S 2015 UTICA PRIMER Research Insight Analysis Key Basin Stats This Primer is excerpted from s 2015 NORTH AMERICAN SHALE & RESOURCE PLAYS FACTBOOK containing all of the continent s commercially viable Shale/Resource Plays For more information or to order, visit natgasintel.com/factbook Natural Gas Intelligence
UTICA SHALE The Utica Shale is a massive formation that lies beneath portions of Kentucky, Ohio, Maryland, New York, Pennsylvania, Tennessee, West Virginia, and Virginia. In a September 2012 report, the United States Geological Survey estimated that the Utica has a recoverable potential of 940 million barrels of oil, and approximately 38 trillion cubic feet of natural gas. Despite its vast geologic footprint, most of the oil & gas exploration and development activity in the Utica so far has been focused in Eastern Ohio, likely for several reasons. One is that the Eastern Ohio portion of the play is more liquids rich. In fact, the Ohio Utica has a dry gas, wet gas, and oil window, whereas much of the remainder of the Utica is believed to be dry gas. A second is that Utica production in Ohio is also boosted by the Point Pleasant carbonate formation, which lies just below the Utica, and is likely largely limited (at least in a commercial sense) to Eastern Ohio. A third is that the Utica is shallower in Ohio, meaning it is relatively less expensive to drill, everything else being equal. The Utica ranges between 2000-8000 feet deep in Ohio, but increases to as much as 14000 deep in portions of Pennsylvania. Chesapeake Energy is the company most associated with the Ohio Utica to this point. They hold the most acreage, and reported the industry s first operating wells in 2011, according to Ohio Department of Natural Resources (ODNR) data. As of 11/29/14, the ODNR had issued 1,652 horizontal well permits since December 2009, and a total of 1,204 horizontal Ohio Utica/Point Pleasant wells had been drilled industrywide. 1
Oil & gas production in the Utica has increased sharply in recent months. According to EIA data, combined liquids and natural gas production from the Utica grew from just 207 MMcfe/d in January 2007 to 1.3 Bcfe/d in June 2014, with much of the growth occurring in the immediately preceding 18 months. 85% of the June 2014 production figure was natural gas and natural gas liquids. The rig count in the Utica Shale also continues to grow at a steady pace. As of 11/14/14, there were 50 drilling rigs working the play, up from just 8 when Baker Hughes first started monitoring these data in early February 2011. Activity within the Utica could have been even higher thus far, were it not for a series of headwinds facing the play. According to remarks made by Sterne Agee analyst Tim Rezvan at a June 2014 industry conference, the biggest of those obstacles is natural gas processing and takeaway; they continue to be limiting factors for growth, especially for companies that are well capitalized. They could be running higher rig programs right now. Beyond the widely discussed limitations of too few pipelines and processing options, Rezvan said the volatility of natural gas prices still threatens the bottom lines of small-, mid- and large- cap independents that rely on the Utica more than some of their peers do. The gassy skew of Utica wells may be too gutsy [or] contrarian in today s commodity price environment, he said. A lot of the investment clients we speak with have a lack of uniform view on how pricing will play out over the next 12 to 18 months. It s also important to note about gas prices that the Utica is much gassier than investors have thought about over the last couple years. You need to see some price stability and some improvement in the near-term future strip for people to really get excited. Much of the early drilling in Ohio has been in the wet gas window, with encouraging results within the dry gas window as well. In June 2014, Rice Energy wowed analysts with a dry gas well in Belmont County that had a 5 day IP rate of 41.7 MMcf/d (~7,000 lateral length, 40 frac stages, 33 64 choke), the largest on record for the Ohio part of the play thus far. Successes such as this have pushed drilling within the dry gas window into West Virginia (see chart below), and during the 2Q14, Range Resources and EQT Corporation announced plans to drill 2
the industry s first two Utica wells in southwest Pennsylvania, in Washington and Greene Counties, respectively. However, the formation seems to get riskier the farther west and north it extends, which could very well be the result of those areas being shallower and therefore less geologically mature. For example, in April 2014, EQT Corporation announced plans to suspend drilling in Guernsey County, while PDC Energy disappointed analysts with the type curves it introduced for its acreage positions in Guernsey, Washington, Noble, and Morgan Counties, OH during its April 2014 Analyst Day. Devon Energy Corp. was an early entrant into the Utica Shale, securing some of its first horizontal permits in 2011 in Ashland and Medina counties where it drilled and plugged dry holes. It continued to permit across a swath of land throughout the next year along the Utica s western edge, completing unsuccessful wells in Coshocton and Wayne counties in search of black oil. It even drilled as far west as Knox County, which is more than 100 miles west of the play s current core in the southeast, before abandoning the Utica and selling its acreage. Activity within the oil window has been far less prevalent, and there is much debate within the industry as to just how economic this portion of the Utica will be. As of June 2014, only 11 black oil wells had been drilled (primarily in northern Ohio), with another 30 volatile oil wells farther south near Guernsey and Tuscarawas Counties, according to EnerVest Energy Partners. Moreover, several operators have announced plans to abandon their development of the Utica s northern tier in Ohio, which today is generally perceived to consist of Mahoning, Trumbull, Stark and Portage counties, and to a lesser extent Tuscarawas County. Among the biggest announcements was BP plc s $521 million impairment. The company said in April 2014 that it would market its roughly 100,000 acres in Trumbull County and the surrounding area, saying only that the acreage did not match the needs of the company s portfolio. Around the same time, Halcon Resources Corp., citing poor results and inconclusive data, decided to suspend its drilling program in northeast Ohio and northwest Pennsylvania (see Shale Daily, March 5). The challenge in the oil window appears to be fracture design and minimizing reservoir damage upon completion, EnerVest CEO Mark Houser told financial analysts during a first quarter conference call earlier this year. We are working with industry partners on studies designed to help the partnership better understand the flow capacity of the oil window rock. However, not all the news within the oil window necessarily portends to gloom and doom. In nearly a dozen interviews 3
conducted with oil and gas professionals, local landowners and community leaders in Ohio and Pennsylvania during the first half of 2014, and through the analysis of both state production data and the plans of some of the Appalachian Basin s leading operators, there appears to remain significant enthusiasm about the Utica s black and volatile oil windows. It s only a matter of time, sources say, before operators learn how to move those molecules through the small pores of shale rock underneath a five-county region in northeast Ohio and a larger area to the west, while some acreage in northwest Pennsylvania is believed to hold the same potential. I don t think any of us familiar with oil and gas in the state of Ohio have written-off areas that have thus far proven disappointing in the north, said the Ohio Oil and Gas Association s Executive Vice President Thomas Stewart. You can t have a boom if the geology doesn t exist under current technology, and it s just not there yet in some of the areas north of Carroll County. Thomas acknowledged that there have been some pretty good wells on the northern end, but added that they ve mostly been spotty. Production data filed with the Ohio Department of Natural Resources (ODNR) do show, in rare cases, wells that have turned out notable volumes of oil and gas, but most have grossly underperformed the statewide average of horizontal Utica wells in recent quarters. Still, Thomas said the play s early days, when operators secured the bulk of their Utica acreage in the north, and ongoing tests in the northern oil window point to a strong likelihood that the northern tier will ultimately be developed. The tests are being conducted by EV Energy Partners LP (EVEP), Chesapeake Energy Corp. and Total E&P USA Inc. People will figure out how to move liquid through very tight low-permeability rock, he said. You re trying to move large chains of molecules through very small pores. The one thing I ve figured out about this industry is that it s better at solving problems than any other. In Northwest Pennsylvania, there had been a handful of wells that had either been or were in the process of being drilled to test the Utica as of September 2014. Those wells were scattered across Beaver, Butler, Crawford, Venango, Forest, Elk, Lawrence, and McKean Counties, areas that interestingly enough have not been big producers of Marcellus Shale or other unconventional gas. According to Pennsylvania Department of Environmental Protection data, those counties comprised just 0.6% of Pennsylvania s unconventional oil and gas production in the first half of 2014. Infrastructure is relatively light in Northwest Pennsylvania, and the fact that much of the acreage in that part of the state is likely already held by production from shallower wells are also contributing to the relative lack of activity in that region. But if Shell s two recent successful Utica test wells in Tioga County, PA that were announced in September 2014 are any indication, the Utica could be economically prospective farther east than previously thought. The Utica tends to be 2000 to 3000 deeper than the Marcellus in that part of the state, which negatively impacts the economics because of greater drilling costs, everything else being equal. That would open the possibility for operators to drill stacked wells for three shale horizons the Upper Devonian, Marcellus, and Utica - in some parts of northern Pennsylvania. Shell is awaiting the results on its other four Utica test wells in Tioga County, which are expected to begin producing later in 2014. 4
Counties Core Ohio Utica Counties As Identified by the Ohio Department of Natural Resources: Ashland, Ashtabula, Belmont, Carroll, Columbiana, Coshocton, Crawford (immature), Delaware (immature), Fairfield, Franklin (immature), Geauga, Guernsey, Harrison, Holmes, Huron (immature), Jefferson, Knox, Lake, Licking, Lorain, Madison (immature), Mahoning, Marion (immature), Medina, Monroe, Morgan, Morrow (Immature), Muskingum, Noble, Perry, Pickaway (immature), Portage, Richland (immature), Stark, Summit, Trumbull, Tuscarawas, Union (immature), Washington, Wayne Note: Immature counties are likely not commercially viable. As of 12/7/13, none of the 1,015 horizontal permits the ODNR had issued were in the immature counties. Pennsylvania: Armstrong, Beaver, Butler, Cameron, Clarion, Crawford, Elk, Erie, Forest, Jefferson, Lawrence, McKean, Mercer, Potter, Venango, Warren Local Major Pipelines Natural Gas: ANR East Project (Proposed), Clarington Hub, Cobra Pipeline, Columbia Gas Transmission, Dominion Transmission, East Ohio Gas, Mountain Valley (Proposed), Nexus Gas Transmission (Proposed), Rockies Express, Rover (Proposed), Tennessee, Texas Eastern Crude Oil: Cornerstone Pipeline (Proposed) NGLs: ATEX Express, Mariner West, TEPPCO, UMTP (Proposed) UTICA SHALE NET ACREAGE POSTIONS Last Updated December 2014 Company Net Acres Company Net Acres Chesapeake Energy 1,090,000 Stone Energy 28,500 EnerVest 1 903,000 Carrizo Oil & Gas 27,300 Chevron 600,000 Lario Oil & Gas Company 23,000 Consol Energy 581,000 Gastar 11,700 Range Resources 575,000 Atlas Resources Partners 2,900 Shell (East Resources) 430,000 Atinum N/A EQT Corporation 400,000 Atlas Noble LLC N/A Antero Resources 302,000 Beusa Energy N/A American Energy Utica 280,000 Brammer Engineering N/A Anadarko Petroleum 267,000 Cabot Oil & Gas N/A Devon Energy 195,000 EM Energy Ohio N/A Gulfport Energy 184,000 Encore Energy N/A Total 155,000 Hall Drilling LLC N/A Halcon Resources 140,000 HG Energy LLC N/A Magnum Hunter 118,000 Hilcorp Energy N/A Eclipse Resources 99,480 Mountaineer Keystone N/A Hess Corporation 90,000 RE Gas Development N/A BP 84,000 Sierra Resources LLC N/A ExxonMobil (XTO) 82,000 Southwestern N/A PDC Energy 67,000 Sumitomo N/A Rex Energy 66,100 Trans Energy N/A Rice Energy 50,772 NOTE: Utica Shale includes Ohio, Pennsylvania, and West Virginia. This chart contains companies that are believed to be active (either directly or through non-operated positions) in the Utica. It does not necessarily include companies that may have rights to the Utica, such as those with acreage in the Upper Devonian and Marcellus Shale in NW PA. 1 The total combined EnerVest and EVEP net acreage is 747K in Ohio and 156K in Pennsylvania. Source: Company documents, Pennsylvania Bureau of Oil & Gas Management 5