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.