The development of the dry gas Haynesville Shale by the exploration and production industry continued in the first quarter of 2012, albeit at a dramatically lower rate than in previous years. This drop in activity is due to the higher price of crude oil and other liquids relative to natural gas.

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Haynesville Shale
The Haynesville Shale has seen a dramatic drop in development over the last twelve months as the industry shifts to crude oil and wet gas development in the United States and other areas. The rig count in the Haynesville Shale dropped to 44 rigs in early May 2012, down from peak levels above 180 rigs reached back in 2010.

SEE: Oil And Gas Industry Primer

One of the most active operators in the Haynesville Shale is EXCO Resources (NYSE:XCO), which reported net operated production of 366.5 million cubic feet of natural gas per day from the Haynesville Shale, as of mid-April 2012. The company drilled or participated in 40 gross Haynesville Shale wells in the first quarter of 2012. EXCO Resources has reduced its activity relative to last year and is currently operating eight rigs in the Haynesville Shale, compared to an average of 22 rigs in 2011.

One benefit of the recent decline in activity here is that the cost to drill and complete wells is also falling. EXCO Resources reported that the cost to drill and complete Haynesville Shale wells in DeSoto Parish, Louisiana, ranged from $9.3 million to $9.5 million in the final quarter of 2011. The company said that well costs are now at $8.5 million and may drop to $8 million by the end of 2012.

SEE: What Determines Oil Prices?

One company that recently ended its Haynesville Shale development is Forest Oil (NYSE:FST). The company was operating one rig here and has redeployed this rig to its properties in East Texas.

Another operator that is ending its Haynesville Shale development is QEP Resources (NYSE:QEP). The company is operating one rig and plans to end operated development of the play during the summer of 2012. QEP Resources indicated that it would not resume drilling in the Haynesville Shale until natural gas prices increased to a range between $4 and $4.50.

The drop in development is also impacting oil service companies that are active here. C&J Energy Services (NYSE:CJES) provides hydraulic fracturing and other services in the United States, and moved one of its fleets from the Haynesville Shale to the Eagle Ford Shale during the first quarter of 2012. The company experienced underutilization as a result of that move and reported lower average revenue per horsepower in the quarter.

SEE: A Guide To Investing In Oil Markets

The Bottom Line
Although activity is down sharply in the Haynesville Shale due to plunging natural gas prices, this commodity may have a bright long-term future. Anadarko Petroleum (NYSE:APC) just received approval from the U.S. Department of the Interior to drill 3,675 natural gas wells over the next 10 years in the Uinta Basin. This may be all the evidence that investors need to start putting money to work at what might be the trough in the cycle.

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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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