Appalachian Basin

Utica Shale Reaping Rewards

As the temperature drops and fall approaches, we start to think about the fall harvest. Falls is usually associated with picking apples, but this year we’re picking data from new Utica shale wells to see if it supports our projected economic outcomes for Ohio.

There are three pillars of data that were the basis of projections in a recent study, “The Economic Impact of the Ohio Shale,” conducted by Cleveland State University: drilling activity, production per well, and the decline curve of production over time.

As of Sept. 10, the number of wells drilled in Ohio reached 133, which shows that out of a projected 160 wells for 2012, as predicted by the study, 100 were already drilled the first eight months of this year. At least for the first projected year, expansion of drilling activity is going up to speed.

Let’s look at the big players in Ohio. Chesapeake remains the largest lease holder and the one with the most permits requested from ODNR (260 or 71% of all 367 horizontal permits issued in Ohio by September 10, 2012). The next three companies that hold at least 4% of total permits are HG Energy (16 permits), followed by Gulfport Energy and Enervest (13 each). We also see the entrance of The Big Four into the Utica via a series of dynamic acquisitions: BP, Exxon Mobil (XTO Energy), Shell, and Chevron, with Chevron becoming the third largest lease holder in the Utica Shale (with about 600,000 acres).

Early production results also seem to be promising. With more than 30 wells in production, the public data range anywhere from 9.5 mcf (thousand cubic feet) per day of natural gas and 1,425 bpd (barrels per day ) of NGLs and oil (Buell well) and 3.1 mcf and 1,015 bpd (Mangun well) to Anadarko‘s 9,500 barrels of oil and 12MMcf of gas for the first 20 days out of their A-3H well. Although, deriving annual production from these data is premature, it is evident that we can expect higher levels of production than projected in our report for the first year. However, there are still not enough data definitively to outline the rate of decline in production, at least based on the publicly available data.

The midstream investment is picking up (with NiSource and M3/EnerVest and Chesapeake cumulatively committing about $1.2 Billion), but we have yet to see the best outcome because it takes time. As much as we want to know for sure what our future will look like, we should understand that step-by-step investments and commitment is required to build long-term economic prosperity. Right now, commitments from Halliburton and Schlumberger for $150M each with promises to create over 500 local jobs are as good as it gets. Over $1 billion in new investments by the Ohio steel industry is due to shale development, not just Utica. This shows the confidence of businesses in long term development.

All pieces of the Utica puzzle seem to favor the Ohio economy. We just need to be patient to cross economic time – from the short-term to the long-term. We are living in the short-term success right now. Companies are still drilling primarily to have a better idea for the type and amount of product to be extracted from the Utica formation. The real long-term boom will come when businesses will have more data on sustainable long-term production: this is the case where supply defines the demand of the market. Depending on how much gas, NGL and oil Utica will add to the equation for the next 10-20 years, the demand will form its response. This demand will come from consuming gas to produce electricity, conversion of trucks and cars to gas fuel, and building chemical plants to process NGL into plastics.

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