Utica shale play may rival Barnett

As with the Eagle Ford shale play in South Texas, the Utica Shale has dry gas, wet gas, and oil windows.

The Utica shale formation spans an area from Ohio to Pennsylvania, into New York, across the Canadian border, and into two Great Lakes (Erie and Ontario). The Utica shale takes its name from the city of Utica, NY, where it outcrops and appears on the surface. It was first identified along Starch Factory Creek near the town of Utica.

In Canada, the play is found along the St. Lawrence River and the adjacent lowlands. The Utica shale lays thousands of feet below the Marcellus shale and is proving to hold impressive quantities of oil, natural gas, and natural gas liquids. Some geologists believe the Utica shale could rival the massive Marcellus shale in terms of oil and gas potential.

Major discovery

On July 28, 2011, Chesapeake Energy reported that it had made a major discovery of a liquids-rich portion of the Utica Shale play in eastern Ohio. Chesapeake has significant holdings in the Utica and thinks that it may hold more potential for the company than even the Eagle Ford Shale in South Texas. For several months Chesapeake had been alluding to an "undisclosed shale play" that they had discovered. The July announcement confirms it as being in the Utica Shale in Ohio. Chesapeake has more than 1.25 million acres of leasehold area in the Utica, which has a western oil zone, a central wet gas zone, and a dry gas zone in the east.

Some think the Utica Shale may ultimately be as productive as the Barnett Shale play in North Texas. Chesapeake is partnering with Houston-based EnerVest Ltd. and France's Total in the Utica.

Geology of the play

Initial drilling in the Utica Shale is still centered around eastern Ohio, in the wet gas window of the play, but activity could push westward as the oily window is better defined, said Christopher Perry, the Energy Group Supervisor of the Ohio Department of Natural Resources' Division of Geological Survey. He noted that while the play is thickest in southeastern Pennsylvania, the depth, maturity, organic content, porosity, and permeability form the best combination for wet gas production in eastern Ohio.

While hard data may not yet be readily available, companies like Chesapeake, CONSOL, Gulfport Energy, and others hold acreage in the Ohio portion of the Utica, and as in the case of certain Chesapeake test wells, results have been encouraging.

"The economics of the wet gas window should improve as completion approaches are optimized and NGL infrastructure is developed," noted Stifel Nicolaus analysts. "The wet gas economics should be similar to the Eagle Ford, potentially making this one of the lowest-cost shale plays over time and accelerating the need for regional fractionation."

Providing another boost to economics in the Ohio portion of the play are the 176 active injection wells for water disposal. "This provides operators with the ability to dispose of frac flowback more effectively," noted the analysts. In addition, "development of the Utica will be aided by the play's close proximity to the Marcellus Shale play, which will allow for easier extension of takeaway capacity."

And while the majority of permitting is taking place in Carroll, Jefferson, and Columbiana counties, the play updips in the northwest direction and some operators are beginning to test the oily window (although the boundaries are not yet clearly defined). Depending on these results, the productive portion of the play could push westward as the boundaries become more clear.

Devon Energy is one such operator. The Oklahoma-based company is currently seeking the play's oil window with two wells drilling in the western portion of the play. According to an investor note, "Devon was encouraged by the positive permeability indications seen in its cores."

Recent activity

Triad Hunter LLC, a wholly-owned subsidiary of Magnum Hunter Resources Corp., has closed on the acquisition of leasehold mineral interests located predominately in Noble County, Ohio from an undisclosed seller for a total purchase price of $24.8 million. The Utica acreage consists of about 15,558 gross (12,186 net) acres. The net price paid per acre for this acquisition was $2,037.

The valuation on the acreage is attractive and the purchase price is in line with previous transactions from Petroleum Development Corp., Rex Energy, and Gulfport Energy at an average price of $2,400/acre, noted analysts at Stifel Nicolaus following the announcement.

Again, while most industry drilling and activity has taken place farther north in Carroll, Jefferson, and Columbiana counties, the perceived core of the oil window, there is a move towards expansion outside of these counties. However, more testing will be needed to determine the potential.