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Released June 06, 2013 | SUGAR LAND
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Some in the Oil & Gas Industry were unpleasantly surprised when the Ohio Department of Natural Resources (DNR) (Columbus, Ohio) recently released full-year 2012 production data for the Utica Shale. But others, noting the nascent infrastructure there, were not surprised with the Utica's low level of crude oil, natural gas and natural gas liquids (NGL) production.
Beyond its spotty infrastructure, the Utica shale has another problem: managing expectations. The Oil & Gas Industry is notorious for boom and bust cycles. When times are good, the sky's the limit and hyperbole reigns. Bad times bring out doom-and-gloom prognostications. This is particularly true for the Utica.
Two years ago, Aubrey McClendon, then chief executive of Chesapeake Energy Corporation (NYSE:CHK) (Oklahoma City, Oklahoma), predicted production in Ohio's Utica Shale "would be the biggest thing to hit Ohio since the plow." He saw the Utica as the centerpiece of a hydrocarbon industry worth $500 billion in the Buckeye State. Industry expectations shot upward. Billions of dollars were spent to acquire acreage.
But so far, the results have not lived up to the expectations. Hydrocarbon production at the Utica may someday track the trajectory of other highly productive shale formations like the Eagle Ford, Bakken or Marcellus. But the Utica is not there yet.
Drilling in the Utica began in 2011. Ohio's DNR said oil production from the Utica totaled 636,000 barrels last year--less than one day's oil production in the Bakken shale. Gas production totaled 18.8 billion cubic feet, the agency added. Low prices last year for natural gas may have limited some production there. But the DNR also warned that "oil production will be incidental to gas production in much of the Utica," at least for the near term.
James Zehringer, director of DNR, tried to accentuate the positive. "The production from these initial Utica wells makes a compelling statement about the staggering amount of oil and gas resources Ohio's shale may contain," he said after the 2012 production data were released. The agency expects more than 360 wells to be producing in the Utica by year-end 2013, more than triple the number at year-end 2012. By the end of 2015, DNR expects to see 1,000 producing wells in the Utica.
Although wells in the Utica accounted for less than 1% of the state's 51,000 oil & gas wells last year, those wells accounted for 12% of the state's overall oil production and 16% of its gas production, said Richard Simmers, chief of the DNR's Division of Oil and Gas Resources Management. "We are very early in the process of drilling."
"The Utica Shale is a victim of geography and unattainable expectations--at least in the short term," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Transmission and Terminals industries. "It still has value as a long-term, natural-gas play, but the absence of crude oil limits its upside given current prices for crude oil, natural gas and NGLs. Results to date show the resource base has more gas than crude oil, though some areas have "wet" gas. Because it is located alongside the Marcellus Shale, the economics of operating in the Utica are more difficult. Why would someone want to go to the Utica and incur extra costs by drilling deeper wells to produce natural gas, when there is so much gas being produced next door in the Marcellus Shale?"
Currently, the hydrocarbon industry in the Utica is quite a bit short of the $500 billion bonanza predicted by McClendon, who was forced to step down at Chesapeake last year as the company battled controversies over management practices. Chesapeake is in the process of selling between $4 billion and $7 billion of assets, including a significant percentage of its acreage in the Utica.
Chesapeake's gas production includes a significant percentage of NGLs, which help support the economics of its production from that shale. But initial enthusiasm about the formation's oil potential has not yet panned out. Devon Energy Corporation (NYSE:DVN) (Oklahoma City, Oklahoma) put its acreage up for sale and is in the process of exiting the formation.
The Utica Shale formation is located underneath portions of the Marcellus Shale, placing it between 7,000 and 10,000 feet underground. The depth and geologic characteristics of the Utica make it more difficult to find and produce hydrocarbons, industry observers agree. But another factor hampering production is the underdeveloped state of the area's gathering systems, midstream processing and take-away capacity.
Steve Dixon, acting chief executive at Chesapeake, blamed "infrastructure constraints" for limiting the company's production in the Utica to about 75 million cubic feet of gas equivalent per day (MMCE/d) last year. These constraints forced Chesapeake to curtail production on wells placed into service last year, he said in an April 1 conference call. He said Chesapeake's wells could have produced twice what they actually did if they were not constrained by infrastructure limitations. He expects a "substantial ramp-up in (well) completions" in 2013, which would allow production to reach 330 MMCFE/d this year.
Dixon said the Utica is a "very prolific resource base" and the company's wet-gas holdings will produce expected rates of return of 30% to 80%. But, he added, "achieving this level will be dependent upon the timely startup of critical processing infrastructure at multiple facilities in the months ahead."
Ohio officials have issued permits for more than 600 oil & gas wells, but only 311 are completed and less than 100 are producing. Low gas and NGL prices are only part of the reason for low levels of production.
"If you look at what's producing, that's still pretty low, largely due to the midstream infrastructure that's not in place yet," Jacob Duritsky, managing director for research at Team Northeast Ohio, told EnergyWire last month. "It would probably take about three years before a lot of that processing and gathering infrastructure is in place, and then you really start to see that activity."
Industrial Info is tracking 17 Oil & Gas Production, Transmission and Terminals projects valued at about $1.2 billion that are scheduled to kick off in Ohio over the next 12 months. Some of the larger projects include:
Beyond its spotty infrastructure, the Utica shale has another problem: managing expectations. The Oil & Gas Industry is notorious for boom and bust cycles. When times are good, the sky's the limit and hyperbole reigns. Bad times bring out doom-and-gloom prognostications. This is particularly true for the Utica.
Two years ago, Aubrey McClendon, then chief executive of Chesapeake Energy Corporation (NYSE:CHK) (Oklahoma City, Oklahoma), predicted production in Ohio's Utica Shale "would be the biggest thing to hit Ohio since the plow." He saw the Utica as the centerpiece of a hydrocarbon industry worth $500 billion in the Buckeye State. Industry expectations shot upward. Billions of dollars were spent to acquire acreage.
But so far, the results have not lived up to the expectations. Hydrocarbon production at the Utica may someday track the trajectory of other highly productive shale formations like the Eagle Ford, Bakken or Marcellus. But the Utica is not there yet.
Drilling in the Utica began in 2011. Ohio's DNR said oil production from the Utica totaled 636,000 barrels last year--less than one day's oil production in the Bakken shale. Gas production totaled 18.8 billion cubic feet, the agency added. Low prices last year for natural gas may have limited some production there. But the DNR also warned that "oil production will be incidental to gas production in much of the Utica," at least for the near term.
James Zehringer, director of DNR, tried to accentuate the positive. "The production from these initial Utica wells makes a compelling statement about the staggering amount of oil and gas resources Ohio's shale may contain," he said after the 2012 production data were released. The agency expects more than 360 wells to be producing in the Utica by year-end 2013, more than triple the number at year-end 2012. By the end of 2015, DNR expects to see 1,000 producing wells in the Utica.
Although wells in the Utica accounted for less than 1% of the state's 51,000 oil & gas wells last year, those wells accounted for 12% of the state's overall oil production and 16% of its gas production, said Richard Simmers, chief of the DNR's Division of Oil and Gas Resources Management. "We are very early in the process of drilling."
"The Utica Shale is a victim of geography and unattainable expectations--at least in the short term," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Transmission and Terminals industries. "It still has value as a long-term, natural-gas play, but the absence of crude oil limits its upside given current prices for crude oil, natural gas and NGLs. Results to date show the resource base has more gas than crude oil, though some areas have "wet" gas. Because it is located alongside the Marcellus Shale, the economics of operating in the Utica are more difficult. Why would someone want to go to the Utica and incur extra costs by drilling deeper wells to produce natural gas, when there is so much gas being produced next door in the Marcellus Shale?"
Currently, the hydrocarbon industry in the Utica is quite a bit short of the $500 billion bonanza predicted by McClendon, who was forced to step down at Chesapeake last year as the company battled controversies over management practices. Chesapeake is in the process of selling between $4 billion and $7 billion of assets, including a significant percentage of its acreage in the Utica.
Chesapeake's gas production includes a significant percentage of NGLs, which help support the economics of its production from that shale. But initial enthusiasm about the formation's oil potential has not yet panned out. Devon Energy Corporation (NYSE:DVN) (Oklahoma City, Oklahoma) put its acreage up for sale and is in the process of exiting the formation.
The Utica Shale formation is located underneath portions of the Marcellus Shale, placing it between 7,000 and 10,000 feet underground. The depth and geologic characteristics of the Utica make it more difficult to find and produce hydrocarbons, industry observers agree. But another factor hampering production is the underdeveloped state of the area's gathering systems, midstream processing and take-away capacity.
Steve Dixon, acting chief executive at Chesapeake, blamed "infrastructure constraints" for limiting the company's production in the Utica to about 75 million cubic feet of gas equivalent per day (MMCE/d) last year. These constraints forced Chesapeake to curtail production on wells placed into service last year, he said in an April 1 conference call. He said Chesapeake's wells could have produced twice what they actually did if they were not constrained by infrastructure limitations. He expects a "substantial ramp-up in (well) completions" in 2013, which would allow production to reach 330 MMCFE/d this year.
Dixon said the Utica is a "very prolific resource base" and the company's wet-gas holdings will produce expected rates of return of 30% to 80%. But, he added, "achieving this level will be dependent upon the timely startup of critical processing infrastructure at multiple facilities in the months ahead."
Ohio officials have issued permits for more than 600 oil & gas wells, but only 311 are completed and less than 100 are producing. Low gas and NGL prices are only part of the reason for low levels of production.
"If you look at what's producing, that's still pretty low, largely due to the midstream infrastructure that's not in place yet," Jacob Duritsky, managing director for research at Team Northeast Ohio, told EnergyWire last month. "It would probably take about three years before a lot of that processing and gathering infrastructure is in place, and then you really start to see that activity."
Industrial Info is tracking 17 Oil & Gas Production, Transmission and Terminals projects valued at about $1.2 billion that are scheduled to kick off in Ohio over the next 12 months. Some of the larger projects include:
- Wellsville Grassroot Crude Oil Terminal, a $300 million project being developed by Hilcorp Energy Company (Houston, Texas)
- Harrison Grassroot NGL Fractionator, a $200 million project being developed by MarkWest Energy Partners LP (NYSE:MWE)
- Seneca Natural Gas Processing Plant Expansion, another $200 million project from MarkWest Energy Partners LP
- Leesville Grassroot Natural Gas Processing Plant a $200 million project from M3 Midstream LLC
