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Report: Still Plenty of Opportunities in Utica Despite Elusive 'Sweet Spot'

Despite oil and gas companies taking divergent strategies in Ohio's portion of the Utica Shale -- and the elusiveness of a "sweet spot" for producers -- the play offers ample opportunities for production and investment, according to a report released Wednesday by the law firm Benesch, Friedlander, Coplan & Aronoff LLP.

In a 10-page report, a quarterly summary covering the Utica in 2Q2014, the firm added that a proposed increase in Ohio's severance tax rate on horizontal drilling should not have a negative impact on oil and gas development in the state.

Benesch cited decisions by BP plc and EQT Corp. during the quarter to halt operations in the Utica, but it said others -- including Magnum Hunter Resources Corp. -- have "doubled down" in the play and were pronouncing their excitement about the opportunities for oil and gas exploration there (see Shale Daily, June 23; April 29; April 25).

"The wide variation between companies' experiences shows the relatively young Utica play remains in the development stage," Benesch said. "Until exploration companies identify a sweet spot and related infrastructure can be developed accordingly, exploration will continue to yield mixed results."

Nevertheless, Benesch said operators were producing some big wells targeting the Utica. Case in point, Rice Energy Inc.'s Bigfoot 9H well in Belmont County. The well stabilized at a rate of 41.69 MMcf/d of gas on a 33/64" choke, with flowing casing pressures of 5,850 psi, making it the largest producing well in the Utica to date (see Shale Daily, June 2).

"These results, along with Magnum's focus in adjacent Tyler County, WV, provide further evidence of the strong opportunities in southeastern Ohio and should spur further investment and supply chain growth," Benesch said. "Results have also shown the Utica could be drier than expected, with fewer NGLs [natural gas liquids] than other plays, and could rival the Marcellus [Shale's] Susquehanna core."

Opportunities also abound in wastewater disposal. According to the firm, private equity firms such as Natural Gas Partners and Trilantic Capital Partners were investing in water management companies that handle oil and gas wastewater across the United States. The firm also cited data by the Ohio Department of Natural Resources showing a 15% increase in drilling wastewater and brine between 2012 and 2013 (see Shale Daily, April 11).

"As investment and production in the Utica and nearby Marcellus ramp up, demand will increase for companies that supply, treat and dispose of the water required, representing a niche opportunity for investment and development," Benesch said.

Although the Ohio House of Representatives passed a bill in May calling for a 2.5% severance tax on oil and gas produced from horizontal wells, Benesch said the measure still needs to pass in the state Senate (see Shale Daily, May 15). The firm indicated that there was no guarantee Substitute House Bill 375 would win passage in the Senate.

"The bill doesn't set the tax rate as high as Ohio Democrats or Republican Gov. John Kasich wanted, but did receive industry support," the firm said. "The bill still faces hurdles in the Senate, which adjourned for the summer without acting on it. In its current form, the compromise bill should permit the state to increase revenue, without dampening energy industry investment."

Kasich has proposed three different severance tax ideas. The first -- a 1.5% severance tax on crude oil and NGL during the first year of production from horizontal wells, increasing to 4% in the second and subsequent years of production -- was suggested in April 2013. Two months later, Kasich modified his proposal and called for a 4.5% severance tax on crude oil and NGL from horizontal wells during the second and subsequent years of production. He suggested a 2.75% oil and gas severance tax last March (see Shale Daily, March 12; June 11, 2013; April 5, 2013).

Last April, BP said it would take a $521 million impairment on its Utica Shale acreage in Ohio and would not proceed with development plans there, and EQT scuttled plans to drill 21 wells in the Utica during 2014. But in June, Magnum announced a joint venture with EdgeMarc Energy Ohio LLC to develop acreage in Washington County, OH, prospective to the Utica and Marcellus shales.

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