An auction of natural gas and oil leases on Michigan-owned parcels last Tuesday, with explorers mostly focused on portions of the Utica and Collingwood shales on the Lower Peninsula, netted the state $178 million in bonus payments, which exceeded projections and broke the record for previous auctions.

To get an idea of how much the state received from the latest bids, until last Tuesday, Michigan’s leasehold auction record stood at $23.6 million, which was set in 1981.

“To put the historic significance of this auction in perspective, since 1929, the state has collected a total of $190 million in bonus payments,” said Lynne Boyd, chief of the Department of Natural Resources and Environment’s (DNRE) Forest Management Division, which administers the state’s oil and gas program. “In one day, we collected nearly as much as we have collected in 81 years.”

What’s bringing the buyers to Michigan now are the Collingwood and Utica shales, mostly undeveloped formations that extend across the northern part of the Lower Peninsula of Michigan. The Utica Shale extends into Canada’s Quebec area and across parts New York and Pennsylvania, where it underlies a portion of the Marcellus Shale.

The Collingwood Shale is around 600 miles west-southwest of Quebec’s St. Lawrence Lowlands and 400 miles west of Utica and Trenton-Black River exploration in the Finger Lakes region of the Appalachian basin around Elmira, NY.

The first well, drilled by Encana subsidiary Petoskey Exploration LLC of Denver, is a 5,000-ft horizontal penetration that targeted the Collingwood Shale at 9,500-foot true vertical depth. The shaley limestone is about 40 feet thick and lies just above the Ordovician Trenton formation, according to DNRE.

The Petoskey Pioneer 1-3 test well is in Missaukee County, about 30 miles southeast of Traverse City, MI. The 30-day initial production rate of the first test well averaged 2.5 MMcf/d, said Encana CEO Randy Eresman.

“In keeping with our approach of quietly assembling large land positions on promising unconventional natural gas plays, our substantial Michigan shale position has the potential to add meaningful future resources and production to our North American portfolio of prolific resource plays,” said Eresman. “With further drilling we hope to demonstrate stronger gas rates as we optimize well completion practices and prove up rich liquids potential in some parts of the play.”

Although the recent lease sale brought in a lot of new money, Encana in the past two years has managed to amass a 250,000 net acre leasehold mostly under the radar and at an average cost of about $150/acre.

Eresman admitted that it was “too early to know the economic potential of this new Collingwood Shale play, but we plan to drill additional exploration wells this year that will help determine the play’s ultimate potential.”

Because the well is still in the testing stage, Michigan officials could not comment on potential gas reserves in the play. But “people are excited,” said a spokesman in Michigan’s Office of Geological Survey.

According to DNRE’s Mary Dettloff, the test well cost about $10 million, “and that’s $10 million that stayed in the region.” Now, she said, “many companies are eager to get moving, based on test results.”

“The future of oil and gas exploration in Michigan looks very bright,” said DNRE Director Rebecca Humphries. “The spin-off impact of the proposed exploration of the formation could provide a significant economic lift to many communities.”

In Tuesday’s auction, the average price paid per acre for lease was $1,507, which compares with the most recent average of $26/acre. The highest bid received was $5,500/acre for a lease in Charlevoix County. A total of 118,117 acres in 22 counties was leased in the auction.

Based on the recent lease sale, Encana’s Collingwood Shale acquisitions would carry a price tag of about $37.5 million.

Petoskey, acting on behalf of Encana, first acquired lands in Michigan in 2008 and added to its position during subsequent state land sales. To date, the company has acquired seven-year leases in seven counties in the Lower Peninsula of Michigan, mostly in the counties of Cheboygan, Kalkaska and Missaukee.

Michigan’s gas and oil development dates back to the 1930s, but it hasn’t been as high on the radar screen for gas producers except in the Antrim Shale, and, to a lesser extent, the Utica Shale. Michigan currently produces around 400 MMcf/d, Encana noted.

Encana is not alone in its belief that the Collingwood Shale may have a big payoff. On Friday Atlas Energy Inc. said it has “amassed 115,000 gross acres,” or 70,000 net, “in the emerging Utica/Collingwood Shale play, which underlies several counties of northwestern Michigan at depths between 6,000 and 9,000 feet.”

Atlas said it “plans to drill several wells over the next year and expects to recover significant natural gas liquids from the rich gas stream.”

The Pittsburgh-based producer said it acquired around 15,000 net acres in the first three months of this year “at an average price per acre of approximately $321 per acre.” At a Michigan lease sale in early March, “acreage that is prospective for the Collingwood/Utica Shale went for prices up to $5,500 per acre.”

In the meantime additional gas supplies from the multiplying shale plays in the Northeast region have led Williams Partners LP to work on “multiple expansions” of its Leidy Line in Pennsylvania, spokesman Chris Stockton told NGI. Williams Partners held a binding open season through March 26 for its proposed Northeast Supply Link (see Daily GPI, March 5). The expansion project would provide up to 420,000 Dth/d of firm service on Transco, carrying Marcellus Shale gas from Pennsylvania to New York and New Jersey markets.

Williams’ Leidy line “goes right through the heart of the Marcellus on its way to the East Coast,” Stockton noted. “Right now the line is pretty full with gas coming from the West and from Canada so expansion is necessary.” The expansions are “producer-driven,” he added.

Stockton was mum about most of the producers that have requested expanded pipelines. “We’re working with numerous producers on several expansion projects to accommodate added supply,” he said. However,Encana is known to be active in the area.

The Transco system, he noted, has the advantage of having the infrastructure and the right-of-way in place so that expanding capacity wouldn’t be difficult. But Stockton couldn’t be specific about the expansions because producers have confidentiality clauses.

Local media reported that the possible pipeline expansion would tie into a single gas well, but Stockton said that wasn’t true. “Producers are getting together on gathering lines and processing plants so the gas will be pipeline quality,” he noted.

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