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CANTON – Staggering potential or shattering disappointment.
Depending on who’s talking, last year’s Utica Shale oil and natural gas production was one or the other, or somewhere in between.
The numbers released by the Ohio Department of Natural Resources last month are subject to debate, and the perception that wins out could influence what happens next.
The state reported that 87 Utica wells produced more than 600,000 barrels of oil and 12.8 billion cubic feet of natural gas last year. Put another way, less than one percent of the producing wells in Ohio accounted for 12 percent of the oil and 16 percent of the gas.
The numbers come with several caveats. The oil flowing from the wells is about 85 percent the value of standard crude, and the state didn’t differentiate between “dry gas” — the methane burned as fuel — and the more sought after “wet gas” that contains natural gas liquids such as propane, butane and ethane.
Also, none of the wells were in production for a full year, as companies have kept the taps closed until pipelines and processing plants are available to handle the flow.
Still, ODNR estimates the state will have 362 Utica Shale wells producing by the end of this year, and could top 1,000 wells by 2015.
“We believe the Utica Shale play in Ohio is the real deal, and that it has already brought unprecedented growth in oil and gas production, and it’s going to produce staggering amounts of oil and gas in the future,” ODNR Director James Zehringer said after the report’s release.
That’s one take on the numbers. Here’s a look at other perspectives.
LOCAL REACTION
The drilling sweet spot, or fairway, running from Carroll County down to Noble County that contains wet gas, is basically in Canton’s backyard.
And that’s good news to David Kaminski, the Canton Regional Chamber of Commerce’s director of energy and public affairs. Although the preliminary numbers are based on partial-year production, Kaminski said the chamber is not far behind the state in its assessment of the Utica Shale’s prospects.
“We remain optimistic about the Utica,” he said. “We don’t see any reason why people shouldn’t be, and we think that it’s just going to take some time until systems are set up so the product can be brought to market.”
As pipelines are completed, the next 18 months will tell what can be processed and shipped, who can make money, and what it will mean for landowners who leased their mineral rights.
“I think everybody wants quick, short-term results, and I think some of the negative press the report has got has been based on that desire to show quick, short-term results,” Kaminski said.
Even if the oil-bearing acreage west of Interstate 77 isn’t developed in the next five or ten years, or ever, the Utica Shale already has created jobs, wealth, and business opportunities and spurred the investment of billions of dollars in infrastructure, he said.
“None of that was occurring a few years ago,” Kaminski said. “We think that’s tremendous.”
Amy Rutledge, director of the Carroll County Chamber of Commerce, said the numbers were about what she expected, considering that pipelines and processing plants still are under construction.
She doesn’t anticipate the report will influence the pace of drilling in her county.
“I don’t think it’s going to affect us here in Carroll County at all because we’re still mainly Chesapeake, and Chesapeake is not walking away,” she said, referencing Chesapeake Energy, the major driller locally and in the state.
Rutledge figures next year’s numbers will look totally different because the processing plants will be on line, and, she noted, the Utica wells punched above their weight when compared to production from conventional wells.
“I still think (the Utica Shale) is the generator that it has been projected to be,” Rutledge said. The report “might slow some of the development in other areas, but I don’t know. That will all go back to the companies themselves.”
INDUSTRY VIEW
Tom Stewart doesn’t buy Zehringer’s statement that the 2012 numbers show a “staggering” amount of oil and gas in the Utica Shale.
“I think that’s hyperbole,” said Stewart, executive vice president of the Ohio Oil and Gas Association.
He calls the results “moderate.”
“Perhaps some day there will be staggering amounts of oil and gas, but it’s not happening right now,” Stewart said.
Not only did the report examine just 87 wells, it didn’t include the rate at which those wells will decline over time, or the cost to replace production — two vital pieces of information for drillers and investors.
“You just can’t look at a well and say, ‘Shazam! Look at that great well,’” Stewart said.
That said, drillers are finding natural gas that is rich in liquids, and there will be more drilling in the heart of the sweet spot, as efficient gathering and processing facilities become available.
“Clearly, what these numbers show us is that the oil window has not panned out — yet,” Stewart said. “And all this talk about big-time oil production has been shown not to be true — yet.”
EnerVest has estimated that portions of the volatile oil window hold 20 million to 30 million barrels per 640-acre section, although the results from six wells drilled to date have not been good.
Developing the oil window will take time and money, a point Stewart makes in his argument against Gov. John Kasich’s severance tax proposal.
“It’s placing the highest tax burden on the area of the state that needs innovation and risk-taking most,” he said. “That’s one of the reasons it’s a very bad idea.”
INVESTOR COMMUNITY
Oil is more valuable than natural gas, and many financial analysts focused on Utica’s lower-than-expected oil production.
Compared to oil-producing regions such as the Bakken Shale in North Dakota and the Eagle Ford Shale in Texas, the Utica has been disappointing, said Mark Hanson, an analyst with investment research firm Morningstar.
“To make the comparison, as Aubrey McClendon did, that this is the next Eagle Ford, I think that was probably premature and based on early results, it doesn’t look like that’s the case,” Hanson said, citing the former Chesapeake CEO.
In March, the Eagle Ford produced 529,000 barrels of oil a day.
The report also shows sweet spots emerging in Carroll, Columbiana, and Harrison counties, Hanson said. But the analyst faulted ODNR’s report for not having data on well costs, drilling depths, and the split between oil, natural gas, and natural gas liquids production.
“On the whole, if the state of Ohio is going to make us wait for a year and then releases … a data set that really doesn’t give you a lot of insight, I mean, look, you’re not making the job any easier for the people who analyze the industry, for people that are looking to invest, for industry observers,” Hanson said.
“Underwhelming” early results could lower stock prices, making it harder for public companies to raise money and dissuading smaller private operators from looking for additional acreage, Hanson said.
He wouldn’t be surprised if well results improve over time, he said. Nor would he be shocked if more companies follow Devon Energy’s lead and give up on Utica.
“Ultimately, I think people are still trying to figure out exactly how to make this area work,” Hanson said.
RBN Energy analyst Sandy Fielden also called ODNR’s report “disappointing” before concluding the news isn’t all bad.
In the short term, the Utica Shale won’t produce as much oil as the Bakken or Eagle Ford, but production should surge this year in the form of natural gas, natural gas liquids, such as propane, and condensate, Fielden wrote on rbnenergy.com.
Condensate — a volatile hybrid between natural gas liquids and crude oil that is prevalent in shale — causes confusion because it’s not something onshore drillers in the U.S. have traditionally produced, he explained in an interview.
“It is valuable, it is something that you can manufacture gasoline and distillates from, but it’s just not something that traditional refineries are set up to process right now,” Fielden said. “And because it doesn’t have the magic name crude oil, which has a slightly higher value to it,” the analyst community sees it as second-rate productions.
Utica producers and refiners — including Marathon’s unit in Canton — are learning to handle condensate, he said.
The state’s release of the numbers six weeks after drillers submitted them, makes analysts suspicious, but results will carry more weight, Fielden said.
“There are so many opportunities in the U.S. today to drill that they’re not going to hang around if there isn’t a good return,” Fielden said.
PROPERTY OWNERS
Producing wells have the potential to provide years of income to landowners who leased their mineral rights to drillers. So, what do the state’s numbers reveal on the value of wells? Not a lot.
“Some people may have stars in their eyes,” said William G. Williams, an attorney with Krugliak, Wilkins, Griffiths & Dougherty who specializes in oil and gas.
But the size of a royalty check can be a moving target. And the state’s report doesn’t detail natural gas liquids production.
“It’s not a true science,” he added. “There are so many variables, so many factors.”
Take for instance the two wells that produced for more than 300 days.
Based on $90 for a barrel of oil and $3.50 for a thousand cubic feet of natural gas, the Buell well in Harrison County made roughly $6.7 million last year through 341 days of production, Williams said.
In Carroll County, the Shaw well produced more oil but less gas than the Buell well during 306 days of production, at a value of $3.4 million, by the same formula.
But the gross value of a well doesn’t automatically translate into a fat check for a landowner. The royalty percentage — anywhere from 12.5 percent on old leases to as high as 20 percent on newer ones — must be factored in and multiplied by the amount of acreage the landowner has in a drilling unit, Williams said.
For example, if a well produces oil and natural gas worth $1 million and the landowner has a 15 percent royalty, but only eight acres in the 640-acre drilling unit, that landowner would get $1,875 a year or $156.25 a month.
Williams said it’s meaningless to calculate the value of a well that produces for less than 100 days, and cautioned that results differ county to county and township to township.