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Industry Experts See Tide Turning Worse Near-term for Appalachia Operators

Ohio regulators expect combined conventional and unconventional natural gas production to top 1 Tcf in 2015 when fourth quarter data is released in the coming months, a milestone that would mark the rise of the Utica Shale five years ago.

The Utica Shale has primarily driven state production numbers higher in recent years. In 2014, combined production reached about 518 Bcf, of which shale wells accounted for about 452 Bcf (see Shale DailyMarch 24, 2015). Rick Simmers, chief of the Ohio Department of Natural Resources' (ODNR) Division of Oil and Gas Resources Management said through the first nine months of 2015, the state's gas production reached 911.4 Bcf. In 2011, when the first commercial production from shale wells was reported, operators produced only 2.5 Bcf, he said.

Ohio releases production data on a quarterly basis, so year-end volumes won't be released until next month or after. But Simmers, who addressed a full audience on Wednesday at an industry conference in Pittsburgh about the Utica's rapid growth in recent years, said things could change this year.

Asked if his agency has any projections for 2016 production, Simmers told NGI’s Shale Daily there aren’t any yet. Since 2012, he said the organization has compiled full-year permit, rig and production estimates for release sometime in January or shortly after.

"For each of those years that we've done these projections, our numbers have been within the 95 percentile. They've been very accurate projections; we've had the advantage of being able to talk to all of the companies so we can find out what their production plans are," he said. "This year is different. Normally, in January, early January, we would put out those projections, but we haven't done that yet because we're trying to find out from the companies what their changing plans are.

"And they're changing a lot. One company told us they're adding rigs, others have said they're not adding rigs. We will do those projections this year. Oil production is declining; it will continue to decline largely based on commodity prices. Natural gas [production] will decline, but we don't think at a steep rate like oil production."

In the first quarter, Ohio's shale operators produced 4.8 million bbl of oil. Volumes increased healthily to 5.5 million bbl in the second quarter, but by 3Q2015 they'd flattened to 5.7 million bbl (see Shale DailyDec. 3, 2015).

Since delineation efforts began in 2010, every metric in the Utica play has increased rapidly, but the commodity downturn has slowed that trend. For example, in 2013 when production and operations in the play began to accelerate in earnest, Simmers said about 30-32 rigs were running in the state on average. There are currently only 16 rigs running in the play.

Seaport Global Securities’ Sunil Sibal, senior infrastructure analyst, who spoke shortly after Simmers on Tuesday, noted that the rig count has fallen by more than 66% nationwide since a September 2014 peak. Despite the downturn and negative metrics, production from the Marcellus and Utica grew by about 5 Bcf/d between 2014 and 2015, he added. Even as the market for gas faces headwinds, Sibal said the plays are both expected to add another 14 Bcf/d of production by 2020.

Sibal and Simmers were among some of the first speakers to take the stage at Hart Energy's Marcellus-Utica Midstream Conference. While the organizer's didn't yet have an estimate for attendance, conference sessions were packed, with nearly all seats filled. Last year, the conference attracted more than 2,000 attendees.

Uncertainty seemed to permeate presentations and conversations on the exhibit floor, as oil and gas prices remain low. Morning presentations each touched on demand and how the oil and gas industry should be working with end-users to create more of it.

"You have to have demand to keep these commodity prices up and that's difficult to do when you look at uncertainties in the global economy," said Ponderosa Advisors LLC CEO Porter Bennett.

Aspire Energy of Ohio’s Mark Eisenhower, vice president of strategic planning and development, said about 20 Bcf/d of demand growth is forecasted through 2025 for natural gas. Most of that, or 11.6 Bcf/d, is expected to come from liquified natural gas (LNG) exports. The rest, he said, would be driven by natural gas power generation and industrial demand growth. Aspire is a unit of Chesapeake Energy Utilities Corp.

To meet some of that gas demand, Eisenhower said about 19 Bcf/d of new pipeline capacity would come online by 2018 to serve Appalachian production. However, there remains significant concerns in the near-term about whether enough LNG exports would be shipped to reduce the gas glut, considering economic weakness in global markets.

Gas-fired power generation remains a big question mark for producers across the country. Residential consumption, Eisenhower said, is down because of energy efficiency, while lingering gas-power coordination issues and uncertainty about how many gas facilities will be built has created uncertainty about the sector's future demand.

"I'm afraid this summer the pipelines are going to have to shut the production in because there is no place for it to go," he said. "There's a little bit of room in there maybe, but not much. I loved the blizzard over the weekend; I'm looking forward to a cold January, February, but even if we get it, we're likely to get to the middle of the summer and there's nowhere for that gas to go.

"All we're trying to say is, if the actual [LNG] shipments don't occur or we don't have a little more colder weather that would blow the top off of this, you're oversupplied," he said. "The 'what if' scenarios don't mean we're right; it's just ask yourself that question when you're doing strategic planning. When we make an investment, we're looking at a use-of-life for our assets of 20 years."

Many of the speakers noted that while operations continue to slow during the downturn, now is the time to increase dialogue about generating more demand for oil and gas. That conversation, Eisenhower said, is about 10 years overdue.

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