Ohio 500 Billion Oil Dream Gone?

Are these people anti-frackers? If this has any validity, it's a disappointment to us waiting for a lease, not to mention any investors concerns. 

     http://www.bloomberg.com/news/2013-04-15/ohio-s-500-billion-oil-dre...

U.S. drillers that set up rigs amid the rolling farmland of eastern Ohio on projections underground shale held $500 billion of oil are packing up.

Four of the biggest stakeholders in untapped deposits known as the Utica Shale have put up all or part of their acreage for sale, as prices fall by a third in some cases. Chesapeake Energy Corp. (CHK) of Oklahoma City, the biggest U.S. shale lease owner, last week offered up 94,200 acres (38,121 hectares). EnerVest Ltd. and Devon Energy Corp. (DVN) are selling as early results show lower production than their predictions.

Enlarge imageOhio’s $500 Billion Oil Dream Fades as Drillers Misjudge

Chesapeake Energy Corp. of Oklahoma City, the biggest U.S. shale lease owner, last week offered up 94,200 acres (38,121 hectares). Photographer: Daniel Acker/Bloomberg

“The results were somewhat disappointing,” said Philip Weiss, an analyst with Argus Research in New York. Early data show “it’s not as good as we thought it was going to be.”

The flip-flop underscores the difficulties faced by even experienced drillers around the world in tapping the sedimentary rock. In California, Occidental Petroleum Corp. was stymied by the Monterey Shale’s fault-riddled terrain. InPoland, Exxon Mobil Corp. (XOM) stopped drilling because shale output was minimal. China’s failures with shale gas drove producers Cnooc Ltd. and China Petrochemical Corp. to seek expertise in North America.

In Ohio’s Utica formation, which runs eastward as far as New York, drillers frequently found the rock too dense and underground pressures insufficient to produce oil.

The rush to buy acreage has reversed.

The Utica saw one deal valued at more than $50 million in the fourth quarter of 2012, compared with seven in North Dakota’s more productive Bakken Shale and six in Texas’ Eagle Ford Shale, according to the accounting firm PricewaterhouseCoopers LLP.

Eagle Ford

By 2017, the Utica should produce a daily average of 200,000 barrels of oil, Wood Mackenzie Ltd. estimated. The Eagle Ford by then will be producing 1.15 million barrels a day, almost six times more.

“People started to realize that, you know what, maybe the oil window of the play is not all it’s cracked up to be,” said Jonathan Garrett, an analyst at Wood Mackenzie who has studied the Utica.

Utica acreage can fetch about $1,000 to $8,000 an acre, Garrett said. In the Eagle Ford, which produced about 374,000 barrels of oil a day in January, acreage can cost about $5,000 to more than $36,000 an acre, he said.

Gulfport Energy Corp. (GPOR) paid $10,000 apiece for 22,000 net acres in Utica in February, compared with $15,000 an acre Total SA spent on a joint venture with Chesapeake in January 2012.

The global exploration and production industry, which Cowen Group Inc. estimates will spend $645 billion this year, is learning how hard it is to transfer practices and expectations from one shale formation to another and replicate the success of the top fields, such as the Eagle Ford.

Shale Spotlight

The Utica grabbed the U.S. shale spotlight in 2011 when the Ohio Department of Natural Resources estimated it held 5.5 billion barrels of recoverable oil reserves -- equivalent to more than twice Yemen’s proven resource and valued at about $488 billion at yesterday’s $88.71-a-barrel U.S. oil price.

Chesapeake had boasted Utica would outperform the Eagle Ford. EnerVest, the biggest gas producer in Ohio, had said the Utica would bring jobs and new industry to the state. EnerVest in the past year has tried to sell acreage there and no buyers have emerged.

EnerVest is selling out of the Utica because oil production doesn’t fit its low-cost business model, Mark Houser, chief executive officer of EV Energy Partners LP, said in an interview. EV Energy is a master-limited partnership controlled by Houston-based EnerVest.

Code Cracking

Going for natural gas is another story. Some areas of the Utica were found to be rich in gas liquids, though only a minority of companies are positioned to benefit. They include Gulfport of Oklahoma City and Denver-based PDC Energy Inc. (PDCE)

Chesapeake has decided to leave it to other companies to crack “the code” of the Utica’s oil prospects after the company found it wasn’t worth trying any longer, Senior Vice President Jeff Mobley said in December at an industry financial conference. Since September, Chesapeake has been seeking a partner to share ownership and costs in the Utica.

Devon, also based in Oklahoma City, decided to sell its 157,000 net acres in the Utica so it can concentrate on more profitable plays, said Chip Minty, a spokesman.

PDC, another Utica explorer, dropped its effort to find a partner when it couldn’t get a high enough bid for the stake it was offering, and in September decided to go it alone.

Better Fracturing

Early drilling results showed the oil portion of the Utica isn’t as porous as some other shale formations and is shallower than its gas-filled areas, meaning it’s harder to get oil to flow through the rock, and there’s less natural pressure to help force it out, said Jerry James, president of Artex Oil Co. in Marietta, Ohio.

Operators are looking for better ways to fracture their oil wells, and discussing whether to use pumps to get crude to the surface, James said.

“Some of the oil window is going to work, it’s just going to take a while,” James said.

The Utica has the potential to be one of PDC’s top performers, based on the company’s recent results, Vice President Scott Reasoner said in an e-mail.

Jim Gipson, a spokesman for Chesapeake, declined to comment. Paul Heerwagen, Gulfport’s investor relations director, didn’t return phone messages seeking comment.

Infrastructure Build

Much still depends on the construction of processing units and pipelines to provide a route to market for Utica production. The pace of drilling has been hindered by a lack of infrastructure that may require a $30 billion investment over three years to build out, said Jack Lafield, CEO of Dallas-based pipeline operator Caiman Energy LLC.

The number of drilling rigs in the Utica has risen year over year, indicating that producers still see value in the field despite the lack of oil, said Jeff Daniels, a professor at Ohio State University who heads the school’s Subsurface Energy Resource Center. The problem with oil production may be solved with new technology.

“We have a lot to learn about producing from these shales,” Daniels said.

To contact the reporters on this story: Mike Lee in Dallas at mlee326@bloomberg.net; Edward Klump in Houston at eklump@bloomberg.net

                  

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Replies to This Discussion

Permalink Reply by Joseph-Ohio on April 16, 2013 at 12:18pm
Actually, competitive prices for gasoline set aside, OPEC sets the $ / barrel
price for oil as a world commodity making simultaneous fluctuations @ the
pump more understandable.
But, it causes me to wonder what the real production cost is per (domestically
produced) barrel.
Permalink Reply by wyalusing jim on April 16, 2013 at 1:10pm

joe, do you think opec was price fixing during the financial crisis when their price plummeted to $38 per bbl?

i'm not saying that they dont try to manipulate prices by controlling the supply, but those controls are limited to the amount of financial pain they can endure. their financial needs can only be met with oil payments, if they cutback too hard, they cant meet their bills.

talking about opec, i think that they can see the handwriting on the wall with what's happening out in the bakken shale. they know that if we open up a few more areas with shale like that, they are screwed ducks. and the bakken itself is only in its' infancy.

wj

Permalink Reply by Joseph-Ohio on April 16, 2013 at 1:39pm
In that case I guess it wasn't OPEC fixing the
price.
Who was do you think ?
I've no clue, Jim.
Permalink Reply by wyalusing jim on April 16, 2013 at 1:59pm

who was what? controlling prices as they plummeted?

the markets were reacting to the collapse is all that was, same game, different scenario,

i know lots of folks believe that the game is totally rigged. they charge what they want and we are all forced to pay what they make us pay. but in reality...in the end...we are the controlling force in these markets.

think of it this way. i make widgets. my widgets are so cool that everyone has to have one. so when i put 'em in my store at a reasonable profit, they're selling like hotcakes. i'm doing great.

but then, i decide that i can make more if i charge more, i get greedy. i raise my price.

things are still going ok, a few less folks are buying them because of the increased price, but the price increase keeps things in balance.

but then i figure, hey, i can make just as much by raising the price even more and selling a few less, it should still be balanced, and my profit margin will increase because my manufacturing costs will go down since im not making as many. i can fire one widget maker.

trouble is, folks only have so much disposable income. my widgets have reached a price where only high income folks can afford 'em. i lose too much of my market, things are no longer in balance. and so my sales plummet, i gotta do something...gotta lower that price to balance things out again.

in a capitalist economy every business has to make a profit. no profits, no businesses. no businesses, no jobs. no jobs, no money to buy the widgets. in large economies like here in the u.s, there are large margins within which to operate. things dont happen overnight. but generally speaking, we the consumers do in the final analysis control our own economy.

remember the depression? it needn't have been so bad really. but folks were scared, they worried constantly about how they disposed of their incomes. they were very cautious. there was also a considerable amount of government tinkering which exacerbated the problem and prolonged the misery, but if folks had gone about their lives as normally as possible, the recovery would have come much sooner than it did.

kinda like today if ya think about it.

wj

Permalink Reply by Joseph-Ohio on April 16, 2013 at 2:16pm
Yeah, guess we could chalk it up to
a paranoid marketplace as easy as
chalking it up to over-reactive would
be masters of the universe.
But the paranoid marketplace is also
a product of the would be masters of
the universe isn't it ?
Permalink Reply by wyalusing jim on April 16, 2013 at 2:23pm

joe...do you feel like you have strings moving your hands?

myself, if gas gets to more'n i wanna pay fer it, i drive less.

simple as that.

wj

Permalink Reply by Joseph-Ohio on April 17, 2013 at 12:39am
Yeah Jim, strings moving my hands and feet as well as everyone else's !
Been thinking about a horse and buggy.
Permalink Reply by Joseph-Ohio on April 17, 2013 at 3:11am

OPEC:

"..........but those controls are limited to the amount of financial pain they can endure. their financial needs can only be met with oil payments, if they cutback too hard, they cant meet their bills."

Now isn't that just ducky; (over time and overall) OPEC has manipulated the cost of a barrel of oil to the end that all of their bills are paid, and our politicians and business interests have allowed / assisted them in doing so to the horrible distress of our own domestic economy.

Cradle to grave social programs for the OPEC citizenry and to hell with the USA's citizenry.

Now we have a way to break the chain and politicians maneuver and waste time instead.

Like I say.....' just ducky'.

Makes me want to puke.

Permalink Reply by wyalusing jim on April 17, 2013 at 8:21am

well joe, i'm real sorry that all of this upsets you so, because in the end, it's needless fretting which could adversely affect your health.

in reality, we dont any way to break any "chains". what we have is a more secure energy source, which may result in some additional stability in our supply and perhaps pricing.

i wouldnt count on any significant price reductions in gasoline prices due to domestic oil production since it is really the current pricing that makes it profitable to drill for that oil.

if prices went down much, drilling would be curtailed, ending that dream pretty quickly, just like we've seen with the recent price decreases in dry natural gas.

wj

Permalink Reply by Joseph-Ohio on April 17, 2013 at 8:40am

I understand what you're saying Jim.

And I'm trying to not let needless fretting affect my health.

Just trying to understand the ins and outs of it all as best that I'm able.

These exchanges with you in my opinion greatly assist toward that end.

Many say knowledge gains an edge on circumstances.

I generally agree but also realize that there are things a person can do to affect better personal circumstances while at the same time and conversely, there are times that there is nothing an individual can do to improve things.  Identifying what and when something can be done to help personal circumstances for me and mine is what I strive to do.

Hopefully that won't adversely affect my health or that of my family.

Wish us luck as we wish continued good luck to you and yours.

Keep posting dude, I look forward to reading what you have to say.

J-O

 

Permalink Reply by wyalusing jim on April 17, 2013 at 8:57am

in matters relating to gas joe, some is luck, some is skill and alot ya just have to accept.

if you have good shale and a halfway decent lease with a good operator though, trust me, you and yours are gonna be just fine...someday.

someday we should talk about how timing in this business can make a difference of millions of bucks. thats one of the ones that takes a little skill and alotta acceptance.

wj

Permalink Reply by Joseph-Ohio on April 17, 2013 at 9:06am

You know Jim, wondering why nobody (besides T. Boone Pickens) seems to want to come up with a comprehensive energy plan for our country.

What would be wrong with looking into the feasibility of using as much natural gas as possible - given the apparent abundance ?  Then if that made sense perhaps look at taking the following steps :

1) Initiate a program to convert to natural gas as the primary fuel for domestic use across the board; that would be for power generation, transportation, and freight (air, marine or overland via planes, ships, trains, buses, autos, etc.).

2) Reserve, gasoline, fuel oils / diesel fuels and jet fuels etc.for use by the military only (air, ships, overland transportation including trucks, personnel carriers, tanks, motorized weaponry, etc.).

I'm guessing a program like that would create many new jobs across the board.

All of that instead of selling our edge to foreign flags who just may use it against us someday.

What do you think ?  

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