Chesapeake Sees Dimming Oil Prospects in Ohio

y DANIEL GILBERT

Chesapeake Energy Corp.'s CHK +0.93% prospects of coaxing crude oil from Ohio's rust belt have dimmed, the company's chief executive said Tuesday, though he maintained the region remains key to the natural-gas giant's future.

Chesapeake, the country's second-biggest gas producer after Exxon Mobil Corp.,XOM -0.97% is seeking to transform itself into a major producer of oil, which is more profitable than natural gas. The Oklahoma City-based company has nearly doubled its oil output in the last year, with the biggest increase coming from its holdings in South Texas.

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AUBREY MCCLENDON

In Ohio, Chesapeake executives had expressed optimism about producing oil from the Utica Shale, a deeply buried layer of petroleum-rich rock. Chesapeake owns drilling rights to 1.2 million acres in the Utica, and roughly a third of them lie in a zone it has described as rich in oil, though the company has focused its drilling in an area known to yield wet natural gases, like ethane and propane.

Aubrey McClendon, Chesapeake's co-founder and CEO, said in May he was confident the company would report good results from oil production.

But on Tuesday, he said the Utica was unlikely to drive a major increase in its oil production. It is not a place "where we are going to probably see a huge amount of oil production growth," Mr. McClendon said at an investor conference. "And to the extent the oil works, it will be with some other companies."

Still, Mr. McClendon said the company is pleased with its results in the Utica, calling it "one of our foundational plays for decades to come."

A Chesapeake spokesman said Tuesday, "For the time being, we are pleased to let other companies commit their capital to the oil window" of the Utica.

Analysts said they weren't surprised by Mr. McClendon's assessment, noting the company's focus on producing wet gas, which is more profitable than regular "dry" gas. A surge in natural-gas production from shale, led by Chesapeake and its rivals, has glutted the market and caused prices to collapse earlier this year to depths not seen in more than a decade.

In response, Chesapeake has spent heavily to acquire drilling rights to areas where it could extract higher-margin fuels, including large swaths of Colorado and the border between Kansas and Oklahoma. But prices for natural-gas liquids have also been dented recently by overproduction.

When oil's share of production declines, profits suffer, said Tim Rezvan, an analyst at Sterne Agee. But he pointed out that Chesapeake, and other companies like Gulfport Energy Corp. GPOR -2.37% have reported prolific volumes of both wet and dry natural gas in the Utica. "The numbers are just staggering," he said.

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Permalink Reply by Frank Nesmith on November 13, 2012 at 7:47pm

Well that sucks!

Permalink Reply by BCCool1234 on November 14, 2012 at 2:26am

I am getting worried....first the low production numbers from the "oil window" well with Anandarko...now this...doesn't bode well for those of us in the western areas...

Permalink Reply by JR on November 14, 2012 at 11:58am
I thought Anadarko was happy with their results? I've seen whispers on here about decline rates but haven't seen anything spoken by the company except they'll make a decision about the play early 2013...
Permalink Reply by Bluflame on November 15, 2012 at 5:16am

Joe,

  I mentioned the pump jack possibility on another string. While transiting the Bakken Shale region via Amtrak in September, every well I saw (and there were plenty) had a pump jack in operation. Another poster suggested the pump jacks may be necessary because the Bakken is a tight sands play versus shale. I did not research the matter further.

BluFlame

  

Permalink Reply by Bluflame on November 15, 2012 at 5:28am

Also beyond my meager O&G techie knowledge base!

BluFlame

Permalink Reply by Billy Park Whyde on November 15, 2012 at 5:32am

Joe just west of Hebron Ohio on BICS  maps there are a few Rose Run Wells that did pretty dang good for vertical wells drilled in early 2000. One produced 43,000/bbl in a year! These wells have the larger pump jacks but  their is quite a bit of difference between the required weights of pump jacks and depth of formation, A Berea formation around here in say 500' depth looks like a HO Scale sized pump jack  in comparison to a Clinton Formation pump jack.  But you have a extra 2700' of sucker rod and a vertical column of oil in say 2"" tubing to pull to the surface as well. Consider the added weight of another 5000'  thus bigger units.

  Pump jacks  only remove the oil after it flows it has very little to due with suction, as I understand it.

Permalink Reply by Joseph-Ohio on November 15, 2012 at 6:35am

Maybe they would have to gouge out an underground reservoir or basin at the end of each fractured lateral (for any oils to drain into after fracturing the lateral).  Then the pump jacks would draw from the basin once it fills (or continues to fill).

Don't know how economically feasible that would be considering it seems to me that it would require two (2) verticals for each horizontal / lateral leg.  Saying that since there's an underground radius turn at the original bore (to change direction to horizontal);  then there would be the reservoir/pool to create at the end of the lateral as well as another vertical  from the surface above the reservoir to draw the pooled oils from.

Pretty interesting stuff to figure out and build.

Just thinking outside the box a little.

Permalink Reply by Joseph-Ohio on November 15, 2012 at 8:17am

You know, I don't know why I sweat the economics of it - no one else does.

If the cost goes up to recover the resource so will the cost go up to the consumers.

Stands to reason leasehold acreage royalties and signing bonuses should also track.

What do you folks think ?

Permalink Reply by Joseph-Ohio on November 15, 2012 at 8:43am

Sweating the economics.....

Never ending questions.

How much of our natural resources were used up and are still being used up to fight the energy wars ?

How much would the cost of natural gas rise over time if there were an incentivized / federally subsidized conversion program from nuclear, coal, diesel and gasoline to natural gas ?  How many domestic jobs would it create and how much would our domestic standard of living improve ? 

If the energy giants and our government do not care why should the landowners / mineral rights owners care ?

I've many more questions but, what's the point ?

Asking them and indefinitely dwelling on them will improve nothing.

Time to act as a matter of national and our own individual security if you ask me.

However, I guess these questions and many more occur to me because I've been trained to think that way; and it's been my job to assist in solving for the most economical solutions to presented issues / problems - very familiar turf.

Permalink Reply by Bluflame on November 15, 2012 at 7:02am

Interesting. The pump jacks in the Bakken are whoppers!  Never considered well depth to be a factor in pump jack size. But it sure makes intuitive sense.

BluFlame

Permalink Reply by Joseph-Ohio on November 15, 2012 at 9:31am

'The western oil region'  where is that exactly ?

Where does the eastern region stop and the western region begin ?

Anybody care to draw the line ?

Permalink Reply by bo boboski on November 15, 2012 at 9:34am

I-77 may be a good bet?

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