The release of Ohio’s 2012 production figures last week by the state hit the market with a thud, disappointing just about any analyst who checked in with their views. “Bust” was a commonly-heard theme about the Utica, supposedly the next-great US shale play.
So it took a few days, but there’s now an alternative voice, put forth by Sandy Fielden of our friends from RBN Energy. Fielden, in a just-released analysis, makes two points: it’s too early to get too worked up, and the Utica play is going to benefit from preparing for a rush of condensate production.
The data that led to all the teeth-gnashing about the Utica’s fate was released by the Ohio Department of Natural Resources, which reported that 87 wells had been brought into production by 11 companies. Average production: 1,750 b/d for the oil and 35,000 Mcf/d of gas.
Those figures lead to two basic conclusions, according to Fielden: the Utica was not producing anywhere near the early days of the Bakken or Eagle Ford; and the oil to gas ratio showed it was going to be more of a natural gas play than anticipated. Given the relative price strength between natural gas and oil, that’s not good news for the state of Ohio, which is looking toward a higher severance tax to help fund an income tax cut.
But Fielden lays out several points to make his point that things might not be that bad. First of all, the drilling that has gone on so far is mostly in the Point Pleasant formation, and while it isn’t proving itself as an oil-rich play, it is producing a decent flow of gas liquids. While that is not as lucrative as an oil-rich play like the Bakken, it’s a lot better than the gas-only flows out of a place like the Haynesville Shale.
He cited recent data produced by Gulfport Energy, which said its first 14 wells averaged flows that were 64% NGLs or condensate, “and that is very good news for well economics.”
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A second point Fielden makes is that the number of wells in production relative to the well permits granted is small: 660 wells permitted, 326 drilled, only 97 in production. (The Ohio DNR’s Utica 2012 data with 87 wells can be found here in a spreadsheet.)
“That is because producers are holding off bringing wells into production until pipelines, natural gas processing plants and other infrastructure is complete,” Fielden wrote. “The largest Utica player, Chesapeake, reported only moderate Utica Shale production growth last year because they were sitting on wells and waiting for infrastructure.” But with new infrastructure coming on, it “will allow producers to unleash their inventory of completed wells into production.”
The third reason Fielden cites for optimism is that the Utica producers appear to be getting ready to turn lemons into lemonade by investing in facilities that will make condensates something other than a byproduct that is worth far less than crude. (How much? The report says for the first six months of last year, Eagle Ford condensate postings were worth $17/b less than crude from that play).
“In the Eagle Ford, producers were embarrassed to admit to condensate production and would rather blend it into the more valuable crude stream,” Fielden said. “In the Utica by contrast both refiners and producers are investing ahead of time to be able to take advantage of attractively priced condensate supplies.” He cited plans announced by Gulfport to build condensate splitters.
And it isn’t just the producers that are doing this. For example, Fielden cites the news announced several months ago that Marathon Petroleum would be building condensate splitters at their refineries in Canton, Ohio, and Catlettsburg, Kentucky.
The combination of all these things should be providing more optimism, according to Fielden. “However meager, ODNR production data for 2012 should not be misread,” he wrote. “In fact, production should surge in 2013 as infrastructure comes into place and allows many completed wells to come online.”