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 wyalusing jim on April 17, 2013 at 9:28am

no idea why this country has no comprehensive energy policy joe. we need some real leaders who recognize the significance of it. (thats one of those things that i accept since i cannot change it)

as far as replacing all oil and coal with natural gas, that would never be pheasible.

they are different forms of energy and ng has its' inherent limitations. you cannot put 5 gallons of ng in a can and store it in your shed for the summer for home use.

in my opinion, it will be 5-10 yrs before there is any significant use of ng as a transportation fuel. we simply do not have the infrastructure or the technology to distribute and use it for vehicles.

and even after it gains a small market share as a transportation fuel, it will always be a small share because of its' limitations. lets say you have an ng car. what are you gonna do if you run out of gas? you cant walk to a station and get a couple of gallons in a can, walk back and put it in your tank. ok, thats a small problem, obviously...dont run out of gas.

but how about the limited range of ng vehicles? fuel up more often? ya could, but lots of folks dont want to make those more frequent stops, and to the trucking industry time not spent driving is miles lost. miles a day equals profit per day. 2 or 3 fuel stops a day wouldnt cut it.

theres needs to be a redesign of the internal combustion engine and much development in the storage technology in order to make that work. it's gonna take time, and even time wont overcome all of the disadvantages of natural gas vs. diesel and gasoline.

wj

Permalink Reply by Joseph-Ohio on April 17, 2013 at 9:56am
I've read articles discussing Nat. Gas fueling stations
installed in private homeowner's garages in other states.
Also, how about dual fuel systems for internal combustion
engines.
Big investments - perhaps subsidized as a matter of
National Defense.
Pretty passive and pro-active way to spend Defense
money. Better than mass destruction if you ask me !
Jobs !
Permalink Reply by wyalusing jim on April 17, 2013 at 10:17am

those "phill stations" that hang on the wall of your garage are pretty cool. if i was a short distance commuter, i'd have me one o' them and a honda civic. one thing to keep in mind though, that gas you'd be filling up with doesnt have any road taxes on it. ya better report your mileage regularly or if ya ever get busted, the fines are huge.

i just happen to know, that cabot has some dual fuel trucks. gas or ng at the flip of a switch. wanna know something? they only run 'em on gasoline. they even put in their own filling station, but they aint using it. someday im sure that they will.

i have a friend who bought just one dual fuel pickemup for his business, a pilot program, if it worked good and was cheaper, he was gonna replace his fleet when ng became available. since he bought it, the truck has travelled maybe 50 miles on cng. for some reason it keeps switching back to gasoline. the dealer hasnt figured that one out yet.

the civic is probably the best thing going right now. i wonder why u.s. car companies arent on board yet. i think it might be because most folks aint gonna by unproven technology that they cant even refuel except in some special spots. it'll get going someday though, remember how the consumer controls the markets? well here we are again.

another big consideration is, fuel tank size. if you buy a 3/4 ton pickup thats dual fuel, you're gonna notice that the ng tank takes up 1/3 to 1/2 of the bed. i dunno  know about you, but i own a pickup to haul my firewood....

they'll fix that too...someday.

wj

Permalink Reply by Joseph-Ohio on April 17, 2013 at 10:47am
That's what I'm saying about jobs.
All of those things 1st need to be figured out
& de-bugged. Then built. Then marketed / advertised,
then sold. Then serviced by trained technicians.
Jobs.
Permalink Reply by wyalusing jim on April 17, 2013 at 11:18am

there'd be some jobs joe, not sure how many, dont think a whole lot, mostly because almost all of those jobs already exist.

wj

Permalink Reply by Joseph-Ohio on April 17, 2013 at 12:30pm
I would think more than a few jobs Jim.
If the matter were treated with an appropriate
amount of urgency in step with a National
Security issue I would think in terms of an
Army of new trained specialists to build
out things like private homeowner Nat. Gas
fill stations for instance; contracts let to
build commercial fill stations; dual fuel conversion
kit installation technicians, etc.
Permalink Reply by wyalusing jim on April 17, 2013 at 1:00pm

pretty speculative joe, but i wont say that you're wrong, just that im gonna differ with ya about the magnitude of it.

natural gas will gain market share though, i think that is inevitable. some soon, more later, and eventually, its' share will reach a limit, with oil and coal still having their places.

wj

Permalink Reply by Gary L on April 17, 2013 at 7:51am

Did anybody here read or were told about contractors filing mechanics liens on property owners due to not being properly paid by drilling a company. A friend in northeastern Ohio informed me of this a few months ago. Today, I ran across this article and thought I would post the link.

 http://www.oilandgaslawreport.com/2012/11/16/protecting-or-defeatin...

Off the post subject, but all part of networking and learning. 

Permalink Reply by wyalusing jim on April 17, 2013 at 8:13am

we have the same situation here in pa gary, the end result is a zero to the landowner though, the lien is not against your property but rather against chk's interest in your minerals.

wj

Permalink Reply by Gary L on April 17, 2013 at 3:58pm

WJ and Joseph-Ohio.....I just want to take a moment to thank you both for your opinions and input about things you have added to this thread. I have been educated with your perspectives regarding other issues that are quite interesting. Thanks to both you and all others including Marcus, that post good sources of information on this thread. EIA.Gov website has a lot of info you guys talk about. I not only speak for myself, but for all others that are here learning and networking with each other. I wish you all the best in all your endeavors.

Gary L 

Permalink Reply by Joseph-Ohio on April 18, 2013 at 3:04am
Thank you also Gary L. for all the same reasons.
Permalink Reply by wyalusing jim on April 18, 2013 at 3:08am

^^ +1 ^^

wj

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