale at reduced levels for several years, with trough spending in 2014 of $168 million.

After 2014, capital spending will start moving higher again and eventually reach $401 million in 2018, boosting production to approximately 59,000 BOE per day.

A Bit of Optimism
One company taking a contrary view is Forest Oil (NYSE:FST), which recently decided to restart operations and operate one rig in the Haynesville Shale in 2012. Forest Oil drilled a number of wells there in 2010 and has been experimenting with restricting production on the wells. The company estimates that this practice will lead to 25% higher estimated ultimate recovery on Haynesville Shale wells. The company has also seen a reduction in drilling and completion costs in this play, and the combination of these two factors has resulted in higher returns.

Another factor motivating the reduction in activity is that many operators are nearly finished with converting acreage to be held by production and will soon no longer need to drill to fulfill obligations under term leases. SM Energy (NYSE:SM) estimates that the company will spend between $85 million and $95 million on its Haynesville Shale properties in 2012. The company needs to drill seven wells next year, to have its acreage held by production.


The Bottom Line
The amount of capital directed towards the Haynesville Shale and other dry gas development, has been declining and will drop again in 2012. The question to consider is when this reduction in spending will lead to less production, and perhaps higher prices, for this commodity. (For more, read Oil As An Asset: Hotelling's Theory On Price.)

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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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