Chesapeake acquiring Vine Energy in bid to capture RSG-LNG export synergy

Chesapeake Energy struck a $2.2 billion deal to acquire Haynesville shale producer Vine Energy, consolidating its position in the Louisiana play, as part of a strategy to market certified gas to LNG exporters, executives said Aug. 11.

In the company's second-quarter earnings call, Chesapeake executives highlighted what they see as a key synergy: the Haynesville's proximity to Gulf Coast LNG export facilities and the company's plans to certify its gas production in the basin as "responsibly sourced gas," or RSG. While a standardized definition for RSG has yet to emerge, certification focuses on lower methane intensity as a key metric.

Chesapeake announced plans in mid-July to work with MiQ and Equitable Origin to certify the company's Haynesville gas production by the end of 2021.

Vine Energy had also set its own RSG certification initiative in motion prior to the acquisition.

On Aug. 2, Vine announced a partnership with Colorado-based continuous monitoring and certification firm, Project Canary, to certify the company's entire production to Project Canary's Trustwell standard starting in November 2021. Around 25-30% of Vine's production will have its infrastructure outfitted with Project Canary's Canary X continuous emissions monitoring devices, according to Vine Energy's Aug. 2 announcement.

"The Haynesville is the right place to be," Chesapeake interim CEO Michael Wichterich said during the Aug. 11 earnings call.

"We know that Haynesville gas goes into the LNG complex," Wichterich said. "We know the buyers of LNG wanted to be certified RSG. We're going to deliver it."

Greener LNG

LNG importers in Europe and Asia have increasingly been paying attention to the environmental footprint of the cargoes they acquire.

Engie's decision to end negotiations to import US LNG from NextDecade because of pushback from environmental activists in November 2020 sent shock waves through the industry, spurring on market efforts to discover what a "greener" LNG cargo would look like.

Some LNG sellers, such as Shell and Eni, have offered carbon-neutral LNG, or LNG cargoes accompanied by carbon offset credits. Other LNG marketers have offered to provide a full accounting of cargoes' emissions, as seen in Chevron's six-year supply deal with Singapore's Pavilion Energy that was signed in February.

Haynesville advantage

Beyond the advantage of lower transport costs that proximity to the Gulf Coast export facilities brings, the shorter distance limits the emissions potential for gas to leak during transport and opens the door to granting some LNG importers' preference for physical molecules over certificates.

The physical reality of the dense US gas pipeline network has previously been a sticking point for RSG demand taking off with LNG exporters.

Most RSG certification activity has taken place in the Marcellus, supported by the basin's naturally lower emissions profile. However, hundreds of miles and a crowded spaghetti bowl of Southeast pipelines separate this gas from the bulk of US LNG export capacity in Texas and Louisiana, injecting uncertainty over whether the physical certified molecules are the molecules being liquefied and exported.

The Haynesville's proximity to LNG export facilities reduces this uncertainty.

The basin's identity as a predominantly dry gas play also brings environmental advantages.

Dry gas plays often have a competitive edge over associated gas fields when it comes to emissions, with routine flaring and venting much less common for this kind of production.

The Gulf Coast Basin, defined by the US Environmental Protection Agency as including Louisiana and Texas and most closely aligning with the Haynesville Basin, is one of the top five basins for low methane intensity gas production, with around 30% of the basin's 2019 production volumes having a below-average methane intensity.

Approximately 50% of onshore gas production in the continental US had a methane intensity of 0.12% or less, according to the most recently available EPA Subpart W data.

Vine Energy

Vine Energy is a pure-play natural gas producer with about 227,000 acres in the stacked Haynesville and Mid-Bossier shales and around 1 Bcf/d of gas production.

The merger will effectively triple Chesapeake's Haynesville gas production.

Chesapeake produced 531 MMcf/d in the region during the second quarter of 2021, with a pro forma production estimate of 1.58 Bcf, according to an Aug. 11 investor presentation.

Vine Energy itself is the product of recent M&A activity: the company was formed in early 2021 as a combination of three privately held companies.