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Utica Shale Disaster

Natural Gas but Not Oil

Written by Brian Hicks
Posted April 17, 2013

The Utica Shale — Eastern Ohio’s promising shale formation that just two years ago promised $500 billion in oil riches — now has companies running for the hills as its promise fizzles out.

It’s a losing battle for many of the U.S. drillers who already have rigs in place. In fact, the region’s biggest stakeholders have decided to sell acreage.

The Utica is a vast, dense shale rock formation that stretches from Ohio to New York.

At the onset, the Utica was thriving; companies were buying up acreage like hot cakes and operations were moving along without a hitch. As an example of how promising things were expected to be, one Utica deal at the end of last year was valued at more than $50 million. That figure is comparable to seven deals in North Dakota’s Bakken Shale and six in the Eagle Ford of Texas.

But the numbers don’t compute. Experts say that by 2017 the Utica will only be producing an average of 200,000 barrels per day. The Eagle Ford, by comparison, will be producing nearly six times that at 1.15 million barrels a day, Bloomberg reports.

Utica is No Bakken

The problem drillers have run into is that the rock is a lot more dense than anticipated. The pressures underground aren’t strong enough to produce the desired oil.

super frackExperts are learning that finding shale rock doesn’t necessarily mean instant dollar signs. Formations of even the same basic rock structure can have elements that make it burdensome for drillers. Even the modern technology of hydraulic fracturing combined with horizontal drilling has its limitations.

Success that has come with the Bakken and Eagle Ford won't come so easy in a shale formation like the Utica, which is less porous where the oil is located, meaning the resource is held in there more tightly.

And its areas for oil extraction are shallower than where gas is found, which is uncommon compared to other shale formations. This makes it harder to get the oil to flow through the rock.

Right now, oil drillers can only wait for that technological breakthrough that can deal with this new, more stubborn shale formation — much like when hydraulic fracturing and horizontal drilling first broke open drilling technology in the Bakken.

It’s a time issue; figuring out what does and what doesn’t work can be time consuming. The former is likely to happen, but when is unclear.

The Dream Fades for Some

But it’s hard to be patient in today’s world. As a result, the cost of land is plummeting.

Gulfport Energy Corp. (NASDAQ: GPOR) paid $10,000 for each of its 22,000 net acres acquired in the Utica in February; just a month prior, however, an acre went for $15,000 in a joint deal with Total SA (NYSE: TOT) and Chesapeake Energy Corp. (NYSE: CHK), according to Bloomberg.

Devon Energy Corp. (NYSE: DVN) is backing out on its holdings in the Utica. The Oklahoma-based energy company has decided to sell all of its 157,000 acres, planning instead to focus on more profitable endeavors around the country and in Canada.

PDC Energy Inc. (NASDAQ: PDCE), which has been exploring the region and seeking a bid for a partnership, has been unable to find anyone willing to bite at the stake it was offering. The company has decided to stay in the region after what it claims are some promising results, but it will be doing it alone.

And privately-owned EnerVest Ltd., which claimed the Utica would bring job growth and economic success to the state of Ohio, is pulling out and attempting to sell its acreage. But it made this announcement a year ago, and still no buyers have come forward.

Even the head honcho of the lot, the U.S.’ biggest shale lease owner Chesapeake Energy Corp. (NYSE: CHK), just last week put up 94,200 acres of its Utica holdings for sale. The company said drilling for oil in the Utica has proven too difficult to justify continuing.

Natural Gas is the Answer

But there's a reason a lot of these same companies aren’t totally abandoning their Utica operations: gas.

Ohio's shale oil dream may be all but dead for now, but the prospect of natural gas still brings that ray of hope for some of the energy companies positioned in the Utica; others, meanwhile, are ill-equipped to reap those same rewards.

PDC is one of the well-equipped, which is why, despite its inability to find a partner, it is remaining in the region.

Even though natural gas is much more promising than oil, it still presently lags in construction and infrastructure, such as processing units and pipelines.

The good news, and most likely the reason there is still action to be had, is that the infrastructure dilemma is set to change this year. By the end of the year, several processing plants and pipelines are set to be online.

M3 Midstream is in completion efforts of its $1 billion Utica East Ohio Buckeye system, consisting of cryogenic plants and a fractionation plant. The total operation is set to begin this summer, and it will be fully operational by 2014.

2013 will be an interesting year, both for natural gas in the Utica and the prospect of technological advancements in oil drilling.

 

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