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Ohio, Industry Experts Offer Insights on Utica Development

Ohio government officials and industry experts met for a shale symposium hosted by law firm BakerHostetler LLP on Thursday, offering their opinions of what the challenges will be in the Utica Shale as the play develops.

Rick Simmers, chief of the Ohio Department of Natural Resources' (ODNR) Division of Oil and Gas Resources Management, touched on last month's report that wells targeting the Utica produced 12.84 Bcf of natural gas and more than 635,000 bbl of oil in 2012. Some industry experts were disappointed there wasn't more oil (see Shale Daily, May 20; May 17).

"If you follow any of the electronic media or the printed media, you're probably seeing articles that either said this is the greatest thing ever to come, or it's a bust," Simmers said. "I would encourage you [not to] believe most of the articles you read, no matter where you read them. Most of the wells in Ohio are very good wells."

Simmers told the audience to consider that nearly 280,000 conventional oil and gas wells had been drilled in Ohio since 1860 and that cumulative gas production from those wells equaled about 7 Tcf. He said that based on initial production reports, fewer than 2,000 unconventional wells drilled in the Utica could exceed the 7 Tcf mark in as little as eight years.

"The production numbers are phenomenally high and the potential for our economy, jobs and for industries of many types is extremely good," Simmers said.

Dave Mustine, managing director of JobsOhio, said Ohio was in competition with the Gulf Coast for downstream projects.

"It's a tough order because of the downstream infrastructure on the Gulf Coast," Mustine said. "But there may come a point when companies say it will take them too long to get in the queue to build [facilities] in Texas or Louisiana and that they're better off going to Ohio. That's what we hope, and we're going to give every effort to try and get some wins for Ohio."

Gary Alletag, business group coordinator for BakerHostetler, cited IHS Inc. figures that showed mergers and acquisition (M&A) deals exceeded $238 billion in 2012. But that figure was a little misleading because it didn't take into account unreported M&A.

"There is probably almost the same number, or more, of unreported M&As, usually between different independents or smaller oil companies," Alletag said. "This is especially true of a newly developed area such as the Utica.

"Historically, as new areas are developed, the development has been in the form of smaller E&P [exploration and production] companies. They go out with their landmen and negotiate leases. They then package up these leases, drill maybe one or two development wells, and then based upon what they have they turn around and sell to one of the more public E&P companies, who then actually have the funds necessary to fully develop the prospect area."

But Alletag said one unique problem in shale plays, especially in areas like the Utica Shale, which has a long history of oil and gas drilling, is that older oil and gas contracts do not contemplate horizontal drilling.

"Some of the many older versions of the leases are standard forms that contemplate 40-acre square units, which are not necessarily what you need for horizontal drilling," Alletag said. "In addition, many old leases have drain covenants which have protective drilling requirements as to wells close to lease boundaries.

"That works when you are putting in a well that goes straight down and you're draining from an area, but when you're doing a horizontal well that you want to shoot out all the way to the boundary of the lease, and when you do your production you do it perpendicular to the actual drill hole, these covenants don't work, and we've been involved in disputes over whether those covenants have been complied with."

W. Ray Whitman, chairman of BakerHostetler's litigation group, said that although hydraulic fracturing (fracking) has been around for 50-60 years, it has only recently come into the public view.

"I can't think of anything, short of a John Wayne movie...Hellfighters, where there has been more press when it concerns fracking," Whitman said. "You have Gasland and movies that are anti-fracking. You have FrackNation and movies that are pro-fracking. You have Hollywood stars against fracking.

"There is so much in the press about it that people are overly sensitized to it. That brings a heightened awareness about it and also a concern about it, and that leads to a lot of the litigation that we are seeing."

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