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High Costs, Infrastructure Woes Stifling North-Central Pennsylvania Utica Development

While interest in the promise of the Utica Shale in north-central Pennsylvania remains strong, incentives are not, as a lack of infrastructure, low commodity prices and high drilling and completion costs have combined to slow the play's development in the region.

Little is generally known about the Utica's mechanics that far east, where it drops considerably compared to what is now a refuge of consistency in eastern Ohio. This year's slowdown in north-central Pennsylvania comes after two encouraging Utica discovery wells were drilled last year in Tioga County by a unit of Royal Dutch Shell plc and another was announced by National Fuel Gas Co.'s (NFG) exploration and production subsidiary, Seneca Resources Corp. (see Shale DailyMarch 9Sept. 3, 2014).

But while permitting for the Utica has increased sharply in Tioga County in recent years and to the west in a speculative area in adjoining Potter County, companies appear to be counting more on the region's future than its present, as they look to the Utica farther west or turn their attention back to the low-risk, high-quality Marcellus Shale.

"Sub-$1 [gas] prices in that part of the state aren't helping..." said NGI Director of Strategy and Research Patrick Rau. "High [drilling and completion] costs and low netback pricing are killing economics in that area."

In September 2014, Shell said its Neal and Gee wells in Tioga County were drilled to a total depth of 14,500 and 15,500 feet, respectively. The Gee well tested at 11.2 MMcf/d, while the Neal well had a peak flow rate of 26.5 MMcf/d. Months later, Seneca said its Utica well, drilled on the state-owned DCNR Tract 007 in Tioga County, had a 24-hour peak rate production rate of 22.7 MMcf/d. At the time, those wells were located more than 100 miles from the formation's nearest horizontal operator and came with results that sources had previously indicated were years away.

In north-central Pennsylvania, the Utica is anywhere from 3,000 to 5,000 feet deeper than the Marcellus. Last year's tests in the region came at a time when operators were also striking out to Northern West Virginia and Southwest Pennsylvania to test the boundaries of the play outside of Ohio (see Shale DailyMarch 26, 2014). While Utica tests in those areas have since overshadowed results farther to the north, it appeared at the time that Tioga, Potter and other nearby counties could be hosting more wells sooner rather than later (see Shale Daily, Nov. 24, 2014).

Instead, commodity prices continued falling, operators curtailed production, cut budgets and damped their appetites for risk. When it announced its Neal and Gee wells, Shell said it was awaiting results from four other wells in the area. The company could not be reached to comment about its operations in the region, where it has 430,000 acres, or any other plans that it might have for the formation in the area.

"I would imagine they're at a stage where they still sort of want to carry a low profile in that area," said Pennsylvania State University Geosciences Professor Terry Engelder, who added that he's heard little about plans for additional Utica wells in Tioga or Potter counties.

Northern and Northeast Pennsylvania have also long been plagued by a lack of infrastructure. Take Cabot Oil & Gas Corp., for example. A prolific Marcellus producer, the company has been forced to turn down the spigot in the Northeast as it waits for its Constitution Pipeline to be built to take more of its gas to New York and New England (see Shale Daily,July 24). The situation is similar in north-central Pennsylvania. In its latest investor presentation, Seneca said there would be limited "development drilling" in its eastern development area, which includes Potter and Tioga counties, until Williams' Atlantic Sunrise project comes online in late 2017 to move more gas to the mid-Atlantic and the Southeast.

Company spokesman Rob Boulware said instead that the company is shifting this fiscal year (FY) to the western part of the state to drill two Utica tests in an area where the formation has seen minimal unconventional drilling. Those wells would be drilled in the company's Clermont/Rich Valley area around Cameron County, PA, where the company has seen "remarkably consistent" Marcellus results, said Seneca President Matt Cabell in August during the company's FY 2015 third quarter earnings call.

Cabell detailed plans for one Utica well in the area, saying it would be drilled with a 5,500 foot lateral at a cost of about $12 million. That's compared to Seneca wells that were averaging about $5.8 million through the end of the FY 2015 third quarter. The company expects to stimulate the well between April and June and have a test shortly after.

"...The bigger factor is that we are drilling this on a Clermont -- existing Clermont Marcellus pad -- so the infrastructure is there," Cabell said. "It is sharing pad costs with 10 other wells. Our water handling is all in place, we don't have to truck water from a long distance. So there is a big, big benefit to developing something like this as part of an existing development rather than a one-off well that is far from everything else."

NFG Accounting Officer Dave Bauer added that "there isn't a whole lot of additional science" going into the western Utica well, saying that the company hopes to complete it for less than $12 million.

Drilling and completion costs in north-central Pennsylvania aren't likely to go down anytime soon given the current levels of development.

"I think operators are only drilling what they have to right now to maintain production," Rau said. "Unless operators have take-or-pay contracts with rigs, meaning they will be paying to use them anyway, or have [held-by-production] requirements, you're just not going to see a ton of more exploratory or science drilling right now."

In Southwest Pennsylvania, where new Utica wells have tested at up to 73 MMcf/d, there is generally more infrastructure that has helped lift prices compared to those farther north. More wells are planned for that region, but the risk is ensured in many ways by consistent success from the formation in nearby Eastern Ohio and Northern West Virginia (see Shale Daily, Aug. 25).

More than 1,800 horizontal permits have been issued in Tioga County to date, while 267 have been issued in Potter County, according to state records. An overwhelming majority of those permits are for the Marcellus. But in recent years, more operators have permitted the Utica and Point Pleasant for development. Pennsylvania Department of Environmental Protection spokesman Neil Shader confirmed that 43 Utica permits have been issued in Tioga County and five Utica permits have been issued in Potter County.

Two smaller companies, however, are currently drilling the Utica in Potter County. Pennsylvania General Energy Co. and JKLM Energy LLC are at work on two wells there. JKLM's operations were voluntarily suspended earlier this month after it was discovered that a foaming agent had migrated from a well into nearby water supplies (see Shale Daily,Oct. 2).

Other larger operators, such as Chesapeake Energy Corp. have recently permitted wells in Potter County. But it's unclear if those are Utica permits. For now, some of the region's leading leaseholders have indicated that they're more likely to develop the formation in the future.

"Our team is evaluating our options to develop this acreage in the next few years, depending on local gas prices and pipeline takeaway capacity," said NFG CEO Ronald Tanski earlier this year after Seneca announced its Tioga County results.

"The price of gas, combined with the cost of those deeper wells and the lack of infrastructure probably isn't providing a lot encouragement at this point," Engelder added. 

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