Utica Shale

The late-Ordovician-age Utica shale has the potential to be the next hot play in unconventional resources drilling and production. It almost had to happen, given that the Utica sits below the geologically younger and highly productive Devonian-age Marcellus shale—and what's more, it even exceeds the Marcellus' vast geographic limits. Adding to its appeal, the Utica is the primary source rock for a number of conventional hydrocarbon-bearing reservoirs throughout the Appalachian Basin.

To date, operators are keeping plans confidential, and little company-based information is available about the fledgling play. Tom Tugend, deputy chief of Ohio's Division of Mineral Resources Management, says, "We won't have any production information until next March; we only hear rumors now as no companies are talking about results."

“In Ohio, we think we’re probably where Pennsylvania was in 2007 in drilling activity,” says Tom Tugend, deputy chief of the Ohio Division of Mineral Resources Management.

Since December 2009, vertical well permits issued in Ohio for the Utica tallied 22, with nine vertical wells drilled. Horizontal permits numbered nine with five horizontals drilled. "I think Chesapeake (Energy Corp.) drilled four of those horizontal wells," Tugend says. "One is in Harrison County and has already been fraced, and the other three are in Carroll County. (Privately held) Marquette has drilled one horizontal in Jefferson County."

A geologic enigma

The Utica and Marcellus shales are a geological enigma of sorts. Because they are so geographically extensive, it's impossible to present a stratigraphic sequence that would be correct everywhere, according to geology.com. One can construct generalized sequences. The vast reach of the Utica, in fact, prompted Montreal-based Gastem Inc. chief executive officer Raymond Savoie to comment, "It's like a Walmart." The company holds 1.1 million acres in Quebec and 34,000 acres in New York.

The source-rock portion of the Utica underlies parts of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia and Virginia, and trends northward into Canada.

In the Appalachian Basin, major rock units tend to thin toward the west, and the rock units between the Utica and Marcellus are no exception. Although deeper than the Marcellus, the Utica's depth decreases westward in Ohio and northwestward beneath the Great Lakes, eventually outcropping in Quebec. It can lie as much as 7,000 feet beneath the Marcellus in central Pennsylvania and less than 3,000 feet to the west in eastern Ohio.

A bit of lagniappe for the new play is that development of the Utica in areas beneath existing Marcellus development would benefit from the cost savings of in-place infrastructure.

The Utica is an organic-rich calcareous black shale overlying the Trenton limestone; it has a much higher carbonate content than the Marcellus and a lower clay mineral content. This causes a different response to hydraulic fracing, e.g., Marcellus fracing methods create less fracturing when used in the Utica.

The Utica has been compared to the highly productive Eagle Ford shale in Texas, which also has a high carbonate component. Operators there have devised methods to make the brittle Eagle Ford rock fracture at a relatively high rate compared to other gas shale rocks. Also like the Eagle Ford, the Utica contains areas of dry gas, natural gas liquids and oil windows, making it alluring in today's price environment.

The Utica is more liquids prone in its western region, even though liquid yields have yet to be revealed. They likely will be most significant in eastern Ohio. Analyses indicate much of Ohio's Utica interval may be oil prone, owing largely to less ultimate burial depth, according to Larry Wickstrom, Ohio state geologist and division chief of the Division of Geological Survey, Ohio Department of Natural Resources.

Even so, the gas-rich Marcellus is predicted to be a more alluring target than the Utica for some time. It is shallower and therefore less expensive to develop, with a more certain payoff, at least for now.

The Utica sits below and exceeds the extent of the geologically younger and highly productive Devonian-age Marcellus shale.

Potential beckons

This hasn't slowed the several companies snapping up leases with Utica-targeted drilling plans in hand in Michigan, western Pennsylvania and, especially, Ohio. The state of Ohio doesn't track leasing data, but county courthouses are said to have experienced a surge in lease filings. Successful development of the Utica would be a godsend to this region, which Wickstrom notes has somewhat meager remaining conventional reserves.

To the north, there's obvious enthusiasm to develop the Utica over a considerable part of the St. Lawrence Lowlands of Quebec, where it's organically rich and sometimes overpressured, and is near infrastructure. Unfortunately for operators, a fracing moratorium is in place that reportedly excludes pilot projects. The principal Utica players in Canada include Talisman Energy Inc., Junex, Questerre Energy, Canadian Quantum Energy Corp., Forest Oil Corp. and Gastem.

Moratoria don't necessarily last forever, however, and a report from GlobalData, "The Utica Shale in Canada—Gas Shale Market Analysis and Forecasts to 2020," is high on the shale's potential.

It's postulated that initial results from both horizontal and vertical wells drilled in the Utica promise huge returns from the play. Companies have reported stable production rates of 100 thousand cubic feet (Mcf) to 800 Mcf. The highest flow rates occurred at Talisman's St. Edouard #1A horizontal well drilled in 2009 in the St. Lawrence Lowlands, where initial flow rates greater than 12 million cubic feet per day were reported. During the test, the well flowed at an average rate of more than 6 million cubic feet per day. According to GlobalData, Utica shale development is expected to change the future of the energy industry in Canada.

In the U.S., aggressive shale player Chesapeake Energy Corp. arrived on the scene early on to bag acreage. With the acquisition of Anschutz Exploration Corp.'s interests in 2010, which included a portion of Ohio acreage, Chesapeake significantly expanded its position in the Ohio segment of the play. Chief executive officer Aubrey McClendon noted during a recent IPAA OGIS event in New York that the company currently holds 1.3 million acres in the Utica play, where it has spent $1.5 billion to date. It has some 500 land brokers working the region.

Chesapeake is drilling several test wells that are in various stages of completion in the western region of the play, according to John Walker, president and chief executive of privately held EnerVest Ltd. and publicly traded MLP EV Energy Partners (EVEP). He discussed the play with investors at OGIS, commenting that the Utica shale "has the promise to be America's next big shale play."

Walker is up to speed on current doings in the Utica, considering that EVEP has a hold on about 1.8 million gross acres in Ohio (600,000 acres net and all held by production).

"The company is focusing on the Point Pleasant trend, which is the most organically rich and is evident in the oil and natural gas liquids window," Walker said. "It disappears as you move into Pennsylvania, New York and Quebec, and to the south and east in Ohio. By December, we and Chesapeake believe we'll have enough horizontal wells drilled and tested to confirm or condemn the producibility of the Utica/Point Pleasant formation."

In Ohio, the Point Pleasant formation, rather than the Utica, is the focus of activity.

According to Ohio's Geological Survey Division, the Point Pleasant is the lateral equivalent of the upper part of the Trenton limestone and is in a gradational relationship with the overlying Utica shale. It thins to the east, whereas the Utica thickens eastward into the Appalachian Basin.

"Within much of Ohio, the Utica is directly underlain by, and in part is an equivalent facies arrangement with, the Point Pleasant formation, which is comprised of interbedded organic-rich limestones and black shales," says Wickstrom, who defined the Point Pleasant/Utica relationship in Ohio in a paper released in the early 1990s. "Within Ohio, the Point Pleasant is the bulk of the play rather than the Utica. One of the things we're trying to do with information on our web site is to make sure everyone has the same vocabulary set.

"In central Ohio, where we think it will be a viable play, it can be as shallow as 3,500 feet and hopefully, more oil prone," he says. "Whether there's enough pressure to push much oil out of it, that's the $64-million question we're more anxious to see (answered).

"We have had some oil production from that interval in central Ohio before. As you go down into the Appalachian Basin you can expect to see the Point Pleasant/Utica interval at depths of about 10,500 feet, where it will be more gas prone."

Range Resources Corp., headquartered in Fort Worth, has gained insight into this broad region via its key role in elevating the Marcellus play to industry stardom. The company's Renz #1 well in Pennsylvania's Washington County has been dubbed the first commercial discovery in the Marcellus.

The company is on record as drilling the first commercial horizontal well in the Utica in southwest Pennsylvania, according to director of public affairs Matt Pitzarella. The well produced 4.4 million cubic feet of natural gas equivalent per day over a seven-day production period. The Utica acreage is held by production from its Marcellus wells. Range also has begun working in the Upper Devonian shales above the Marcellus—in other words, it has a triple decker.

"Besides the Marcellus being one of the most economic plays in North America, we like it because it's really three plays in one," said Range chairman and chief executive John Pinkerton during the company's fourth-quarter 2010 earnings call. "Because all the other shale plays are essentially single horizon plays, versus the Marcellus, where we believe our acreage holds resource potential in the Upper Devonian and Utica as well as the Marcellus, we view the 700,000 net acres we plan to develop to be more like 1.5 million acres when compared to the other plays.

"A very significant advantage we'll have in developing the Upper Devonian and Utica will be that we'll be drilling where we've been drilling Marcellus wells," Pinkerton continued. "We've already incurred the cost for acreage, roads, surface location, water management, gas lines and compression. Therefore, the incremental costs to develop the Upper Devonian and Utica will be reduced by approximately one-third versus developing these zones on a stand-alone basis."

During Range's first-quarter 2011 conference call, Jeffrey Ventura, president and chief operating officer, noted, "We plan two to four additional Upper Devonian tests this year. Like the Marcellus, a significant portion of the Upper Devonian shale potential on our acreage should be wet gas. Our next horizontal Utica well will be late this year, followed by a third well early next year."

Consol Energy Inc. drilled a vertical Utica shale well in 2010 in Belmont County, Ohio, that coughed up 1.5 million cubic feet of gas over a 24-hour period with no stimulation, and is currently waiting on pipeline. The well is said to have triggered a leasing bonanza, kicking prices up to $2,000 per acre. Canonsburg, Pennsylvania-based Consol has noted that it plans to spend $35 million to drill six delineation wells in Ohio in 2011.

Rex Energy Corp., headquartered in State College, Pennsylvania, is joining the fray with plans to drill its initial Utica shale well this month. The company is developing the Marcellus shale on its leaseholdings in the Appalachian Basin in Pennsylvania. Rex estimates that drilling deeper to the Utica would cost $5 million, versus $4.7 million for a Marcellus well, according to a KeyBanc Capital Markets Inc. report.

Oklahoma City-headquartered Gulfport Energy Corp. appears to be focusing on acreage where the Utica would be prospective along the border of the oil and condensate windows, according to a Morgan Stanley Research report. Gulfport and Windsor Energy Resources have acquired 27,500 gross acres in the Ohio Utica. Gulfport paid $31.6 million, or about $2,300 per acre, for its 50% working interest in the leasehold.

Larry Wickstrom, Ohio state geologist and division chief of the Division of Geological Survey, Ohio Department of Natural Resources, notes that within Ohio, the Point Pleasant formation is the bulk of the play rather than the Utica.

But the Utica play is about more than just large independents and smaller players. Shell showed it is among the believers with its acquisition of East Resources in 2010. And Chevron gained entrée into the play when it acquired Atlas Energy LP for $4.3 billion this past year. The deal included 623,000 net acres with exposure to the Marcellus and Utica. Chevron has stayed mum on its Utica plans.

When comparing the liquids-rich part of the Utica to the Bakken or Eagle Ford, initial expectations indicate that the Utica has the potential to stack up favorably, according to a Morgan Stanley report. The analysts anticipate initial D&C costs of $6 million per well, with estimated ultimate recoveries (EURs) in the range of 455,000 to 910,000 barrels of oil equivalent, implying a 5%- to 10% recovery factor.

Comparing the one-well economics of this "typical" range of Utica wells, Morgan Stanley notes the play has the potential to be on par with leading North American liquids-rich targets. Economics should improve as operators gain more knowledge about the play, leading to an increase in EURs and the ability to better target the high-liquids-content areas.

Only time will reveal the final story of the Utica shale. The Ohio Geological Survey calculates a Utica/Point Pleasant recoverable reserve potential estimate for the Buckeye State of 1.96 billion to 8.2 billion barrels of oil equivalent. In an accompanying disclaimer, the agency emphasizes that without actual production histories from existing Utica shale wells, it is not possible to properly create a "probable" reserve estimate.

For now, don't expect a lot of info to come down the pike, as companies keep results close. "In Ohio, we think we're probably where Pennsylvania was in 2007 in drilling activity," says Tugend of the Ohio Division of Mineral Resources Management. "With the exploratory drilling, people are trying to define the resource by doing vertical stratigraphic tests.

"Enthusiasm is building, and a number of companies are contacting us," he adds. "Some are essentially ready to get permits, but the timing is in the future a little bit as they're still trying to get their leasehold together by getting new leases. I think by fall, we'll see a little uptick in activity. We're preparing for increased activity and gearing up staffing-wise to be ready for the wave of permits to come."

As for the Canadian sector of the Utica, it could take as long as 30 months to complete the government's full study into the environmental effects of controversial drilling techniques such as hydraulic fracturing. This will have considerable impact on companies' abilities to make decisions or development commitments.