That was the impression some observers said was created by an April 15 Bloomberg news story titled, “Ohio’s $500 billion oil dream fades as Utica turns gassy.” (see article below)
But those observers say people who think the Utica is a bust are missing the point. Oil was not the Utica’s major attraction to begin with — “wet” gas that contains not just methane, but ethane and other valuable liquids has been the major lure for drillers.
Oil, if it was found and successfully extracted, would just be a bonus.
Nonetheless the story drew attention to some developments in Ohio that are open to interpretation. Those developments include the large-scale sale of mineral rights leases by some of the Utica’s big producers — among them the biggest producer by far, Oklahoma City-based Chesapeake Energy.
A motivated seller
Chesapeake has been trying to sell rights on 337,000 acres in Ohio since the middle of last year and, earlier this month, it listed another 94,000 acres for sale. Meanwhile, EnerVest Ltd. and Devon Energy Corp., two other drillers that were active here, have put up for sale smaller offerings.
So, does that mean Utica play is a bust? Not at all, say analysts and industry insiders, especially considering who’s doing most of the selling.
While Devon and Enervest might be selling because they were disappointed not to get more oil from their wells, Chesapeake is another matter. It needs to raise billions in cash to bolster its balance sheets, analysts say, so it’s difficult to tell whether it’s selling mineral rights in areas it doesn’t want to keep, or whether it’s marketing good acreage in order to improve its chances of finding buyers and raising more cash.
Or, it could be both.
The last possibility might explain why Chesapeake put up some acreage last year and then, when no buyer emerged, put up for sale a new selection of leases this month.
“You can’t really make a firm judgment just because they’re selling there,” said Allen Brooks, a longtime industry analyst and consultant in Houston and author of the popular industry blog “Musings from the Oil Patch.”
“When you’re so over-leveraged, you basically start selling the things that are least valuable to you in the long term,” Mr. Brooks said. “If you can’t sell those, then you sell the more valuable property.”
Observers also took issue with the supposed disappointment that Ohio might not contain the “$500 billion” of oil that they say only the uninformed really were expecting. That figure comes from a 2011 presentation made by the Ohio Department of Natural Resources, but it was given with several caveats that are now being ignored.
The $500 billion figure was used as the upper end of a wide range of estimates of the play’s total resources, said one local analyst who asked to remain anonymous — it was never a hard and fast estimate of what drillers would produce.
Mr. Brooks remembers the event similarly.
“I thought he did a good job of presenting how the number could be very disappointing or very prolific,” Mr. Brooks said of the 2011 presentation by former ODNR geologist Larry Wickstrom. “But the real message was: ‘Hey guys, we’ve got a couple of years before we know which end of that spectrum we’re going to be on.’”
Pipelines prognosticate production
But perhaps the biggest reason many experts say they still have faith in the Utica play is the amount of midstream development planned for Ohio. Midstream companies have already begun to spend what they say will be billions of dollars on pipelines to gather and transport gas, as well as on processing facilities used to separate wet-gas components and make methane more compatible for pipeline transport.
Many of those companies, including big developers such as Oklahoma-based Access Midstream Partners and Dallas-based Caiman Energy, were in Canton and Pittsburgh just this month, updating the industry on their progress and recruiting local contractors to help them complete their developments.
The midstream companies made it clear that they are in close contact with drillers and are expecting massive amounts of natural gas and other hydrocarbons to fill their pipelines and keep their processing facilities busy. Because they partner with drillers and work with them on long-term contracts, midstream developers have an excellent view of the play not afforded to most other observers.
“You don’t see many pipelines that are built and then abandoned in a few years,” Mr. Brooks said. “When people do that (build pipelines), they’re confident that the resources are there and they’re betting the play will be productive.”
More than anything, experts warn that those interested in the play need to be patient. The play is still in its early stages, and until pipelines are built that enable more wells to be brought on line, no one will have a clear picture of what the Utica holds or what it will give up.
Meanwhile, the state of Ohio has not even released drilling results for 2012, the first year for which substantial results from horizontal Utica shale wells will be available.
Don Fischbach, an oil and gas industry attorney who came from Oklahoma to become a partner with the Cleveland law firm Calfee Halter & Griswold largely because of the Utica’s potential, said he isn’t worried.
“It’s far too early to draw conclusions,” Mr. Fischbach said.
“If this (the Utica) were a child that we were going to raise and send to college, we’d still be in the first trimester of our pregnancy in terms of where we are on the timeline,” Mr. Fischbach said.
By DAN SHINGLER