Tuesday, January 31, 2012

Shift from Shale Gas to Liquids Good for Ohio, Utica

Chesapeake adjusts investment strategy, moves to liquid plays
Ohians, already anticipating increased oil and gas industry investments in the Utica in 2012 got even more good news January 23rd when Chesapeake Energy announced that it will reallocate capital to liquid rich shale plays, including the Utica. Chesapeake also mentioned that investment away from shale gas activity could even accelerate and expand if economics remained unfavorable or worsened. Any investment away from natural gas will surely go towards even more investment in shale liquids.

Shift to liquids no surprise, mild winter playing a role
This was no surprise to those watching the industry. Natural gas prices have been down for quite some time, and hopes for normal or below normal temperatures this winter, and corresponding draws on the already natural gas storage, have been in vain. As a result of historically high natural gas storage, increases in shale gas production, and a relatively mild winter, natural gas investment was due to take a hit.  

Completions of already drilled wells to be delayed
In addition to curtailment of activity in mostly dry gas plays like the Marcellus in Northeast Pennsylvania, Chesapeake will delay completing many wells that have already been drilled and will wait until economics improve. All of this is good news for Ohio tax coffers, land owners, and the thousands of others that stand to benefit. Chesapeake also plans to defer pipeline connections of dry gas wells that have already been completed. 

Money moves, some might have missed their opportunity to cash in
While shale liquids, tied more closely to oil prices, have enjoyed sustained high prices and good economics, shale gas, and associated mostly dry gas plays have suffered to the point that economics just don't add up. Many landowners holding out for better contracts on their mineral rights in the dry gas areas are learning that it might have been best to take those early offers.

Hess comments on the Utica shale in their January 25th earnings release
Just two days after Chesapeake announced new plans for shale liquids, Hess announced plans to continue appraisal of Utica Shale acreage in Ohio. In their Q4 2011 earnings results call, Hess mentioned that the Utica, and other liquid rich plays, will play a significant role in contributing to future production growth and will drive lower overall risk than has been the case historically.

Delineation of the Utica Shale into oil, liquids, and gas rich areas is needed
Despite the fact that we have all seen the maps that appear to delineate the Utica into oil, liquids, and gas-rich areas, those designations are rough at best.  Hess indicated in their Q4 2011 earning release that they will delineate acreage in what is called an "appraisal drilling program". Before any company drops 5-8 million dollars/well on a "development" program, a great deal of data needs to be collected and subsequent analysis done in order to maximize success. The rock is not uniform from acre to acre and "sweet spots" need to be mapped and identified in order to maximize production. Operators are learning more and more that these are not "statistical plays" and the difference between a marginally economic well and one that pays out quickly, and pays out big, can be subtle.

Wednesday, January 25, 2012

State of the Union Supports Shale Gas

As a longtime follower of everything shale gas related I was quite pleased to hear our president come out in support of shale gas development last night, and the reasons are clear. Natural gas production from the Marcellus, Utica, Barnett, Eagle Ford, Woodford, Fayetteville shale plays, and others have drastically impacted us all. The graph below makes it obvious that without shale gas development coming along at a time when we were facing steep declines in natural gas production from other more"conventional" sources, we would all be paying more for energy. Shale gas development kicked in at a very good time indeed.

Source: U.S. Energy Information Administration |
Annual Energy Outlook 2012 Early Release Overview

President Obama also sited that "Experts believe shale resource development will support more than 600,000 jobs by the end of the decade." In a time of high unemployment and threats of higher energy prices and tighter supplies, shale gas development, along with shale oil development, could simply not be ignored. 

And acknowledging the controversy over fracking and environmental concerns the president had this to say, "America will develop this resource without putting the health and safety of our citizens at risk."  

So there we have. We absolutely must find ways to reduce risk and development this "shale resource gift" safely. I believe that it can be done, and that it will be done. There will always be some risk, but just like there is some element of risk in all that we do, from driving down the highway, to boarding an airplane, or piloting an oil tanker, this is a risk that we will mitigate and accept.

I will take some exception with the president's  statement that

"The development of natural gas will create jobs and power trucks and factories that are cleaner and cheaper, proving that we don’t have to choose between our environment and our economy. And, by the way, it was public research dollars over the course of 30 years that helped develop the technology to extract all of this gas out of shale rock, reminding us that government support is critical in helping business in getting new ideas off the ground." 

While I have read that government research did indeed "help" in some significant ways (see the investigation sited at the Breakthrough Institute), not giving a nod to George Mitchell and the continued great scientific work and investment, all done in the private sector,  gives too much credit to the government in my opinion. More information here, Oil And Gas Investor

Tuesday, January 17, 2012

Utica Shale Takes the Stage

Until recently, Ohio resident's only contact with company's like Exxon Mobil have been at the gas station. Now, as a result of the potential to extract huge quantities of oil and gas under our feet, large oil and gas company representatives are far more visible, finding their way into town hall meetings, industry forums, government buildings, and construction sites from which oilfield equipment will be staged.

Along with large oil and gas company visibility,  Ohio communities and energy groups are also receiving far more attention than they once did now that the potential for jobs and land lease and royalty checks are in the offering. Everyone wants to know the facts and understand the issues. Environmental groups are also making themselves known, voicing their concerns that oil and gas companies will not protect our fragile ecosystems and water supply. Recent Youngstown earthquakes fuel speculation that the industry brings with it some unwelcome baggage.

Recognizing the need to address community concerns head on,  several energy industry organizations have come together to form the Ohio Energy Resource Alliance. A recent December 14 press release includes the following:

“Shale exploration, drilling and production have the potential to recharge Ohio’s economy, get Ohioans back to work, and help ensure Ohio’s and our country’s energy security,” said Rebecca Heimlich, director of the Ohio Energy Resource Alliance. “We understand that many of our state’s community leaders and citizens have questions and concerns about oil and gas development, and we want to make sure they get the answers they need.”

The Alliance Website has not yet appeared, but is expected to popup soon.  The January 16, 2012 town hall meeting in Bridgeport, organized by the alliance,  is the latest example of community outreach.

As the energy industry continues it's decent on Ohio, it will be more and more important to separate fact from fiction. The potential direct energy jobs, ancillary economic activity from hotels to restaurants, and landowner $$, in an economy such that it is, creates enormous interest and strong feelings. As long as the Utica Shale can be exploited in a relatively safe and environmentally conservative manner, Ohio, and a nation less dependent on foreign oil and gas, will be extremely thankful and fortunate.