Sustained Outrage

The Utica Shale: Big deal or big hype?

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Earlier this summer, Gazette-Mail business writer Andrew Brown produced a detailed look at how West Virginia’s oil and gas industry uses partition lawsuits to assemble the mineral rights it wants to pursue natural gas drilling in the Marcellus Shale region. Now, Andrew has spent some time examining the recent hype over the Utica Shale and provides us with this guest blog post:

Based on reports, one can be forgiven for believing that West Virginia is about to witness an immediate surge in gas exploration in the state’s northern counties. Over the past month, coverage of the gas industry has been fueled by a new study by West Virginia University that suggests the state may be sitting above another one of the world’s largest gas reserves – the Utica shale, a formation located several thousand feet below the now well-known Marcellus.

When the study was unveiled in Canonsburg, Pa., on July 14, numerous stories were written that played up the Utica’s potential and the possibility of the formation overtaking the Marcellus as the primary target of gas companies.

The State Journal wrote:

While the Marcellus Shale basin has been getting most of the credit for West Virginia’s recent natural gas boom, a recent West Virginia University study suggests the Utica play could soon fall under the spotlight.

Data from the Utica Shale Play Book Study, a two-year geological study conducted by the Appalachian Oil and Natural Gas Research Consortium, suggests the Utica Shale play is much larger than original estimates, and its size and potential recoverable resources are comparable to the Marcellus play, the largest shale oil and gas play in the U.S. and the second largest in the world.

The Exponent Telegram quoted Doug Patchen, the director of the Appalachian Oil and Natural Gas Research Consortium, the WVU group that led the study:

 “It certainly has that potential. Right now, we’re estimating it has an equal potential, at least, to the Marcellus. It’s just a matter of time,” Patchen said.

With all of this hype over the formation, it should come as no surprise that gas companies – some of which helped to fund the study — took the opportunity to emphasize their plans to drill their first Utica wells in West Virginia. On July 31, the EQT officials emphasized the results of a Utica test well in Pennsylvania and reiterated their interest in drilling another well in Wetzel County later this year. As the State Journal reported:

EQT Corp.’s test well in the Utica Shale in western Pennsylvania has produced more dry natural gas than expected, so now the question is whether the Utica test well it plans to drill in Wetzel County soon will deliver the same results.

And less than two days after the study was released, Antero Resources jumped on the opportunity to announce its first exploratory well in Tyler County. The Exponent Telegram predictably linked the company’s announcement to the WVU study:

News of Antero’s first Utica well in the Mountain State comes as new research suggests the gas play contains far greater reserve than originally thought. On Tuesday, researchers released the results of a West Virginia University-led study that concluded the Utica holds 782 trillion cubic feet of technically recoverable natural gas and another 1,960 million barrels of oil.

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Graphic from U.S. Energy Information Administration

There is no doubt that some Utica wells have been extremely productive. EQT announced in July that one of its Utica wells in Pennsylvania was producing 72.9 million cubic feet equivalent per day. And earlier this year Consol announced the production results of a Pennsylvania well that produced 61 million cubic feet of gas per day.

Several key questions have gone unanswered about this rush to crown the Utica as the up-and-coming king of the shale formations.

The first is whether companies can actually afford to shift their exploration away from the Marcellus and towards the Utica with the current price of gas. A quick look at the companies’ quarterly financial reports show that slumping gas prices over the last 12 months have reduced industry profits significantly.

In its most recent quarterly financial report, Antero points out that it received 55 percent less money for gas in the second quarter of 2015 than it did over the same time period in 2014. Between April and June 2015 the company received $2.40 per thousand cubic foot of gas equivalent compared to $5.30 in 2014.

EQT’s quarterly earnings report shows the company received $2.80 per thousand cubic feet equivalent for the second quarter of 2015. Compare that to the same time frame in 2014 when it received $4.47 per thousand cubic feet equivalent. EQT executives pointed out the impact that this price slump has had:

EQT Production’s operating income totaled $119.0 million for the six months ended June 30, 2015 compared to $421.9 million for the six months ended June 30, 2014. The $302.9 million decrease in operating income was primarily due to a lower average realized price to EQT Production.

And as the Pittsburgh Business Times reported last month, CNX is now losing money on every cubic foot of gas it sells:

Commodity prices are taking a huge bite these days out of Consol Energy Inc.’s margins when it comes to selling natural gas: It’s actually lost 22 cents per thousand cubic feet this quarter.

With profit margins narrowed it seems unlikely that the companies would jump headlong into developing a relatively-unexplored formation, which costs significantly more to drill than the Marcellus.

The highly-touted EQT well in Greene County, Pa. cost around $30 million to develop. CNX’s Pennsylvania well cost around $27 million to complete, according to the company’s earning call. And Antero’s financial numbers show that it invested around $13.6 million ($1.29 million per 1,000 feet * 10,600 foot average lateral) on average for its Utica wells that it has completed in Ohio.

Compare that to Antero’s cost to complete a Marcellus well, which now averages around $9.46 million ($1.14 million per 1,000 feet * 8,300 foot average lateral). With those cost differentials, it would seem that Utica wells would need to produce significantly more gas than their Marcellus counterparts in order for companies to be able to profit from them.

Secondly, even if those cost differentials can be made up or reduced, it has yet to be proven that West Virginia is the most productive area to tap the Utica. As the WVU study points out, nearly all of the Utica’s wet gas – methane mixed with condensates that make a well more profitable – is found across the state line in Ohio. As the study points out:

Antero has 77 permits to drill Utica/Point Pleasant horizontal wells in Monroe and Noble counties, Ohio.

CNX (Consol Energy) has permitted 41 Utica/Point Pleasant wells in seven counties in eastern Ohio.

Shell Appalachia has concentrated their efforts in the dry gas area in Pennsylvania – from Lawrence County eastward to Tioga County – and has permitted 75 Utica/Point Pleasant horizontal wells.

Enervest has permitted 18 wells in Guernsey, Tuscarawas, Carroll, Stark and Jefferson counties in eastern Ohio

Hess has 63 permitted wells concentrated in the southeastern Ohio counties of Harrison, Belmont, Guernsey and Noble.

Rex Energy has been active in Carroll, Noble and Guernsey counties, Ohio, and Lawrence and Butler counties, Pennsylvania, with a total of 37 permitted wells.

With all of this, it’s unclear whether wells targeting the Utica in West Virginia are anything more than exploratory at this point. And it raises further questions about why the formation has been promoted so heavily in the state.

One possible explanation could be that interest in the Utica – even if it is industry-generated — gives the state’s gas companies another reason to promote the forced pooling bill that it has been trying to push through the West Virginia Legislature over the past couple years. Proponents of the pooling bill have already started to emphasize that an unfavorable pooling statute already exists for the Utica and that their proposed bill would reform that existing law.

At an August 10 meeting in Charleston, members of the West Virginia Royalty Owners Association – a group that came out in support of the 2015 forced pooling bill – said the industry’s interest in the Utica would likely play a large part in the push to pass the controversial legislation.

Only time will tell whether the Utica’s hype in West Virginia is for real, or if it is meant to provide political ammunition for the supporters of forced pooling.