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 Bill on November 15, 2012 at 2:51pm
http://businessjournaldaily.com/drilling-down/energy-industry-gathe...

ITTSBURGH – Oil and gas industry executives, engineers and suppliers got a better picture of the Utica shale’s potential some 18 months into its development as they gathered here Wednesday for Hart Energy’s “Developing Unconventionals” conference.

Vendor displays lined the aisles of the David L. Lawrence Convention Center, leading to a large room where geologists and company CEOs shared their enthusiasm – and data – in telling more than 3,200 conference attendees why the Utica, and more specifically its Point Pleasant rock formation, is like no other shale play explored so far.

“It’s been quite a ride,” said Jim Palm, CEO of Gulfport Energy Corp., Oklahoma City.

“We were real proud of our south Louisiana acreage, which throws off a tremendous amount of cash flow. We hoped when we came here we could duplicate that and drill more wells, but this may turn out to be better than south Louisiana,” Palm said.

In recent weeks, Gulfport has reported bonanza results irom the wells it has drilled in Harrison, Guernsey and Belmont counties in Ohio, surpassing the output of natural gas liquids reported by Chesapeake Energy Corp. at its Buell well outside Cadiz.

“It’s been a good play because of the over-pressure we’re seeing, the company’s CEO emphasized at the conference. "That’s one of the keys that make it extra special. We've got that pressure preserved to help get the oil out of the rock,” he said.

“It’s really an unusual play,” Palm said, and highly profitable to explore because of the composition of the rock.

The Point Pleasant formation began to form some 400 million years ago -- before plant life evolved -- from layers of compressed organic material that today lies 7,000 feet below the earth’s surface.

The brittle rock contains millions of microscopic pores and very little water, which gives it high porosity and permeability, and results in “depletion rates holding up better than in other gas plays,” explained geologist Kent A. Bowker, manager of Bowker Petroleum LLC, Woodlands, Texas.

“Scores of thin limestone layers may act as permeable super highways,” he posited. “The permeability is why we’re seeing such high flow rates. The reservoir boundaries vary across the play and that’s going to be the key to finding the sweet spots.”

Gulfport's sweet spots cover 64,000 acres in southeast Ohio – none in Carroll, Columbiana and Mahoning counties. The company is currently running two rigs and has spudded 12 wells. Next year it plans to spend as much as $225 million to drill another 50 wells, at the same time pursing “attractive acreage acquisition opportunities,” its website states.

The natural gas and oil that Gulfport brings out of its wells will be transported to soon-to-open processing plants in Harrison and Noble counties being built by MarkWest Energy Partners of Denver. Thus the infrastructure Gulfport needs to get to market is nearly in place and what can’t be processed at Cadiz and a related facility will be sent to MarkWest's huge processing complex in Washington County, Pa.

Further north in the Utica shale play, the gas processing complex under construction in the tiny Columbiana County town of Kensington is slated to begin operations in the second quarter of 2013. That facility, and its related processing plant under construction in Harrison County, will serve Chesapeake Energy’s wells. Both operations cannot come on line soon enough, says the CEO of EnerVest Ltd., one of partners in the midstream project.

“Every well in the Utica is being hampered right now because of [the lack of] processing capacity,” said John B. Walker. “The wells are impeded by the inability to move wet gas.”

Until pipeline infrastructure is built and the Kensington processing complex comes on line, “It’s going to be more of a stair-step approach,” Walker observed.

The EnerVest CEO praised Gov. Kasich and the Ohio Environmental Protection Agency for working to accelerate Utica exploration and development. But he had harsh words for the federal government, calling EPA regulators the “greatest threat” to eastern Ohio's emerging industry.

Although the EPA “failed to shut us down on hydraulic fracking,” Walker said he has “great concerns” over what may happen during President Obama’s second term.

“It’s a very dangerous situation,” he warned.

Still, "It's all hands on deck," said financial analyst Bill Marko, managing director of Jeffries & Co., New York.

The Utica has the lowest break-even costs for exploration, he explained. "What this means is this is an area where the money flows regardless of gas prices."
Permalink Reply by JR on November 15, 2012 at 3:06pm
Well, I like this post. So-to-speak.
015334grltd9mPermalink Reply by 015334grltd9m on November 15, 2012 at 5:25pm

It's still just the beginning folks............unless we are shut down politically.

Permalink Reply by Garfield on November 15, 2012 at 5:39pm

McClendon's comments have been widely misinterpreted.  The Utica will not be an oil producer for Chesapeake simply because Chesapeake has already committed to sell its oil acreage (so the company can survive its financial predicament).  The oil potential of the western side of the play has not changed or diminished.  Just wait and see what Chesapeake sells their western acreage for.  Better yet, watch what EnerVest sells their western acreage for... since EnerVest has the advantage of selling from a position of strength.  Expectations of $15K per acre for oil acreage have been floating around.

0ym9x5ag7ury2Permalink Reply by 0ym9x5ag7ury2 on November 16, 2012 at 3:49pm

"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".

So you'll take another companies money as Royalty payment. Sit back, relax and enjoy the ride. It all spends the same. Don't worry, be Happy, you'll live longer.     Ron

Permalink Reply by country driver on November 17, 2012 at 3:54pm

I think Chesapeake is just keeping what they know about the Utica under there hat. If the Wells in Columbiana County are just Wet Gas,  Why are they putting tank farms on the Well pads? They are Drilling and putting Well pads all around Lisbon nonstop. Rumor has it that there is a Lake of Oil under Hanover, Center, and Elkrun Twp.

Permalink Reply by Paul Martinelli on November 19, 2012 at 2:18am

I have heard the same rumor ....a sea of oil under the UTICA/PP formation.....down deeper.

Permalink Reply by Joseph-Ohio on November 19, 2012 at 2:57am

Hoping this is a fact and not just a rumor.

Why aren't they tapping into it to ease their debt burden.

I keep coming back to marketing strategy playing a great part.

Throttle earnings just enough to keep the ship afloat - they (board members) are making million dollar salaries annually anyway - then they complain about the corporate leadership and all of the financial hard times wrought by 'mistakes' made - probably all a diversion to cast confusion on the real truth that they'll continue to make bizillions far into the future - and in the meantime beat up the landowners and consumers.

Hard to find even a drop of truth as we float around in a sea of lies.

I've become such a cynic I swear.  The 1st thing that comes to mind to me whenever I hear or read something involving business or money is:  How do I know this to be true ?  Then it's: Can I believe it ?  And the last thing that always comes to mind is:  Probably not !  And then (not being an insider) I find myself right where I started - knowing nothing for sure.

 

Permalink Reply by Paul Martinelli on November 19, 2012 at 3:05am

 Reply by JR 22 minutes ago

Spoke with a reliable midstream insider over the weekend.  1.  He confirms Anadarko is pulling out. Not necessarily because of the Utica, but because they have heavy focus on plays overseas and he thinks they're committing more to those.

2.  He concurs CHK is broke and committing resources to NGLs over oil because the oil portion needs the "sciencing up" that Gulfport mentioned in their recent comment. Need to figure out techniques to get it flowing which will cost more $ to develop but the oil IS there.

3.  Because of this engineering required he believes 2014 will be a HUGE year for the play.

 

 

 

 

This makes perfect sense and explains CHK's position. Besides....CKH is not an oil company.

Permalink Reply by Joseph-Ohio on November 19, 2012 at 3:27am

If they really are 'broke' they need to shake a leg with the 'sciencing up' and get the development ball rolling.

Associating CHK as primarily a Natural Gas company.

If that's true (and I've got my tongue in my cheek on that point right off the bat - since they're advertising their bent to stay in the NGL development window instead) they ought to lean on our 'big government' along with T. Boone Pickens and get some federal backing for natural gas conversion on a grand scale to get some positive cash flow going.

Or is it really that they don't know what in blazes to do !

Maybe they can't chew bubble gum and walk backwards at the same  time ! 

Hard to imagine that considering all the money they've dumped into things so far.

Left scratching  my head - just like always !

Permalink Reply by paleface on November 18, 2012 at 2:44am

 For the time being,we are pleased to let other companys commit there capital to the oil window of the utica, that sounds to me that the lease holdings are already sold.I would think the buyer would be a oil company like Shell,Chevron or Exxon.

Permalink Reply by Bluflame on November 18, 2012 at 6:13am

Paleface,

   Mr.McClendon's comment can be interpreted in various ways. One possibility would be for his competitors to determine a profitable technical methodology for flowing and recovering the more viscous oil. Likely this will require expensive trial & error. Then CHK could either mimic their competitors' methodology or peddle their oil window leaseholdings at a tidy profit.

   IMHO, since I have no clairvoyant (sp?) insight into Mr. McClendon's thoughts.

BluFlame

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