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A Utica Shale slowdown? The play has only just begun experts say.


Published: Fri, October 4, 2013 @ 12:00 a.m.

The play has only just begun, experts say

By Jamison Cocklin

jcocklin@shalesheet.com

youngstown

To a layman, it might seem as though activity in Ohio’s Utica Shale play has all but slowed to a halting pace.

The promise of a gold-rush-type scenario seems to be a distant memory across eastern Ohio when weighed against the hype of the play’s early days in 2009 and 2010 when landmen arrived from the south and helicopters, thumper trucks and towering rigs were still somewhat foreign or forgotten about as the state’s oil and gas industry was being reborn.

The rig tours for Ohio media outlets have, for the most part, stopped, and the informational meetings that unfolded throughout small and large communities have shifted focus to inform the public of how pipelines and processing facilities will affect land and meet the demands of oil and gas that needs transported.

What’s more, the land grab that saw far more than 1 million acres leased is nowhere near as intense or sustained as it once was.

What seems like a dull roar, though, can’t be mistaken for inactivity.

In reality, the play is shifting gears. Exploration and production companies have set into a quiet, methodical pace. A handful of them have become the predominant players in Ohio, including Chesapeake Energy, Gulfport Energy, Consol Energy, Hess Corp., Devon, Noble Energy and Andarko E&P, among a sprinkling of others whose work today will define the trajectory of the Utica and its part in shaping the state’s future.

“The project evolution is taking an ordinary course from the stand point of you lease it, define it and harvest it,” said Don Fischbach, chairman of the energy group at Calfee, Halter & Griswold in Cleveland. “We’re just about to give birth to the extent of the project area. The parameters of this play are dependent on a lot of unknown factors like commodity prices, infrastructure build-out, and it’s not fair to compare the Utica’s time line to other plays that are predominantly producing crude oil.”

On the cusp of something more is a characteristic that has defined the Utica since development got underway here. Nearly five years have passed since development of the Utica started, but experts continue to maintain that the play remains in its early, exploratory phases — it will remain that way for the foreseeable future.

The boom, sources say, is still in the future.

During a two-day natural-gas conference in Columbus in September, Thomas Stewart, executive vice president of the Ohio Oil and Gas Association, said producers are starting to get a better handle on the Utica formation. He focused on a pickle shape stretching through Carroll, Noble, Harrison, western Guernsey, Belmont, Monroe and possibly Washington counties.

“A well-defined sweet spot is becoming much, much more evident, [with] some very good wells in a narrow strip,” Thomas said.

“We’re not really there yet,” he said when asked about updated projections for the expected economic impact on the state’s economy. “What we need to see is a couple of years in the future and what happens when [producers] are done validating and more interested in doing development of their positions.”

Although drilling for oil is nothing new, each rock formation has its own characteristics and composition that operators must adapt to and understand in order to “crack the code” of the rock and figure out best practices. Like a child that needs rearing, exploration companies must raise the efficiency of the rock by maturing techniques that ensure a high rate of return on the colossal investments they sink into it.

The geology of the Utica Shale varies from north to south and east to west. The formation is older than others and, as a result, there are about five zones where the composition of oil and gas vary from black and volatile oil to condensate and wet and dry gas.

Unlike the Bakken Shale play in the Williston Basin in North Dakota — thought to be one of the largest oil fields in the world — the Utica is a natural-gas field, which poses different logistical challenges. What’s produced in the Utica must be separated, properly stored and transported.

“When you’re drilling for crude oil, you don’t have the delay in finding results from a production standpoint,” said Fischbach, who once worked in North Dakota’s Bakken as a landman. “When you’re drilling for crude, things are a bit easier. You pull it from the ground, store it in a tank, and a truck comes to get it. You don’t have to worry about pipelines, separation and the time line that natural-gas fields have to address.”

What might seem like a slowdown or a setback in this sense is a crucial period in the Utica’s development. In September, the Columbus-based business law firm Benesch, Friedlander, Coplan & Arnoff, which tracks industry development in the state, reported that 133 pipeline projects are either underway or in the planning stages.

At the same time, more than $10 billion is expected to flow into Ohio for such infrastructure and the processing facilities necessary to prepare Utica oil and gas for the marketplace.

To be sure, drilling has quietly picked up in the state since last year. At the end of September, the oil field services company Baker Hughes reported that 34 drilling rigs were in operation throughout the state — nearly double the average monthly count for 2012.

While the figure has doubled, it hasn’t tripled, Fischbach said, and the current challenges of the Utica play and any perceived slowdown can be gleaned from production reports.

According to the Ohio Department of Natural Resources, a total of 557 horizontal wells had been permitted at the end of September. But only a portion of those wells had been drilled, and just 153 were producing, with 327 of those permits issued in Carroll County — by and large the epicenter of the state’s shale industry.

Many of the state’s wells are shut-in, awaiting infrastructure to move and monetize the product they produce, while others are producing at a restrained rate because of midstream limitations.

Ohio’s numbers undoubtedly pale in comparison to its neighbor’s. In Pennsylvania, where operators have been active in the Marcellus Shale play since before 2008, 11,128 horizontal wells are permitted and 4,371 of those are reporting production, according to the Pennsylvania Department of Environmental Protection.

In a recent interview with Shale Sheet, Stewart, of the Ohio Oil and Gas Association, joined Fischbach in saying shale plays can’t really be compared.

The Marcellus is a younger, shallower rock, he said. Development there got underway well before it did in the Utica. Pennsylvania’s first horizontally fractured Marcellus well was drilled in 2005.

Market conditions factor into production as well. Development in the Marcellus formation accelerated quickly because natural gas was selling at a higher price when activity got started there.

Although prices have come up from an average of $2.75 per million British thermal units in 2012, rising by a dollar or more this year to reach about $4 per million btu, they remain a fraction of what they were in 2008 when natural gas reached highs of between $8 and $12. At the end of September, the U.S. Energy Information Administration said it still expected U.S. gas production to hit a record high in 2013 for the third-straight year.

Factor in a stockpile of natural gas that remains just 5 percent below last year’s record highs with low prices and infrastructure constraints, and Utica operators find it difficult to meet their full potential or match their investment with predictable financial returns.

Couple those market conditions with the still evolving science and geology of the Utica and it’s easy to see why exploration companies are focused on their work to maximize the benefits of the play.

In a recent interview with Shale Sheet, Harry Schurr, general manager of Utica operations for Pennsylvania-based Consol Energy, said the Utica remains a challenge for many producers with its varying depths, oil, gas, condensate windows and the lack of infrastructure that he deemed to be a major aspect of getting the play to its next stage.

“The industry itself, not just Consol, has a lot of information, and it’s moving fast. Companies will move through that process on their own accord,” Schurr said. “At the same time, as an industry we continue to bring new ideas and new technology. When prices for oil and natural gas stabilize or increase, we can take more risks and develop new portions of the play with experimental technology.”


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