Will the Utica Shale Surpass the Barnett and Marcellus?

Includes: CHK, CNX, CVX, RRC
by: Vinod Dar

The Barnett and Marcellus shale plays are justifiably regarded as world class resources for natural gas and are becoming recognized for their great gas liquids potential. Thus, when industry conversation starts mentioning a North American gassy shale play that could be in the same league or eventually even more impressive than these two proven plays, both industry participants and investors become curious.

The Utica lies beneath a very large geography.

In physical extent, the Utica shale covers a geography about twice as extensive as the Marcellus (and far more extensive than the Barnett). In terms of hydrocarbon resources, no one knows the potential of the play. It is too early in its E&P lifecycle (recall that the first modern well was drilled in the Marcellus by Range Resources only in 2004). Only a few commercial wells have drilled by less than half a dozen companies but even so expectations have risen dramatically.

The Utica lies between 3,000 and 7,000 thousand feet beneath the Marcellus but extends further northwest and much further southwest. It underlies parts of New York, Pennsylvania, Maryland, Virginia, West Virginia, Ohio, Tennessee, Kentucky, Lake Erie, Lake Ontario, Ontario and Quebec. Its depth ranges from about 2 miles deep in parts of Pennsylvania to under 2,000 feet below sea level in parts of Ohio, the Great Lakes and Ontario. It is reportedly even shallower in Quebec.

It is this very large footprint that is persuading E&P companies, especially Canadian companies, to postulate that the Utica shale may be a very large resource play even if recovery with current technology is only in the 2 to 3 % range. Each generation of technology increases recovery rates and the industry is confident that recovery rates will keep rising over the next few decades.

The Utica has a much higher carbonate and lower mineral clay content than the Marcellus. Thus the production techniques that suit the Marcellus may not suit the Utica; however, the experience gained from the high carbonate Eagle Ford may be directly relevant. The Utica is of considerably varying thickness, from over 500 feet in the East to less than 100 feet in the West. Depth does equate to resource potential. The liquids window of the Utica is thought to be in the West and it is this liquids window that is likely to attract industry attention and risk capital much more than the dry gas in the East.

Where the Utica lies beneath the Marcellus, the disadvantage of greater drilling depth is partly or wholly mitigated by the opportunity to benefit from existing drilling pads, roads, permits, filings, landowner agreements, gathering and processing systems , pipelines and the local presence operating experience of field service companies and drilling crews.

Early Activity

Much of the leasing activity in 2011 for the Utica has been, as might be expected, in Ontario and Quebec where the resource is quite accessible. However, the first commercial drilling is said to be in Pennsylvania (Butler County). Range Resources (NYSE:RRC) drilled what it believes to be the pioneering commercial well in 2010 and plans more drilling in 2011. Consol Energy (NYSE:CNX) drilled a discovery well in the Utica and will shift exploration resources to this play in 2011. Shell and Chevron (NYSE:CVX) (via the acquisitions of East Energy and Atlas Energy respectively) are well positioned to be significant in the Utica. Chesapeake Energy (NYSE:CHK) supposedly is building a land position in this play, most likely in Ohio. Private equity and MLP investors have also been briefed on the nascent Utica play and the response is said to be encouraging.

In Canada, a Utica pioneer is Gastem, based in Quebec. It drilled two exploratory well in Quebec explicitly to test the Utica in 2006 and is convinced the play is real. Another Canadian company, Epsilon Energy, has formed a joint venture with Gastem to pursue the Utica in the St. Lawrence Lowlands. Forest Oil (Canada) has drilled two successful Utica test wells in the Gaspe Peninsula. A recent discovery by Questerre Energy in the St Lawrence Lowlands is considered to be strategically significant by companies active in that area. Questerre has been studying the Utica shale in Quebec for about two decades.

It is worth recalling that the Marcellus excitement began just a few years ago with a small pioneering company. The resource potential was initially viewed as quite limited and neither the majors nor government agencies thought there was much commercial significance. Today the Marcellus is estimated to have a technically recoverable resource of over 250 trillion cubic feet (about a mid teens ultimate recovery rate). In a mere 6 years the play went from novelty to world class. It is this trajectory and record of success that inspires the half dozen or so companies that are now seriously investigating the Utica. If there is validation then one would expect the number of companies committing money, technology and management time to the Utica to jump to over two dozen by end 2011.

Disclosure: I am long RRC, CVX.