CLEVELAND — What happened to the Ohio shale boom? Oil and gas companies have given different answers every few months.
1. It’s a Marcellus shale boom. No, wait, it’s a Utica shale boom.
At first, the Ohio shale boom was all about the Marcellus shale, not the Utica. For example, in October 2010, Chris Perry and Larry Wickstrom of the Ohio Geological Survey gave a presentation on Ohio’s shale prospects, called, “The Marcellus Shale Play: Geology, History, and Oil & Gas Potential in Ohio.” The State geologists saw a big future in the Ohio Marcellus formation:
“. . . due to large production increases, a play such as the Marcellus is reshaping our natural gas distribution networks and the way we ultimately may use natural gas.”
Perry and Wickstrom barely noticed the Utica shale.
Before long, everything was reversed and no one mentioned Marcellus shale. Why?
Because nothing was happening in the Marcellus. There are currently only six producing wells in Ohio Marcellus shale, only one of which is a Chesapeake Energy well.
As a sign of how thoroughly the Marcellus vanished, in its report on 2011 natural gas production the Ohio Department of Natural Resources included figures for Utica wells, but didn’t even bother to report on the Marcellus wells.
“No more than a year ago, expectations of shale development in Ohio focused largely on the Marcellus. However, it became clear in 2011 that Marcellus-related drilling is unlikely to happen very far west of the state’s borders with Pennsylvania and West Virginia.”
— “An Analysis of the Economic Potential for Shale Formations in Ohio,” February 29, 2012, study funded by the Shale Coalition, and conducted by Cleveland State University, Ohio State University, and Marietta College.
Meanwhile, the Utica Shale bandwagon started rolling. On July 29, 2011, Chesapeake Energy CEO Aubrey McClendon said, “The Utica should emerge as a key driver in the future growth of U.S. energy supplies.”
2. It’s a natural gas boom. No, wait, it’s an oil boom. No, wait, it’s a natural gas liquids boom. No, wait . . .
With natural gas prices crashing, Chesapeake Energy said it was changing its focus for the Utica shale from natural gas to oil.
On February 23, 2011, Aubrey McClendon was definitive about it:
“I do find it curious that investors and analysts believe that somehow a potential increase in natural gas prices from, say, $4 to $5 or maybe even to $6 per MCF will somehow bring those rigs back from drilling oil projects where the revenue level will be $15, or I guess today I should say $16 or $17 per MCF. So to me, this is the greatest misconception about the natural gas market today, that somehow an increase of $1 or $2 per MCF in the price of natural gas in the years ahead is going to create a sufficient financial incentive to cause the return of hundreds of rigs from drilling in more valuable oil plays to drilling and less valuable natural gas plays. I can assure you that it will simply not happen without a substantial rise in natural gas prices.”
Speaking specifically about the Utica, in May, 2012, McClendon said he was confident about the results.
This confidence only lasted a few months. On November 13, 2012, McClendon told investors the Utica shale is not a place “where we are going to probably see a huge amount of oil production growth. . . “ Another Chesapeake official said, “For the time being, we are pleased to let other companies commit their capital to the oil window” of the Utica shale.
As of its May 2013 investor presentation Chesapeake now insists that instead of natural gas or oil, it will prosper from extracting and selling natural gas liquids.
The same presentation shows that 79% of its production still comes from natural gas and oil. In any case, the problem with promoting a boom on natural gas liquids is the same as with natural gas: weak prices. On January 15, the U.S. Energy Information Administration reported that prices for natural gas liquids had generally fallen in 2012 as well.
Daily spot prices for natural gas liquids (NGL)—ethane, propane, normal butane, isobutane, and natural gasoline—were generally down in 2012. Ethane and propane, the lower-priced NGL, shown as dashed lines in the chart, experienced the largest percentage declines relative to 2011 average prices.
3. We just don’t know.
On February 22, 2013, Chesapeake Energy officials met in Oklahoma City with industry analysts. This time, they would not give an assessment of the Utica Shale formation. Analysts returned repeatedly to the topic of the Utica Shale, pressing for specifics, and learned nothing. Here is a sample of replies:
“… production in the Utica was fairly minimal in the year 2012 …”
“I’ll start with the Utica. That’s still pretty early and results change pretty quick across the play … So I don’t really have a number to give you on that.”
“We are constrained there [in the Utica] and really haven’t been able to produce these wells as we would like. So that’s why we gave a big range … So I’m afraid it’s just too early to tell.”
“It’s pretty early, and a very limited well set …”
“It’s just early …”
“There’s a lot to learn about this [Utica] basin still. Our number of penetrations relative to the number of wells that we’d ultimately drill is very small. And we don’t yet have the processing capacity to flow things at full rate yet, and there’s just a lot to learn. So that’s the reason we’re being a little bit less informative here, just because we feel like we need to learn more before we can say more.”
“Don’t have that with us this morning.”
Only once did a questioner elicit a hint about Chesapeake’s internal assessment of the Utica’s potential. Scott Hanold, an analyst for RBC Capital Markets, said,
“A little bit on the Utica again, and I’ll try to skin the cat a different way. When you step back and look at the Utica today versus what you all thought a couple of years back, it seems like it’s a little bit more gassy, and the core is a little bit smaller. Is that a fair statement?”
After some back and forth, Nick Dell’Osso, Chesapeake’s Chief Financial Officer, said,
“As far as the volumes [of natural gas] for the Utica … it’s a good basin, and when markets tell the industry to produce gas, there will be some gas that we can look to the Utica to deliver.”
The phrase “when the markets tell the industry to produce gas” translates to “when the price of natural gas goes up enough.” As discussed below, most industry observers consider that to be a long way off.
4. It would be a boom, except for the bottlenecks with processing plants and pipelines.
On April 1, 2013, Chesapeake officials met again with analysts. This time, they blamed the small results from the Utica Shale on
infrastructure bottlenecks. Senior Vice President Jeff Mobley said —
“As a result of infrastructure constraints, we currently have turned to sales just 54 wells, but we anticipate substantial ramp-up and completions as we progress through this year. We are only producing 75 MMcfe per day [million cubic feet of gas equivalent] from the play net to Chesapeake due to processing constraints. But we believe these wells are capable of producing approximately double this level if unconstrained.”
“We are targeting net production of more than 330 MMcfe per day or 55,000 boe per day from the play by the end of the year. Achieving this level will be dependent upon the timely start-up of critical processing infrastructure at multiple facilities in the months ahead.”
“Due to the infrastructure constraints as I mentioned before, it was necessary to curtail and restrict production on these wells placed in service last year. . . we believe the data [Chesapeake Energy] reported to the Ohio Department of Natural Resources is not indicative of the productive capacity of the initial wells drilled . . .”
Later, Acting Chief Executive Officer Steve Dixon said —
“. . . we really can’t ramp up any more than we are today. We hope to be able to do more of that next year but this is fastest
we can do today and not get too far ahead of the processing capacity.”
While drillers wait for processors, processors are waiting for drillers.
“Supposedly Chesapeake has only connected 25% of its wells in Utica and they have been constrained largely because of infrastructure issues,” said Teri Viswanath, analyst with BNP Paribas. . . . As companies continue to develop the region, there is a sense of “hurry up and wait” as production continues only to have to wait for infrastructure both for the processing and takeaway of liquids and natural gas, “both of which are limiting the ability to monetize on investments,” Viswanath said. There are wells online to sales but it is “severely constrained,” [another] analyst said. “The market is in wait-and-see mode.”
Similarly from another processor:
What’s next? Depends on drilling: Although the ATEX pipeline jump-starts Utica production, the infrastructure build-out depends on what gas producers find in the Utica play, [Marc] Halbritter [Managing Director, Commercial Midstream Operations, Dominion Transmission] said . . . . “I think the stuff that is announced is going to be built,” Halbritter said. “There are certain aspects of these expansions that will be dependent on the drilling activity.
“Utica is really still in its infancy. If we’re going to serve the producers’ needs, we need to allow them time to delineate the acreage they have and figure out where it’s wet, where it’s dry. Once they know what they have, we will be able to expand to meet their needs,” he said. “Certainly there have been very encouraging results” from wells in Harrison and Carroll counties in eastern Ohio. “But a lot of questions remain,” Halbritter said.
“It’s a real challenge to predict exactly where we are headed with [gas] liquids,” he added.
Both drillers and processors are really waiting for the price of natural gas and liquids to go up.
The fracking bandwagon has run into a lot of obstacles. Some are human: widespread, unrelenting opposition by neighbors, landowners, farmers, local officials, networks of grassroots groups, people who drink well water, people who drink municipal water, and so on. Other obstacles are also human: Aubrey McClendon, recently jettisoned from his post as CEO of Chesapeake Energy. Some of the problems are geological: “Ohio’s $500 billion oil dream fades as Utica Turns Gassy.”
The most easily quantifiable obstacle, however, is the price of natural gas.
The chart above tracks the price of natural gas. “Henry Hub” refers to a hub in the national natural gas pipeline network near Erath, Louisiana, 117 miles west of New Orleans. The spot price at Henry Hub is an index for the price of natural gas, and the unit used is U.S. dollars/one million British Thermal Units, roughly equivalent to U.S. dollars/thousand cubic feet of natural gas.
In 2008, when the oil and gas industry was planning its invasion of Ohio, the average Henry Hub price was $8.86. In 2012, the Henry Hub average price was down to $2.75. The 2008 calculations which saw Ohio shale as immensely profitable, give much bleaker results when $2.75 is substituted for $8.86.
The low prices will likely persist for a long time. The federal Annual Energy Outlook, released April 15, 2013, foresees that natural gas prices will take until the end of the decade – 2020 — to reach $4.13. Even by 2040, prices are expected to be only $7.83, still a dollar shy of the 2008 price.
— Paul Ryder, Assistant Director, Ohio Citizen Action