Pipeline company Williams Partners asserts that the Barnett Shale of North Texas, the play that started the great North American gas shale revolution, could soon see a renaissance in drilling as a result of a recently announced deal with Chesapeake Energy -- but analysts with Platts Analytics remain skeptical.
The agreement announced last week is part of a larger series of deals by which Chesapeake seeks to exit from the Barnett.
As part of that arrangement, Chesapeake will turn over its assets to Saddle Barnett Resources, an exploration-and-production company backed by private equity company First Reserve, thereby extricating itself from its pipeline contracts in the play.
Analysts say these contracts with their minimum volume commitment (MVC) obligations, negotiated when the Barnett was the only shale play in town, have proven onerous to the producer as the play has cooled off considerably over the last several years.
"By eliminating Chesapeake's MVC payments and establishing monthly gathering rates at a percentage of NYMEX Henry Hub settlement prices through the end of 2029, the conditional gas gathering agreement will bring drilling back to the Barnett Shale and return wells determined to be uneconomic under earlier gathering rates to production," Williams Partners said in a statement.
However, according to Platts Analytics' Bentek Energy, a number of factors have led to the decline in Barnett production and any single change, such as the renegotiation of pipeline contracts, is not likely to have any appreciable effect on output from the play.
The Barnett Shale peaked at about 5.9 Bcf/d back in 2011 and currently produces about 3.8 Bcf/d, roughly 2 Bcf/d below the peak, Bentek said. The rig count in the play peaked at 241 rigs back in 2008, a marked contrast to the current 11 active rigs.
The transfer of Barnett Shale assets that Chesapeake announced is better categorized as a "surrendering of assets" rather than a "sale," Bentek said. Essentially, Chesapeake has agreed to part ways with its Barnett acreage in return for release from any future commitments related to the assets.
While the deal is good news for Chesapeake, it is unlikely that it will boost gas production from the Barnett Shale in a meaningful way under current economic conditions.
According to Bentek, most of the current drilling in the Barnett is vertical, which has much lower initial production rates than horizontally drilled wells.
The upside from vertical drilling is that the decline rates from those wells are much shallower than those of horizontal wells, which explains why Barnett production has not completely crashed, as the rig count has plummeted over the past few years.
Still, vertical wells typically yield lower rates of return, and based on Bentek's most recent rate of return analysis, the Barnett has the second-lowest rates of return in the country at minus 0.85%, based on the current 12-month forward curve.
In tandem, at $4.74/Mcf, the Barnett has the highest breakeven price among gas-focused plays in the US, given a half-cycle 10% discount rate. While it is difficult to determine the well profitability without knowing the renegotiated terms Straddle Resources will get, current commodity prices are discouraging at best, Bentek said.
Additionally, the Barnett simply cannot compete with other gas-focused basins in the US, such as the Marcellus and Utica, where breakeven prices are more than half what is found in the struggling Barnett Shale.
