Ohio law requires oil and gas operators to report prior year production from oil and gas wells on an annual basis — by March 31 of the following year. The Ohio Department of Natural Resources (ODNR) recently unveiled the 2012 production results from Ohio’s Utica shale play. These figures have been much anticipated by investors, land owners and the oil and gas industry, who are all trying to glean insights about the most productive areas and the overall potential of the play.
First, a Look Back at 2011
The first production from Ohio’s Utica Shale was realized in 2011 and reported on March 31, 2012. That data showed that merely nine Utica wells were in production during some part of 2011 — all drilled by Chesapeake Appalachian, LLC. Six of those wells were located in Carroll County. The remaining data came from wells in Portage, Harrison and Mahoning counties.
Though none of those nine wells were in production for all of 2011 (all but two were in production for less than six months), combined they still produced 2.56 billion cubic feet of natural gas and 46,326 barrels of oil, which amounted to 3.5% of the state’s overall gas production and 1% of oil production for that year. These are impressive statistics considering that Ohio had more than 50,000 conventional (vertical) wells reporting production in 2011.
“Staggering” 2012 Production Results
On May 16, 2013, ODNR released production results for 2012. There were 87 wells in production for at least part of 2012. Not only has the number of wells expanded since 2011, so has the number of companies drilling those wells and the area in which those wells were drilled. The wells reportedly in production in 2012 were drilled by 12 different operators across 18 counties throughout the eastern half of Ohio.
So how were the results? In the words of ODNR Director James Zehringer, “staggering.” ODNR data shows that the 87 horizontal Utica wells produced 635,896 barrels of oil and 12,836,662 mcf of gas (that’s nearly 13 billion cubic feet of gas). That equates to 12% of Ohio’s total oil production and 16% of its gas production in 2012.
These numbers truly are staggering when you keep in mind that Ohio still has about 50,000 active conventional wells and that none of the Utica wells were in production for all of 2012. In fact, 85% (74 wells) of the Utica wells were in production for less than six months and 37% (32 wells) were in production for less than one month. To put this in perspective, ODNR estimates that a single horizontal Utica shale well will produce as much oil as 312 conventional wells and as much gas as 448 conventional wells.
Looking Behind the Numbers
It is important to understand what is, and is not, reflected in the production data. Foremost, the general terms “oil” and “gas” can be misleading to anyone who does not understand the Utica shale play. Utica “oil” is lighter than Brent or even WTI crude oil traded on world exchanges, which means it will not be able to command as high a price. However, Utica “gas” is much more valuable than the natural gas or dry gas traded on the world market because it has a much higher Btu content than dry gas.
While some skeptics have recently decried the Utica shale play, it is apparent that many of those skeptics do not appreciate what the industry has long understood about the play: the value is in the gas. Natural gas liquids can be separated from the rich Utica shale gas and sold for 40% to 60% of the price of a barrel of oil.
Ohio law does not require operators to report the Btu content of their gas but it is clear that operators are excited about their results in Ohio. ODNR reports that as of May 14, 2013 there were 31 active drilling rigs in Ohio and permitting and drilling continues to grow. There were 215 wells drilled in 2012. Another 111 wells were drilled in roughly the first four months of 2013. There are 27 different companies registered with ODNR focused on the Utica shale. With all of this activity, ODNR expects Utica shale wells to out-produce conventional wells in Ohio by 2015.
The data also shows how the play is evolving. When the play first began, much attention was focused in Columbiana, Carroll and Mahoning counties. But, the new production numbers show the reason for the recent interest in the southern portion of the play: oil! The following map helps visualize 2012 production by volume and product (click image to view larger):
Source: MacKenzie Land & Exploration, Ltd.
What Else Did We Learn?
First, Ohio needs infrastructure. All this oil and gas needs a place to go and a way to get there. Pipelines and processing facilities are being built fast, but right now wells are being drilled faster. The single biggest thing holding back the potential of the Utica shale is lack of pipelines and processing facilities. This lack of infrastructure is the reason so few wells were in production in 2012 — there is simply no good way to get the product to market or to separate the valuable natural gas liquids.
Second, ODNR supports higher severance taxes and quarterly production reporting. The production results news conference conducted by ODNR gave us some insight into ODNR’s position on hot topics in the industry. At that news conference ODNR made clear that it supports the Governor’s plan to boost severance taxes and also believes that quarterly reporting of production results would be beneficial.
The real proof of the Utica shale will be slow to develop. The most telling figures will be full year production results when production is not constrained by pipeline capacity problems. This data may not be available for any wells for another year or two. Will Utica shale wells have production curves similar to what we see in the Marcellus or Eagle Ford shale? Time will tell but right now, the Utica shale continues to look very promising.