Business News

North vs. South

by Jeremy Alford

The hubbub around north Louisiana’s Haynesville Shale play continues to hog investments, oftentimes at the expense of coastal properties.

If you believe the studies, economic analysis and corporate hype, the Haynesville Shale will become the nation’s top producing natural gas field within the next six years. The money involved in such a feat is astounding; just one well drilling in the shale will cost a company more than $6 million, and there are already about 17 companies lined up to play. That the area covers four parishes — Caddo, Bossier, DeSoto and Red River — is just as impressive as what the shale actually is: a layer of sedimentary rock located 10,000 feet or more below the surface of the earth.

Energy companies have been working in the area for a couple of years already and have found indications of a potentially large supply of gas trapped within some portions of the shale. In simpler terms, it’s an untapped gold mine. The action, however, is drying up investments in south Louisiana. After all, landmen and energy companies can only put their money in so many places, especially during sour economic times.

The numbers don’t lie. According to the Department of Natural Resources, there have been 97 rigs erected in Louisiana year to date, of which 77 are located in north Louisiana and 66 in the Haynesville Shale. During the same period in 2008, there were 129 rigs statewide, with 72 in north Louisiana and 21 in the shale play.

DNR Secretary Scott Angelle admits development and exploration in south Louisiana is “anemic” but adds it’s hard to stand up to and compete against a historic opportunity that’s just a few hours away. “There’s no doubt we’ve seen successes in one area at the expense of another,” Angelle says. “This is a game changer. The Haynesville Shale represents the best geographic area in the U.S. to be drilled, and people want to get involved.”

The area south of Interstate 10 is quickly becoming the stepchild of energy investments. If more evidence is needed, look no further than the state Mineral Board’s monthly oil and gas lease sales. The August sale produced a small but noticeable bump for south Louisiana, where eight leases were awarded in areas that hadn’t seen interest in months. The one lease awarded in offshore waters in August, following another single sale in July, highlights the lull, especially when you consider they were the first sales on record since January.

If the August sale revealed any consistency, it can be found in the fact that action is still hot in north Louisiana. Twenty of the 23 north Louisiana leases were sold in Caddo, DeSoto and Red River parishes, in the area of the Haynesville Shale natural gas formation. Of that 20, 16 were sold in Caddo Parish, the hub of related activity. Lease values also remain strong in that area, officials point out, with the 20 Haynesville Shale area leases averaging more than $6,500 an acre — up from nearly $4,800 an acre in July.

Baton Rouge economist Dr. Loren Scott was commissioned by the state to estimate the statewide economic impact of the shale play, and his findings suggest that it will become every bit the “game changer” that Angelle predicts — to the point of possibly even benefitting south Louisiana and Acadiana in the long run. Last year alone, there was about $2.4 billion in new business sales from the area and roughly $3.9 billion in household earnings created.

The study, published earlier this year, finds there was an increase of 32,742 new jobs within the state in 2008 linked to the shale. “As a reference point, this is slightly larger than total employment in all of Louisiana’s banks and credit unions,” economist Scott explains in the study.

Companies are taking note. Just a few weeks ago, Chesapeake Energy Corporation opened a headquarters near the shale and promised to be a “good partner” for the state — it has already distributed more than $30 million in royalty payments to Louisiana residents and businesses and is the largest holder of land in the region. “The acreage we are acquiring is well located in the heart of the Haynesville Shale play, and we believe that it will be highly productive,” says Chesapeake CEO Aubrey K. McClendon.

Even Gov. Bobby Jindal attended the grand opening and commented on what the move means for Louisiana — north and south. “With an estimated 6.5 billion cubic feet of recoverable natural gas per well in Haynesville, Chesapeake is certain to remain in Louisiana for some time, and they will help ensure that Louisiana remains at the forefront of the nation’s energy industry,” Jindal says.

In related news, Dallas-based Regency Energy Partners unveiled new plans to construct a $44 million pipeline extension to the shale area.

When it comes to technological advances, the shale is once again leaving south Louisiana behind. For starters, there’s the leap into urban drilling. Officials were actually forced into this because of the proximity of production operations in the Haynesville Shale zone and nearby populated areas. The rules and regulations are the first of their kind for Louisiana and encompass such issues as well setbacks from buildings; drilling operation concerns such as fencing, dust, noise and work hours; water use; and upkeep of drill sites.

New rules have also been drafted for the limited re-use of waste water from exploration and production in the shale, primarily for a process known as hydraulic fracturing or fracing. The process involves using water to fracture a shale formation for natural gas to be extracted. The purpose of the new use rules is to help conserve freshwater aquifer resources. In that vein, Chesapeake Energy, for one, has already sought and received the very first permit ever from the U.S. Army Corps of Engineers to draw surface water from the Red River to supply its own hydraulic fracturing operations.

From advances in operations to the amount of investments, there’s no doubt north Louisiana is outshining southern parishes these days. But to hear Angelle explain it, the shale may end up being such a large play that it may very well carry the entire state, all the way down to the Gulf of Mexico, into a new era. “You can connect the dots in a bunch of different ways, but it’s important not to underestimate the importance of the Haynesville Shale statewide,” says Angelle. “It’s brought Louisiana another area that can be explored and developed.”

The Cost of Success

More than a dozen energy companies are fighting over territory in north Louisiana’s Haynesville Shale, and all of them are financially strapped. Below you will find a list of annual expenditures, taxes and direct employment of seven of those companies that were interviewed this year by Baton Rouge economist Loren Scott. All figures are averages.

Mineral Lease Payments    $3.1 billion
Royalty Payments    $93 million
Rental & Surface
Lease Payments    $18 million
Wages and Salaries    $31 million
Other Administrative
Expenses    $3 million
Direct Drilling Expenditures    $1 billion
Infrastructure Spending    $75.3 million
Direct Taxes    $3.9 million
State Taxes    $13.9 million
Local Taxes    $38.3 million
Total    $4.5 billion
Direct Employment    318
Contract Employment    113
Source: Louisiana Department of Natural Resources