The Utica Shale is a Bust...Or Maybe it Isn't - Varied Reactions to Production Figures Continue to Pour In

Various outlets continue to cover the reaction to the ODNR's release last week of the 2012 Utica shale production figures.  While Reuters quickly goes negative, pointing out that the entire oil output from the Utica shale last year was less than North Dakota's Bakken shale produces in a single day, other outlets are quick to note that the gas numbers indicate that the Utica shale is a very promising wet gas play.  Here's a sampling of the continued reaction.

From Reuters:

For the past three years, the boom in the U.S. shale oil industry has outstripped all expectations. Production surged far faster than any forecasts; drillers raced to secure space in new pipelines to get their crude to market.

Now, at the periphery, that may be changing - at least for a while.

News from two of the country's less developed shale plays in Colorado and Ohio last week offer a reality check for the wave of euphoria that has washed across the industry. The stumbles mark a break from the past few years, when nearly every new project was an overnight success and output grew and grew.

On Thursday, Ohio, home to the Utica shale, finally released annual data on 2012 production that showed the state pumped less than 700,000 barrels of oil from its shale wells -- barely enough to fill a small oil tanker. North Dakota's Bakken shale pumps more than that every day. Even state officials said it the result was "lower than initially estimated."

From SNL:

The Utica Shale may not be able to replicate the oil results of the Bakken and Eagle Ford, but early results show it could be a major wet gas play. 

The Ohio Department of Natural Resources on May 16 reported 2012 Utica oil production of nearly 636,000 barrels and natural gas production of more than 12.8 Bcf. Only 87 of the 215 wells drilled in 2012 reported some form of production, and the majority produced for less than half a year. 

Self-described "Utica bears" found the results to be encouraging. 

"We acknowledge that the results were better than we'd expected, particularly if gas volumes presented are higher BTU as companies have suggested," Bernstein Research analysts said in a May 17 research report. "At this point, the Utica Shale is clearly not in the camp of shale 'duds' (in which we would place opportunities like the Michigan Basin and Tuscaloosa Marine Shale) but hasn't yet joined the elite club of the Eagle Ford and Marcellus and may fall short of membership." 

The Bernstein analysts said the oil results were mainly in line with their low expectations. Production data showed no wells online for more than 33 days that averaged more than 230 barrels of oil per day, and most oil is light condensates with an American Petroleum Institute gravity of 55 to 70. But the best wells were gas-dominated, and the firm will be keeping a close eye on gas Btu values. State officials said Utica gas averaged 1,250 Btu.

From Columbus Business First:

The production numbers in a new state report on Ohio’s Utica shale play are positive but could be even better if drilling companies had more pipelines and processing plants to support their operations, said energy industry expertDon Fischbach. 

The lack of such infrastructure is limiting drillers from showing what their wells can do, said Fischbach, who has more than 30 years experience in the oil and natural gas business. He heads the energy practice group at Calfee Halter & Griswold LLP, a law firm with offices in Cleveland, Columbus and Cincinnati.

As we reported, the Ohio Department of Natural Resources released 2012 production numbers Thursday that showed oil production in eastern Ohio’s Utica play increased 93 percent in 2012 compared with the prior year and natural gas production was up 80 percent. The number of producing wells grew from just two in 2011 to 87 by the end of last year in what continues to be described as a shale gas play in its early stages of development. 

From Energy in Depth - Ohio:

 The numbers reported to the DNR and discussed in the Reuters account would indicate that the 86 wells now producing are averaging approximately 20 barrels of oil per day.  It’s hard to argue with statistics, but it’s also important to understand that on the surface, these particular ones are very misleading. 

For example, Chesapeake Energy reported production on 53 wells that averaged 77 BOPD and 2097 Mcfd.  The gas production rates are certainly substantial, even with only three wells being online for more than 300 days, but the oil production rates appear less than impressive.  However, no mention is made of natural gas liquids (NGLs) that are being recovered from the gas.  In fact, considerable NGLs are being recovered from the gas stream and are not reported as oil production to the state.  Similarly, nothing is mentioned as to how the wells are being produced. Notably, due to limited pipeline capacity (a condition that is only temporary, given massive buildouts already underway), many of these wells are being “choked back” until the product can actually be sent somewhere. 

In fact, nearly $10 billion is being invested in Ohio’s midstream infrastructure to help bring the gas and entrained NGLs from these wells to market.  How will this impact the production from these same 86 wells going forward? No one knows for sure.  But it’s safe to say that the numbers will look better when this infrastructure is in place. 

In the end, the raw production numbers reported to the state represent only a snapshot of what the industry is actually doing — and, more importantly, what it’s capable of doing.  No, the oil numbers are not as good as other, more mature plays, like the Eagle Ford in Texas. But the real question is, are the wells economic?  Can a company invest $5-9 million to drill and complete a well in the Utica shale and make a profit on its investment?  The most important numbers to a company are net present value and payout time — neither of which are reported to the State.

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