INSIGHT: The potential and pitfalls of the Utica shale

14 July 2014 17:31 Source:ICIS News

By Tom Brown

LONDON (ICIS)--The Utica shale play can be found a few thousand feet below the Marcellus shale. Roughly 175 miles wide and 225 miles long, the seam of deep-buried oil and natural gas reserves runs through the states of New York, Pennsylvania, Ohio and West Virginia.

The play has not been developed as fast as other unconventional resources in North America, because of the depth of its tight oil and gas reserves compared to other plays such as Marcellus, but is being eyed as a potentially huge resource, with incumbents and wildcatters alike buying up land in the region.

The most significant drilling activity since 2010 has been in eastern Ohio, where the shale is a little shallower, but even in that state the play is still in the early stages of development, according to Tom Waltermire, CEO of northeast Ohio development group Team NEO.

“Utica ‘s still very early stage. Just this year the midstream [operators], where you’re separating the gas liquids from the methane, are just starting to operate. And until those things are operating, it doesn’t even make sense to be doing a lot of drilling, other than for the benefit of scoping out the field,” Waltermire said.

“There’s still some exploration going on, trying to see if there’s a profitable oil window. We’re all learning a lot about how all this works,” he added.

Although the challenges of tapping into the Utica shale may have led operators to pursue more accessible plays such as Bakken or Eagle Ford, there are indications that it could stand in the longer-term to be one of the country’s most productive sources of unconventional energy.

The US Geological Survey’s first assessment of the potential resource reserves of the play, released in late 2012, estimated 38,000bn cubic feet of technically-recoverable [gas] stocks, along with a mean of 940m bbl of unconventional oil and a mean of 208m bbl of unconventional gas liquids.

Commenting on the progress of the Utica Shale late last year, Manuj Nikhanj, energy research head of analyst ITG, noted increasing interest in the play, and “encouraging comments from operators”. US-headquartered oil and gas company Carrizo said in June that it expects expecting to more than quintuple its investment in Utica this year, to $100m.

Despite the nascent state of the Utica shale resources at present, the shale gas boom in general has been a boon for states with strong industrial bases, including Ohio, according to Waltermire.

“We have had several major industrial expansions, particularly for steel and pipe, that have taken place in our region and most of that is leaving Ohio to North Dakota, the Gulf, and Oklahoma,” he said.

“As local activity picks up, maybe more of that will stay in the area, but our region is benefiting from the national picture on shale and not just what’s happening in our back yard,” he added.

“The small business impact has really been in the supply chain, we’re seeing a lot of entrepreneurial activity,” added Team NEO regional marketing president Rick Batyko. “A company that makes snowploughs decided that they can also make the tanks that are needed for the water trunks. Lots of examples where companies are changing what they do to cater to this industry,” he added.

The area of Ohio around the Utica Shale play is more densely-populated than North Dakota - one of the epicentres of the unconventional oil and gas extraction in the US, with a state population of a little over 700,000 people - meaning that developers will need to tread carefully when exploring for reserves in the area.

A larger local population base can provide benefits as well as challenges to developers, according to Waltermire.

 “The majority [of shale exploration] is happening further south of Cleveland, and a lot of these counties tend to be rural, but there are far more people in this area than there are in the whole state of North Dakota,” he said.

“ The benefit of that is there are people to go to work. North Dakota is crazy because there aren’t even people there to do the work. Somebody working in an oilfield relies on other things – places to eat, places to stay,” he added.

The public response to the development of the industry has been broadly positive, with a survey of eastern Ohio public officials revealing that the majority feel that the development of a shale gas industry is having a positive effect on their communities.  

However, there have been setbacks, with a minor seismic event in March this year found to be linked to hydraulic fracturing, leading state regulators to introduce new restrictions and permitting systems for developing shale resources near known fault areas.

“One current thing that has gotten some attention is we have had a little bit of activity... because of a wastewater injection well that was unfortunately allowed to be drilled near a small fault,” Waltermire said.

“They allowed this injection well to be drilled in a really stupid place that was right near this fault-line, so they were injecting wastewater, you started to get these little earthquakes... there have been some regulations announced that there has to be some kind of seismic monitoring, and if anything is noticed than the driller is required to do more extensive monitoring,” he added.

Waltermire is former CEO of polymers specialist PolyOne, which is headquartered in the state, as are fellow chemicals producers, RPM International, Sherwin-Williams, Omnova and A Schulman.

“Our area is very strong in specialty chemicals companies,” he said. “Specialty chemicals compan[ies] try to sell product based on value not on cost. If you are capturing the value and your raw material costs go down, you pocket most of the difference. This is a very good thing if you’re a specialty producer.”

“Over time [margin uplift] will tend to get competed away, because the buyers are going to keep working on the sellers and gradually over time it get passed through, but in the meantime you benefit from it,” he added.

Although the potential of the Utica shale is not in dispute, the development of the play has run into some roadblocks this year, with UK-headquartered oil and gas major BP announcing in April that it will not be proceeding with plans to drill wells in northeast Ohio, and that it would be taking a $521m writedown related to its operations in the region.

BP is the latest company to cut short its explorations into the play, following the discovery that the Utica shale is richer in natural gas than in oil. Texas-based Halcon Resources also announced that it would be suspending its operations in the region for the time being in favour of developing its operations in Texas and North Dakota.

Natural gas prices have plummeted to near historic lows since the shale gas boom, with the Henry Hub spot price for wellhead natural gas standing at $4.15/MMBTU for the week to 9 July, while higher-value oil reserves are more sought after by many drillers.

“The main difference is price,” said Waltermire. “The oil is worth  lot more and the Utica was never really billed all that much of an oil play, it was billed more as a wet gas play, which is more in between.

“And that seemed to be bearing out. The Utica [play] is wet, but they’re not finding the amount of oil that I think is being found in North Dakota and some of the other more oil-oriented plays,” he added.

This has not deterred other operators such as oil and natural gas specialist Chesapeake Energy, which is one of the largest operators in the Utica shale and remains bullish on the play, with vice president Chris Doyle referring to Utica in May “the newest world-class asset in the portfolio of Chesapeake.”

Irrespective of the oil/gas mix to be found in the play, with activity around Utica expected to last for decades, the region seems set to become the latest chapter in the narrative of the shocking reversal of fortune for the US energy sector.

“To be able to say that the Ohio-Pennsylvania region is one of the largest sources of natural gas in the world is rather astonishing because we’re used to not having that point of view, especially in the Midwest,” said Batyko.

Utica shale deposits, US Geological Survey

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By Tom Brown