No Oil Window in the Utica? No Worries, Lots of Wet Gas

Source: The Business Journal 

YOUNGSTOWN, Ohio — No, the Utica shale isn’t producing the kind of “Texas Tea” found in other shale plays such as the Eagle Ford. But its value as a source for wet gas is extremely lucrative for the companies drilling deep horizontal wells in eastern Ohio.

The Eagle Ford in eastern Texas, together with the Bakken shale play in North Dakota, has emerged as a top producer of heavy crude oil, the most sought-after and profitable product in the energy sector.

Initially, it was hoped that the Utica would be a lucrative crude window in addition to the high volumes of natural gas liquids and dry gas that many geologists know is there. Instead, what little oil is produced from the Utica is likely condensate that is very light, highly volatile and less profitable when compared to its crude-oil cousin, noted Rick Simmers, the chief of the Ohio Department of Natural Resources’ oil and gas division.

“That’s a very volatile type of oil that might evaporate very quickly. It’s not thick. It’s almost waterlike,” Simmers said May 16 at a press event where ODNR announced production results from 87 operating Utica shale wells.

The American Petroleum Institute grades oil based on its viscosity, or its ability to flow, Simmers explained. The oil produced in Ohio usually ranges in gravity between 55 degrees to about 70 degrees; the higher the degree, the lighter the oil.

“Its chemical composition has a narrower range than thicker crude oils,” Simmers added, and often sells at 85% of what heavier crude commands in the market.

Reports from energy companies exploring the oil window — considered the western edge of the Utica play — have largely come up empty.

The 2012 production report shows, for example, that Devon Energy Production found nothing while prospecting for oil in Wayne, Ashland, Medina and Knox counties. According to the report, the four wells — one in each county — produced no oil or natural gas.

One well, the Eichelberger 1H well in Ashland, was in operation 102 days.

Only Devon’s well in Guernsey County in the southeastern portion of the state showed any measurable results. That well, the Chumney Family Trust 2H, eked out just 2,149 barrels of oil over 23 days of production.

“They [Devon] may have evaluated the economic potential, and based on their company economics, decided that these wells might not be economic for their play,” Simmers said. “That’s not uncommon.”

Other energy companies have marketed their leases along the western edge of the play and instead are concentrating on what they believe is the most profitable region of the Utica — a “fairway” that stretches from Columbiana County south through Harrison and Belmont counties.

Chesapeake Energy Corp., by far the most prolific driller in the Utica with 1.2 million acres under lease, recently announced its intent to sell 94,000 acres just to the west in Stark and Portage counties and concentrate on developing its assets in Carroll County.

Last November, former Chesapeake CEO Aubrey McClendon told investors that the oil prospects in the Utica were fading. According to a Wall Street Journal report, McClendon said that the Utica is not a place “where we are going to probably see a huge amount of oil production growth.”

The figures ODNR released May 16 all but confirm that oil, as of now, isn’t going to be a major factor in the Utica. Others have said, however, that as technology improves, there may be oil reserves that can be tapped profitably down the road.

Clearly, the prize in the Utica is “wet” gas, or gas that can be converted into marketable products such as ethane, butane and propane.

Natural gas liquids command a higher price in the market than more conventional dry gas, such as methane. The state’s production report, however, doesn’t distinguish the amount of wet gas production versus dry gas production. Instead it’s all lumped together under natural gas production.

For wet gas to be profitable, the region’s processing and pipeline infrastructure needs to be in place. “Midstream infrastructure will likely affect Utica production more than anything else,” Simmers noted.

Natural gas liquids require separation from dry gas, which is done through cryogenic plants such as the one under construction in Kensington in southern Columbiana County. Once the wet gas is separated from methane, it’s piped to a fractionation plant that can separate the liquids into definitive products such as propane, ethane and butane.

David Mustine, managing director of energy, chemicals and polymers at JobsOhio, reported that shale development stands to have a profound economic impact on not just midstream development such as the construction of new plants and pipelines, but also downstream growth.

He said the economics of the play for some of the major companies is starting to bear fruit. Chesapeake, for example, recently reported that the financial returns on its wells are averaging about 40%. Meantime, Gulfport Energy has said that two of its wells in the Utica are delivering more than 100% returns.

“Some of the early results are showing very positive returns,” Mustine says.

Many of the production constraints should be lifted by the end of this year when new processing and pipeline networks are activated throughout the state.

Mustine reported that about $4 billion worth of infrastructure investment alone is under way throughout the state. “This is great news for northeastern Ohio,” he said. “This has long-term economic value.”

Also, while oil and gas exploration across the state has lured new companies and spurred major expansions of plants such as V&M Star in Youngstown, it also has the potential to stimulate end users and the downstream market, especially in the petrochemical industry, Mustine emphasized.

“We’re a global polymer leader,” Mustine said. “We have tremendous capabilities in research and development related to chemicals and polymers.” The state has four refineries that benefit from energy production in Ohio.

Utica shale provides low-cost natural gas and natural gas liquids to these industries, Mustine said. “We’re really strong with specialty chemicals,” which are produced through stocks of liquid gas. “This is why we’re focused on the downstream opportunities.”

Once the wet gas is separated into products, it’s further processed into components instrumental in the chemical industry. Ethane molecules, for example, are “cracked” to manufacture ethylene, which is used as a base to make certain plastics.

“We’re also working on converting boilers, large natural gas users and how they can expand in our state,” he said. Four electric companies are also examining conversion to natural gas-fired plants, which would help make electricity more competitively priced.

“We’re focusing on the supply chain, and downstream opportunities,” Mustine noted. “We’re off to a strong start, but the best is yet to come.”