A ‘forgotten’ region will become world class, Chesapeake says

Source: Houston Chronicle 

Just a month after BP decided to take a $521 million hit to abandon its plans for the Utica Shale, Chesapeake Energy is calling the region its “newest world-class asset.”

It’s the second surprise from Chesapeake executives this year on where they expect the company’s growth. The first came in February, when the Oklahoma City-based oil and gas producer told investors it would march back into the gas-rich Haynesville Shale in northwestern Louisiana, East Texas and southwestern Arkansas.

The Utica, an Ohio shale play once expected to yield large bounties of pure oil, turned out to have much bigger deposits of natural gas and natural gas liquids. Chesapeake and others “whiffed” on the Utica a few years ago, but now the company believes it’s going to be a big growth driver, said Jason Wangler, an analyst with Wunderlich Securities in Houston

Chesapeake officials said this month that they believe the Utica holds more than 4 billion barrels of recoverable resources and that the play will deliver 45 percent returns this year. With plans to ramp up as many as nine operated rigs there, the company is aiming to boost its production in the Utica to almost 10 times its level two years ago.

It’s a switch that could bring on a lot more natural gas production for Chesapeake — already the nation’s second-largest gas producer behind Exxon Mobil Corp.

“No longer bound by a focus on shifting toward an oily portfolio, we expect rig count to accelerate in the Haynesville, Marcellus and Utica over the next few years with infrastructure constraints governing near-term growth,” Matt Portillo, an analyst with Houston-based Tudor, Pickering, Holt & Co., wrote in a recent note to investors.

The Marcellus Shale crosses several states in the Northeast, including Pennsylvania and New York.

Even the Utica’s skinny “oil window,” the hard-to-reach layer that turned out to be a lot smaller than the industry had first believed, holds plenty of potential value, a Chesapeake executive said during a recent meeting with analysts in Oklahoma City.

“We are believers in the Utica,” said Chris Doyle, Chesapeake’s senior vice president of operations for its northern division. “Who thought I would talk about the oil window today? Nobody. This is largely forgotten by the entire investment community, written off as unworkable.”

But Doyle said Chesapeake has the technical expertise and an advantage on production costs that could turn the oil window into a much more viable piece of its portfolio.

Doyle said most companies spend an average $11.8 million on a Utica well. Chesapeake spends $6.7 million and is looking at ways to cut the cost further. The company also lifted its oil well production from 500 to 1,000 barrels per day under new post-drilling completion models.

And the company has dedicated a team of researchers in Oklahoma City to figure out the best way to approach its position.

Geologists, drillers, engineers and lab workers have worked to figure out a new completion model the company expects will lift its Utica production further.

“It’ll be online in the next month or so,” Doyle said. “I can’t wait to see how it does.”

Chesapeake’s production regime in the Utica is expected to pump an average 1,360 barrels of oil equivalent per day this year, and it is looking to boost its returns next year to 60 percent, which could make the Utica one of its most valuable assets