In 2004 the U.S. energy profile changed drastically as Range Resources, Inc. (NYSE: RRC) reported positive results from its recently drilled Renz well. This well would soon become the epicenter of development of the Marcellus Shale and the godfather of oil and gas development in Ohio.
Now a roaring household name in Pennsylvania, the Marcellus Shale started with the purr of flowing gas as Range Resources reported initial production rates of 22 million cubic feet per day (“mmcf/d”) from seven horizontal wells in Washington County, Pennsylvania. Engelder & Lash, “Marcellus Shale Play’s Vast Resource Potential Creating Stir in Appalachia,” The American Oil & Gas Reporter, May 2008. That was May of 2008. The lion has been on the prowl now for almost five years, roaring louder each year.
According to the U.S. Energy Information Administration, Pennsylvania’s natural gas production quadrupled since 2009 to 3.5 bcf/d by the end of 2011. The EIA credits this dramatic gain in production to the prevalence of horizontal drilling in Pennsylvania. The EIA reports that less than 500 vertical wells were started in 2011. That is compared to about 2,200 horizontal well spuds that same year (click here to see an animation of drilling in Pennsylvania since 2005).
However, natural gas prices have tumbled since July 2008 when natural gas was selling for $10.79 per thousand cubic foot (“mcf”) at the wellhead. As of October 2012, that price fell to $3.03 per mcf. Yes, that is a 72% decline. So, what is a gas baron to do? Go West. While most producers of natural gas have enjoyed the fruits of southwestern Pennsylvania, some others are testing their luck a little farther west into the Buckeye State. But why?
To answer that question, one must understand the bigger picture of natural gas development. The residential customer who heats her home all winter long is only one facet of energy consumption in the United States. The natural gas that heats your home—methane—is only one type of gas that flows from the bosom of the Mighty Marcellus. In the southwestern extents of Pennsylvania, the gas flows “wet.” This means that when the gas comes out of the ground it contains other “hydrocarbons” besides methane such as butane, propane, ethane, and pentane. Smokers will appreciate butane squirting out of the Earth and grillers go for their spatulas at the sound of “propane.” There is a catch, however. To harvest these very valuable natural gas liquids (“NGL’s”), a producer must have infrastructure in-place to separate the flowing gas into its respective constituents. And, you guessed it: that costs big bucks. But, to the victor go the spoils. It makes sense right? One hole, multiple markets.
This is where Simba enters stage-right. While the Mighty Mustafa Marcellus charges on in Pennsylvania, Ohioans are gearing-up and pulling out their ink pens to sign leases as oil and gas producers move into the oil and liquid-rich Utica Shale. You tick a what? Another shale? A government conspiracy must be afoot, right? Wrong. Any such conspiracy would have to stem from the collision of tectonic plates approximately 450 million years ago—60 million years before the formation of the Marcellus Shale. It was at that time that the Utica Shale took its shape.
At 14,000 feet at its deepest, the Utica Shale is quickly being added to oil and gas service companies’ taglines as they try to keep pace with the always forward-looking oil and gas producers. Where Washington County was the epicenter of Marcellus development, Carroll County is the corollary in eastern Ohio, constituting 36% of permits as of January 19, 2013 according to the Ohio Department of Natural Resources (click here to see a map of permitted and drilled wells in Ohio).
As you look around eastern Ohio take note of Belmont County. While it may only account for 3% of permitting in Ohio, it is home to the mother of northeastern gas wells: the Shugert 1-12H. The Columbus Dispatch reported on December 3, 2012 that production data from this well indicated that it had initial production rates of 28 mmcf/d and (potentially more impressively) 2,900 barrels of liquids per day. The Shugert well appears to produce three times the gas and two times as much liquids as the prior champion, the Buell well, in Harrison County, Ohio. The Buell well, operated by Chesapeake Energy (NYSE: CHK), was the first big Utica well that started to draw others into the play. If the Buell well was not successful in attracting attention, Gulfport Energy’s Shugert well did the trick. In fact Gulfport (NASDAQ: GPOR) picked up another 30,000 acres—an estimated $300 million acquisition—by December 18, 2012 according to Marcellus Drilling News (www.marcellusdrilling.com), bringing its net acre holdings to 99,000 in Ohio.
Source: geology.com
This diagram illustrates the relative depths of the Marcellus & Utica shales as you cross from Ohio into Pennsylvania. This should make it clear why Utica development is more prevalent in Ohio and not as much in Pennsylvania, and why the opposite is true for Marcellus development.
According to the Dispatch’s December 13th article, 114 wells are drilled but many are not producing. Why? Recall, the earlier discussion about the necessity of processing with liquids-rich shale plays. Because Ohio is in its infancy stages, its processing facilities and gathering lines (known as “midstream operations”) are not yet fully operative. However, here is an interesting “connection” between the Renz well in Washington County, Pennsylvania and the Shugert well in Belmont County, Ohio: both wells produce gas and liquids processed by MarkWest Energy Partners (NYSE: MWE). See, it is a small world after all.
What does this all mean for us commoners? That is hard to say exactly. In the near term home-heating prices in the Northeast remain low, a smoker can get her lighter filled on the cheap, and the Superbowl tailgators will enjoy less-expensive propane for their grills. Long-term prospects include compressed natural gas (“CNG”) fueled vehicles and natural gas-fired power plants. Keep in mind, the EIA reported on January 28, 2013 that United States citizens in all sectors consumed nearly 20 trillion cubic feet of natural gas in the first ten months of 2012 and slightly more than 24 trillion cubic feet in all of 2011. So, yeah, we need gas. According to fractracker.org, horizontal well production in the Marcellus declines 39% over the first year of production. Thus, companies will continue to hunt new sources of natural gas to meet growing demand but in the face of declining wellhead prices. Perhaps Rafiki Resources, will help keep the fledgling Utica shale viable until midstream operations become full functional in the next year or so.