Call it the Golden Triangle of natural gas. The region where southwestern Pennsylvania, southeastern Ohio and northern West Virginia mash up near the Ohio River is turning out to be the natural gas version of Fort Knox. Monster dry gas wells seem to be fulfilling the promise of geologists who claim Utica Shale production might end up being bigger than its Marcellus cousin.

That’s saying something, because the Marcellus already produces more than 17 billion cubic feet per day (Bcf/d) and is the largest producing gas field in the world.

As a result, traditional Appalachian pipeline flows are changing for the first time since the 1940s, with gas and NGLs now set to flow south to the Gulf Coast, east to New Jersey and Maryland LNG export points, and west via the reversed Rockies Express Pipeline to Midwest markets.

Bernstein Research forecasts that by 2018, the Marcellus and Utica combined will produce 23 Bcf/d or a third of all U.S. gas production. About 3.7 Bcf/d of new and expanded pipeline capacity comes on line this year and another 6 Bcf/d comes on line in 2016.

Like other shale plays, the Utica offers a basket of opportunities via its wet, dry and condensate/oil windows. It is larger than the Marcellus in areal extent throughout the Appalachian region and is a thicker reservoir, but it’s found deeper, so is more expensive to drill.

In Ohio roughly 300 Utica wells are drilled but uncompleted, said Rick Simmers, chief of the Ohio Department of Natural Resources, Division of Oil & Gas.

Its ultra-rich gas areas boast some of the lowest breakeven prices in the U.S. Rice Energy Inc. claims its Utica dry gas breakeven price is $2.35/MMBtu; wet gas is $2.05. However, thanks to low oil prices that hurt condensate realizations, producers have been focusing on the Utica’s dry gas window, and that is turning up some huge prizes.

This play first kicked off in Ohio in 2012 (four early Utica well permits were issued in 2010). Most of the permits to date are east of Interstate 77. “The infrastructure is partly driving that and, of course, the geology is speaking,” said Rick Simmers, chief of the Ohio Department of Natural Resources, Division of Oil & Gas. “We believe when commodity prices recover, some exploration will go west of I-77 again.”

Several players who arrived in the Ohio Utica later went south and east where there were leases still available, and lo and behold, they found bigger wells there, he said. “We do attribute that partly to better completion techniques over the past two years.” The longest producing lateral reported so far is 12,194 feet by Chesapeake Energy Corp. in Columbiana County. The longest permitted lateral is 13,000 feet, held by Antero Resources Corp. in Noble County, ODNR data show.

The play gained a lot of momentum until the oil price crash hit last fall. Ohio has issued nearly 1,900 Utica permits to date and 1,442 wells have been drilled. At press time about 850 were producing, but 300 or so were shut-in because of low prices or lack of infrastructure hookup—and roughly another 300 have been drilled but not completed (DUCs).

“In the Utica, we have a significant amount of DUCs,” Simmers said. “So we do expect production to increase even though drilling has slowed down.” Echo that thought, based on what many Utica operators said on their first-quarter 2015 conference calls.

The ODNR is grappling with newfound Utica drilling by having consulted with Texas and North Dakota regulators on shale play dos and don’ts. When Simmers became chief in November 2011, the staff numbered 35 people; it has increased to about 120 to keep up with permitting and field inspections for proper well design, blow-out preventers (BOPs) and cement jobs. The ODNR tracks Utica activity weekly, separately from conventional Ohio oil and gas plays.

Despite the Utica’s promise and some excellent well results, the rig count is down by about a third as of press time to about 25, with low oil prices hammering the value of condensate and NGLs, and low gas prices coupled with takeaway bottlenecks affecting gas economics. Several operators with good lease positions—and great well results so far—will not drill any Utica gas wells this year, at least not until commodity prices improve.

Gastar Exploration Inc. CEO J. Russell Porter, who enjoyed announcing the company’s Simms U-5H (it tested 29.5 MMcf/d from Utica in Marshall County, West Virginia), said at the IPAA’s OGIS conference in April that he has stopped drilling in the Utica for now. Likewise, PDC Energy Inc. president and CEO Bart Brookman told OGIS attendees that he will drill no wells in Ohio until prices improve. Some 50% of PDC’s 67,000 net Utica acres is held by production. At year-end 2014, the company moved approximately 8 million barrels of oil equivalent (MMboe) of Utica PUDs to the probable category, due to this change in its development plans.

Gulfport Energy Corp., an early leader in the Utica, cut its horizontal rig count to three from eight last year. Chesapeake Energy Corp. cut its count to between three and five rigs, partly due to economics, partly due to more efficient drilling; its Utica expenditures will almost double, however, to $1.06 billion because its 2011 joint venture drilling carry with Total has reached its term. At year-end, the company had 165 Utica wells waiting on completion or pipeline hookup.

“I would characterize this year as learning about the Utica,” said Range Resources Corp. chairman, president and CEO Jeff Ventura. “The question is, what will the economics be, relative to the Marcellus?”

A sporting chance

Meanwhile, new excitement is building across the Ohio River as producers test the Utica in Pennsylvania. It appears that the excellent porosity found in southeast Ohio extends into Washington and Greene counties at depths of 10,500 to 13,750 feet, with the Washington County formation shallower than in Greene.

Recently, one of the Marcellus Shale’s top players, Range Resources Corp., upped the ante when it drilled its first deep Utica well in western Washington County, the Claysville Sportsman’s Club. It tested 59 MMcf/d—all dry gas.

This is the largest Utica gas well completed in the tri-state area, surpassing some impressive headline-makers announced in the past year by a dozen operators, from the likes of Chevron to Stone Energy Corp. (The latter has ceased all drilling operations for Marcellus until receiving a fit-for-purpose, hybrid rig in late 2015 or early 2016. The new rig will be capable of drilling both the Marcellus and Utica. In the meantime, Stone said it will study optimal development plans for both shales.)

Range thinks its Claysville well may in fact have the highest test rate of any shale well to date in the U.S.

The company knew that Utica pay underlies the Marcellus throughout its Appalachian acreage. Over the years it had drilled vertical Trenton/Black River wells in the good ’ol pre-shale days, when the drillbit passed through the Utica. This nicely set up its first horizontal Utica well.

“We had looked at all the logs in the region and compared them, plus we had already shot a lot of 3-D over most of Washington County,” said Range chairman, president and CEO Jeff Ventura.

“We sidewall cored the Claysville well and contributed that to the Core Lab consortium for further study. Our well not only had the highest rate of any Utica well on a normalized basis per 1,000 feet of lateral, it also had the highest test rate of any Utica well ever. If you look at the raw quality of the data, we have some of the highest porosity and permeability rock, and the highest reservoir pressure.”

Range believes it has anywhere from 20% to 40% more gas in place across its southwest Pennsylvania acreage than any of its peers in eastern Ohio or West Virginia.

“The question is, what will the Utica’s performance be, and what will the economics be, relative to the Marcellus?” said Ventura. “If it can compete, we’ll drill more Utica wells, because there are a lot of hydrocarbons in place. The other good thing is, we basically are drilling where we have Marcellus production holding the acreage.”

The Claysville has been producing 20 MMcf/d since it was put on line on an interruptible basis in January 2015. Once permanent facilities are ready this July, Range will see how much gas it really has captured. Ventura would not venture an EUR estimate at press time, saying he needs to see about six months of well performance first. The economics look fine: No processing is needed here, because the gas is nearly pure methane.

Meanwhile, a second well is going down on the Claysville pad in Washington County, aiming for total vertical depth of 11,700 feet with a lateral of 6,500 feet. Completion will be similar to the first well, which was slickwater fracked in approximately 32 stages. The expected drill and complete (D&C) cost is $13 million.

“That $13 million has a lot of science in it,” Ventura added. “I would characterize this year as learning about the Utica. And I would argue that we’ll do some of the same things we did with our team in the Marcellus over time that should enable us to get the costs down by 15% to 25%, not counting whatever service costs do.”

This ranking could change rapidly. In the first quarter, Range Resources brought on line a well in the dry gas area of Washington County, Pennsylvania, that produced under constrained conditions 31.3 MMcf/d, with a lateral length of 7,906 feet and 41 frack stages.

With 400,000 net acres prospective for Utica, Range enjoys one of the biggest footprints in southwestern Pennsylvania and, indeed, in the entire Utica play. But as Ventura says, it’s not just about size, it’s about quality of acreage. The Utica is deeper and higher-pressured, therefore more expensive to drill, but the industry foresees no technical problems handling the reservoir, he said. Pressure was 0.88 psi per foot at the Claysville.

For now, the company plans to stay focused on The Keystone State and not venture into Ohio. “In general, when you think of where the most prolific part of any shale play is, it’s always in the dry gas window, and that’s where our acreage is, so we think we may be sitting on the core of the Utica” in southwestern Pennsylvania, he said.

Eastern Ohio

Operators throughout Appalachia have pulled back to focus on the sweet spots in the most gas-rich counties in the tri-state area. The center of Utica action, in Belmont and Harrison counties, Ohio, is seeing the most activity recently with eight rigs and seven rigs drilling, respectively. The other most active counties are Monroe and Guernsey.

Having a clear vantage point of the whole Utica scene is Eclipse Resources Corp., which has drilled 181 gross Utica wells (68 operated); for the rest it has partnered with eight other operators. In Monroe County it has drilled some good wells and, among those, some real winners. Its Tippens 6H in the middle of the county tested 23.2 MMcf/d with a lateral of 5,858 feet. In the northern part of the county, the Shroyer 2H flowed an average 24.8 MMcf/d in its first 30 days; the Schroyer 4H averaged 22.1 MMcf/d.

But at the moment, it has reduced spending to only one operated rig.

“Even with that one rig, we’ll grow production,” said president and CEO Ben Hulburt. “Our backlog from DUCs will come online through the second quarter. We’d like to be going faster, but it’s prudent to be cautious right now.” On April 15, Eclipse Resources revised capex to $350 million, down from its December guidance of $640 million. Production growth is still estimated to be over 100% this year.

“I think the most likely reason to go up by one more rig later is when we see WTI closer to $65 or if we see gas get up to $4,” he said. “I think we’ll end up spudding almost 30 wells this year though [operated], which is a little less than half what we did last year.”

The company breaks its Utica holdings into seven type curves with EURs ranging from 0.7MMboe to 1.4 MMboe on the easternmost acreage, to 1.6 MMboe in the rich-gas portion.

Hulburt said he can move a rig between each of these areas fairly quickly, in five to seven days between pad sites, and a few sites are already built and waiting.

Rates of return are still 30% to 40% in the gassy areas, he said, whereas in the liquids area, return ranges from the high teens to 20%. “It doesn’t take much in the way of an oil price move where liquids will compete with our dry gas acreage,” he said.

“We have about 20 wells in the lean condensate area that are not completed yet, mostly in Guernsey County, that we’d go back in and complete first” if prices merit that, he said.

As Eclipse’s team has climbed the learning curve, the time it takes to reach total depth has improved; the last 20 operated wells averaged 18 days, versus 25 a year ago. The company uses zipper fracks on its pads and can do five to eight stages a day.

“It’s very different as you go into different thermal maturity bands. Each has its own challenges, so you almost have to look at it as two plays, not one. In completions, I’d say we are still in the third inning as far as knowing best practices in each thermal band, but I do think we’ll continue to see EURs move up,” Hulburt said.

One pad that was drilled for dry gas experimented with a spacing test down to 750 feet between laterals. Slickwater fracks are used, but Eclipse and others still are experimenting with different proppant volumes and stage spacing. “Initially our challenge was really about understanding the reservoir, but that is largely well delineated at this point.”

Rather, Hulburt said, the biggest challenge confronting Utica operators remains low commodity prices, which are not helped by the surge in Appalachian gas output. At Dominion South Point, the largest gas hub in the play and just 45 miles northeast of Pittsburgh, the recent price was about $1.10/Mcf below Nymex—which at press time was just below $2.80. In Hulburt’s words, this location is “the worst possible gas market in the U.S.”

Limited completions, growth anyway

As of early May, Antero Resources Corp. was running four rigs and five completion crews on its acreage. A significant hedge book of 94% of 2015 production, one of the highest of its peers, has insulated it somewhat from the downturn.

“We had limited completion activity during the first quarter, but achieved record average daily [Utica] production of 274 MMcf/d equivalent (43% higher than fourth-quarter 2014) … primarily driven by the 16 completions we placed online in the fourth quarter of 2014, some of which were very late in the year,” said chairman and CEO Paul Rady on the company’s first-quarter conference call.

For the rest of 2015, Antero anticipates putting an additional 45 Utica wells online, with roughly half placed in the third quarter from three different seven-well pads, he said.

“It’s important to point out that the natural gas production from these 45 wells will flow into our Rex [Rockies Express Pipeline] firm transport capacity to the Chicago and Michigan markets,” he said.

Rady expects AR’s production this year to average 1.4 Bcfe/d, including more than 37,000 bbl/d of liquids. Antero acquired roughly 12,000 net acres in the Utica dry gas window in December for $240 million. This included 20 MMcfe/d of production and 115 drilling locations. The deal added 29 Bcf.

Eclipse Resources CEO Ben Hulburt says the pad was Eclipse’s first dry gas spacing test with 750-foot spacing instead of the usual 1,000 feet.

As of December 2014, Rice Energy had 57,000 net acres prospective for the Utica in Ohio, resulting in 356 undeveloped net locations. The company assumes these locations will support wells with 8,000-foot laterals and 750-foot spacing between wells to yield approximately 138-acre spacing.

The company has partnered with Gulfport Energy Corp. Their first well in Belmont County was spectacular; the Bigfoot 9H tested at a stabilized rate of 42 MMcf/d and the well is currently producing at a restricted rate of 16 MMcf/d. It has produced 4.6 Bcf so far.

Wunderlich analyst Haas said Rice is well-positioned within this sweet spot in Belmont County. “Rice’s first operated well … had porosity of more than 14% and is over-pressured, with a pressure gradient of more than 0.8 psi/ft and bottomhole pressure of more than 8,000 psi. The company believes that this high-porosity pocket extends eastward into Washington and Greene counties in Pennsylvania, and the company was drilling its first dry Utica well in Pennsylvania in early 2015.”

Meanwhile, Gulfport Energy Corp. brought online 22 gross Utica wells during fourth-quarter 2014. Six were in the condensate window, 12 were in the wet gas window and four were in the dry gas window. In the first quarter of 2015, it spudded 12.7 net wells and turned-to-sales 7.2 net wells. In January the company had six horizontal rigs drilling in the play, but in the first quarter of 2015, it dropped to operating three.

Eclipse Resources breaks the Utica into seven type curves, with rates of return of 30% to 40% in the dry gas window and possibly up to 20% in the liquids area. CEO Hulburt says he won’t put a second operated rig back to work until commodity prices improve.

At press time it reported net Utica production averaged 396 MMcfe/d in the first quarter of 2015, an increase of 213% over first-quarter 2014 and an increase of 12% over fourth-quarter 2014.

As previously announced, Gulfport is acquiring Paloma Partners III LLC for $301 million, thus adding 24,000 net nonproducing acres in the core of the dry gas window in Belmont and Jefferson counties. Pro forma for this transaction, Gulfport will have approximately 208,000 net acres under lease in the core.

Tioga County allure

To date, most of the Utica action has focused on Ohio and in Pennsylvania’s southwest corner, but tantalizing results are being announced far to the northeast, in the north-central part of the state near the New York boundary. Last September, Shell Oil unveiled two Utica wells there in Tioga County, the Neal and Gee. Its Neal well tested 26.5 MMcf/d.

“These wells were drilled to a total measured depth of approximately 14,500 and 15,500 feet with lateral lengths of 3,100 feet at Gee and 4,200 feet at Neal, respectively,” a Shell release said. “These results are comparable to the best publicly announced thus far in the emerging Southeast Ohio Utica dry gas play.

“The Gee and Neal discovery wells extend the sweet spot of the Utica Formation beyond Southeast Ohio and Western Pennsylvania, where previous discoveries have been located, and into an area where Shell holds a major leasehold position of approximately 430,000 acres. The Gee well was drilled over 100 miles to the northeast of the nearest horizontal Utica producer, and had an initial flowback rate of 11.2 MMcf/d. Gee has been on production for nearly one year. Shell began production of the Neal well in February 2014, with observed peak flowback rates of 26.5 MMcf/d.”

Shell said at the time that it was awaiting results from four additional wells.

Meanwhile, Seneca Resources also reported completing an exploration well in the county on a pad located within its DCNR 007 tract. The well had a 24-hour peak production rate of 22.7 MMcf/d. It was drilled to a true vertical depth of approximately 12,200 feet, had a treatable lateral length of 4,640 feet, and was completed over 30 stages.

Ronald J. Tanski, president and CEO of parent company National Fuel Gas Co., said in a release, “This well, along with wells drilled by other operators in the area, has de-risked the Utica potential of our 10,000 acres on DCNR Tract 007. We estimate resource potential on this tract alone of approximately 1 trillion cubic feet.”

Upon hearing about Tioga County, Wunderlich Securities analyst Irene Haas asked in her recent Utica report these key questions: “Is the area between the two clusters prospective? Have we overlooked the Utica in these parts of northern Pennsylvania? If we do end up with another mega-dry gas trend, what are we going to do with the gas, while current production still exceeds outbound capacity?”

Utica end-use markets

More than commodity prices, in the end what matters is the degree to which new infrastructure—and new markets—absorb the tremendous amount of projected Utica production growth. A Morgan Stanley report said recently, “In 2017 [and beyond], pipelines to move Marcellus/Utica gas to new demand in the U.S. Gulf Coast will begin to come online as production continues to grow, causing basis differentials to stabilize around transport costs.

“Brownfield pipeline economics point to a transport cost of approximately $1/MMBtu from the mid-Atlantic to the Gulf, with greenfield costs as high as $1.50-2.00/MMBtu. We believe we are at the inflection point of a structural shift in the U.S. natural gas market … with the Marcellus/Utica becoming the new base price point for U.S. natural gas.”

In Columbus, Ohio, law firm Bricker & Eckler LLP’s oil and gas group began tracking such announcements in October 2013, according to the Columbus Business Journal. The firm said more than $28 billion in projects has been announced, from pipelines to gas processing plants to petrochemical plants and new hotels and office buildings in southeast Ohio.

Of course, not all will be built, and some will be delayed. Haas said 16 Bcf/d of pipeline capacity will be online by 2017. Columbia Gas Pipeline, which plans to separate from NiSource and be a separate public entity this July, is negotiating with a large producer in southwest Pennsylvania for a new dry gas gathering system. “The need for this system is driven by the robust results of Utica drilling in that region. It could be as large as a B [bcf/d],” said Robert C. Skaggs, CEO of CPP GP LLC, on the company’s first-quarter conference call.

PTT, the Thai energy company, and Japanese conglomerate Marubeni have chosen a site in Belmont County, Ohio, for their proposed ethane cracker. Engineering studies are ongoing with a final investment decision expected in 2016.

Meanwhile, Braskem America, whose parent is the Brazilian firm that is the largest petrochemical company in Latin America, said it is reevaluating its plan to build an ethane cracker in nearby Parkersburg, West Virginia, to use Marcellus and Utica gas. Some 40% of U.S. polyethylene demand is within 500 miles of the proposed site. The developer cited that there may in fact be too much ethylene available if all the proposed projects are built.

Another company, Houston start-up Appalachian Resins Inc., is moving ahead with plans to build a $1.3-billion ethylene/polyethylene facility in Monroe County on the Ohio River. It would take up to 350 MMcf/d from the Marcellus-Utica area. Start-up could be in 2018.

It all shows just how much natural gas lies beneath these scenic vistas.

“I think U.S. utilities are seeking a call on gas supply and LNG off-takers are also looking to secure supply through deals with producers. The potential gas resource in the Utica may well exceed the Marcellus, and this is the time for people with a long-term view to secure that gas supply,” noted Skip Hobbs, managing partner of Ammonite Resources Co., a consulting firm. “I think good deals can be made in this environment on favorable terms.”