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Released June 19, 2014 | SUGAR LAND
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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Higher crude-oil prices and a recovery in natural gas prices are driving a surge in Oil & Gas Production in Ohio's Utica Shale. Aubrey McClendon's new company has bought more than $3.5 billion of acreage in that formation since last October. McClendon's former company, Chesapeake Energy Corporation (NYSE:CHK) (Oklahoma City, Oklahoma), declared the Utica its next world-class asset. These moves come as other players, like BP plc (NYSE:BP) (London, England) and Halcon Resources (NYSE:HK) (Dallas, Texas), are exiting the Utica.
First, a little context. Production is indeed surging in the Utica, but that formation is not yet a top-tier producing region. Crude oil production in the Utica averaged about 16,000 barrels per day (BBL/d) in the fourth quarter of 2013, a modest gain over third-quarter 2013 production, but a dramatic jump over full-year 2011 and 2012 production, according to data assembled by the Ohio Department of Natural Resources (ODNR) (Columbus, Ohio). The Utica's total production for the fourth quarter of 2013, about 1.4 million barrels, is roughly what oil companies produce every day in the Permian Basin.
Click on the image at right to see crude-oil production from the Utica Shale in Ohio.
Natural gas production has risen even faster--to about 43 million cubic feet in the fourth quarter of 2013, up about 26% over third-quarter 2013 production but a dramatic gain over full-year 2011 and 2012 production, ODNR reports.
Click on the image at right to see natural-gas production from the Utica Shale in Ohio.
The Utica's hydrocarbon reserves are mainly natural gas, though some areas have meaningful deposits of crude oil and natural gas liquids (NGLs). Profitably producing dry gas in the Utica was not a problem when gas prices averaged $6 to $8 per thousand cubic feet (Mcf), as they did in 2004-08. But gas prices plummeted in 2008-12, rendering uneconomic many investments in the Utica. Many producers packed up, sold acreage for pennies on the dollar and moved to liquids-rich plays in Texas and North Dakota. For more on the disappointing early results from the Utica Shale, see June 6, 2013, article - Oil & Gas Production from Utica Shale Falls Short of Expectations.
Click on the image at right for average U.S. wellhead prices for natural gas, 2001-12.
Current gas prices have recovered to about $4.50 per Mcf, which helps the operating economics in the Utica. And growing industrial demand for gas and NGLs should continue to act as a floor for the pricing of those commodities. But the keys to success in the Utica are low operating costs, detailed knowledge of the area's geology, and the continued expansion of the formation's gas and NGL midstream and takeaway capacity.
Chesapeake and McClendon's new company, American Energy Partners L.P., say they have the geologic knowledge and cost structure to profitably operate in the Utica. Chesapeake has long been the Utica's leading producer and acreage holder. Since late 2013, McClendon's American Energy Partners has spent an average of about $12,500 per acre (more than $3.5 billion in total) to acquire about 280,000 net acres of exploration land in the Utica. The company estimates it will drill 1,560 net wells in the Utica in the coming years. All this coming as BP was taking a $521 million write-down on its Utica assets.
Meanwhile, in a May presentation to investors, Chesapeake Energy executives said the company's cost to drill a typical Utica well will decline to $5.7 million by year-end 2014, down from $6.7 million in 2013 and $7.7 million in 2012. By contrast, Chesapeake said, the average operator in the Utica spends about $11.8 million drilling a well there. Chesapeake has been exploring and drilling in the Utica for three years. It has drilled more wells there than all other companies combined.
Because of its low cost structure and extensive knowledge of the Utica's geology, Chesapeake officials reportedly told investors its Utica wells will generate returns of 65% to 80% when gas is priced at $4.50 per Mcf at the wellhead and oil is priced at $95 per barrel. Executives predicted the company will generate a return of about 45% this year from its Utica drilling program, more than double last year's 20% return. In 2015, the return in the Utica could hit 60% under certain conditions.
Other producers, including Magnum Hunter Resources Corporation (NYSE:MHR) (Houston, Texas), Antero Resources Corporation (NYSE:AR) (Denver, Colorado), Gulfport Energy Corporation (NASDAQ:GPOR) (Oklahoma City) and Rice Energy Incorporated (NYSE:RICE) (Canonsburg, Pennsylvania), have reported very high initial production rates from wells drilled in southeastern Ohio, according to media reports. This year Range Resources Corporation (NYSE:RRC) (Fort Worth, Texas), a pioneer in the adjacent Marcellus Shale, will drill its first Utica well.
Ohio has issued more than 1,300 Utica Shale drilling permits in the last few years. Aggregate oil & gas-related investments in the state are reportedly hovering around $20 billion. Exploration is concentrated in a handful of the state's eastern counties: Carroll, Harrison, Noble, Belmont, Guernsey and Columbiana. Industry observers say that the Utica is transitioning from an exploration phase to a development phase.
Some financial analysts have cautioned investors and drillers about the danger of getting ahead of itself--again. "The industry remains in the early stages of actively delineating" the potential of the Utica Shale, Tim Rezvan, an analyst Sterne Agee (Birmingham, Alabama), told an industry conference recently. He said the industry may know more about the Utica today compared to five years ago, but it shouldn't get too far ahead of itself. "There's still a lot of stuff we don't know. We need to be patient and get toward 2016 and beyond," when more infrastructure is expected to be online and more questions will have answers, he said.
"There are some very clear headwinds" facing oil & gas companies in Ohio, Rezvan continued: "The biggest ones are natural gas processing and takeaway (capacity); they continue to be limiting factors for growth, especially for companies that are well-capitalized. They could be running higher rig programs right now."
Industrial Info is tracking 78 active Oil & Gas Production, Pipelines and Terminals projects in Ohio with total investment value of about $5 billion. Two of the largest projects are NGL pipelines, and eight gas processing projects are each valued at $200 million or more.
"The Utica Shale is a dual 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, Pipelines and Terminals industries. "It still has value as a long-term natural-gas play, but the spotty deposits of crude oil increase risks and uncertainties for companies operating there. And even if you're a gas-focused producer, why would you want to operate in the Utica, which has higher costs and more challenging geology, when you could operate next door in the Marcellus?"
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Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
First, a little context. Production is indeed surging in the Utica, but that formation is not yet a top-tier producing region. Crude oil production in the Utica averaged about 16,000 barrels per day (BBL/d) in the fourth quarter of 2013, a modest gain over third-quarter 2013 production, but a dramatic jump over full-year 2011 and 2012 production, according to data assembled by the Ohio Department of Natural Resources (ODNR) (Columbus, Ohio). The Utica's total production for the fourth quarter of 2013, about 1.4 million barrels, is roughly what oil companies produce every day in the Permian Basin.
Click on the image at right to see crude-oil production from the Utica Shale in Ohio.Natural gas production has risen even faster--to about 43 million cubic feet in the fourth quarter of 2013, up about 26% over third-quarter 2013 production but a dramatic gain over full-year 2011 and 2012 production, ODNR reports.
Click on the image at right to see natural-gas production from the Utica Shale in Ohio.The Utica's hydrocarbon reserves are mainly natural gas, though some areas have meaningful deposits of crude oil and natural gas liquids (NGLs). Profitably producing dry gas in the Utica was not a problem when gas prices averaged $6 to $8 per thousand cubic feet (Mcf), as they did in 2004-08. But gas prices plummeted in 2008-12, rendering uneconomic many investments in the Utica. Many producers packed up, sold acreage for pennies on the dollar and moved to liquids-rich plays in Texas and North Dakota. For more on the disappointing early results from the Utica Shale, see June 6, 2013, article - Oil & Gas Production from Utica Shale Falls Short of Expectations.
Click on the image at right for average U.S. wellhead prices for natural gas, 2001-12.Current gas prices have recovered to about $4.50 per Mcf, which helps the operating economics in the Utica. And growing industrial demand for gas and NGLs should continue to act as a floor for the pricing of those commodities. But the keys to success in the Utica are low operating costs, detailed knowledge of the area's geology, and the continued expansion of the formation's gas and NGL midstream and takeaway capacity.
Chesapeake and McClendon's new company, American Energy Partners L.P., say they have the geologic knowledge and cost structure to profitably operate in the Utica. Chesapeake has long been the Utica's leading producer and acreage holder. Since late 2013, McClendon's American Energy Partners has spent an average of about $12,500 per acre (more than $3.5 billion in total) to acquire about 280,000 net acres of exploration land in the Utica. The company estimates it will drill 1,560 net wells in the Utica in the coming years. All this coming as BP was taking a $521 million write-down on its Utica assets.
Meanwhile, in a May presentation to investors, Chesapeake Energy executives said the company's cost to drill a typical Utica well will decline to $5.7 million by year-end 2014, down from $6.7 million in 2013 and $7.7 million in 2012. By contrast, Chesapeake said, the average operator in the Utica spends about $11.8 million drilling a well there. Chesapeake has been exploring and drilling in the Utica for three years. It has drilled more wells there than all other companies combined.
Because of its low cost structure and extensive knowledge of the Utica's geology, Chesapeake officials reportedly told investors its Utica wells will generate returns of 65% to 80% when gas is priced at $4.50 per Mcf at the wellhead and oil is priced at $95 per barrel. Executives predicted the company will generate a return of about 45% this year from its Utica drilling program, more than double last year's 20% return. In 2015, the return in the Utica could hit 60% under certain conditions.
Other producers, including Magnum Hunter Resources Corporation (NYSE:MHR) (Houston, Texas), Antero Resources Corporation (NYSE:AR) (Denver, Colorado), Gulfport Energy Corporation (NASDAQ:GPOR) (Oklahoma City) and Rice Energy Incorporated (NYSE:RICE) (Canonsburg, Pennsylvania), have reported very high initial production rates from wells drilled in southeastern Ohio, according to media reports. This year Range Resources Corporation (NYSE:RRC) (Fort Worth, Texas), a pioneer in the adjacent Marcellus Shale, will drill its first Utica well.
Ohio has issued more than 1,300 Utica Shale drilling permits in the last few years. Aggregate oil & gas-related investments in the state are reportedly hovering around $20 billion. Exploration is concentrated in a handful of the state's eastern counties: Carroll, Harrison, Noble, Belmont, Guernsey and Columbiana. Industry observers say that the Utica is transitioning from an exploration phase to a development phase.Some financial analysts have cautioned investors and drillers about the danger of getting ahead of itself--again. "The industry remains in the early stages of actively delineating" the potential of the Utica Shale, Tim Rezvan, an analyst Sterne Agee (Birmingham, Alabama), told an industry conference recently. He said the industry may know more about the Utica today compared to five years ago, but it shouldn't get too far ahead of itself. "There's still a lot of stuff we don't know. We need to be patient and get toward 2016 and beyond," when more infrastructure is expected to be online and more questions will have answers, he said.
"There are some very clear headwinds" facing oil & gas companies in Ohio, Rezvan continued: "The biggest ones are natural gas processing and takeaway (capacity); they continue to be limiting factors for growth, especially for companies that are well-capitalized. They could be running higher rig programs right now."
Industrial Info is tracking 78 active Oil & Gas Production, Pipelines and Terminals projects in Ohio with total investment value of about $5 billion. Two of the largest projects are NGL pipelines, and eight gas processing projects are each valued at $200 million or more.
"The Utica Shale is a dual 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, Pipelines and Terminals industries. "It still has value as a long-term natural-gas play, but the spotty deposits of crude oil increase risks and uncertainties for companies operating there. And even if you're a gas-focused producer, why would you want to operate in the Utica, which has higher costs and more challenging geology, when you could operate next door in the Marcellus?"
View Plant Profile - 3108849 1039998 3103211 3103360 3052657 3087517 3084568 3059466 3059466 3117178
View Project Report - 300143898 300143246 300137137 300154995 300154998 300065852 300114495 300122294 300126511 300164314 300165594 300168542
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.
