Hess Corp. last week made a grand entry into the Utica Shale, capturing almost 185,000 net acres in the emerging Ohio region in two transactions.

In the first transaction, one of the Utica’s biggest leaseholders, CONSOL Energy Inc., agreed to partner with Hess on half of its nearly 200,000 acres in eastern Ohio. Hess is acquiring a 50% interest in CONSOL’s leasehold for aggregate payments of $593 million. Last month CONSOL sold Noble Energy Inc. half of its leasehold in a portion of Pennsylvania and West Virginia’s Marcellus Shale in a deal valued at $3.4 billion (see NGI, Aug. 29).

Gaining entry to the Utica “enables us to build a strategic acreage position in an emerging unconventional play in the United States,” said CEO John Hess. “We believe that this acquisition offers significant potential for future growth in reserves and production with most of the land either owned in fee or held by production with high net revenue interests.”

Hess agreed to pay CONSOL $59 million at closing, which is expected in October, and $534 million in the form of a 50% drilling carry of some of CONSOL’s working interest obligations over a five-year period. Hess would operate mostly in the liquids-rich window in Belmont, Harrison, Guernsey and Jefferson counties, and CONSOL would operate elsewhere in the oily land of eastern Ohio, including Portage, Tuscarawas, Mahoning counties, as well as in Noble County.

The partners expect to ramp up initial drilling operations in a few weeks and would average two rigs in 2012, 3.5 rigs in 2013 and eventually plateau at an average of five rigs in 2015. The carry is expected to be fully utilized by year-end 2016.

The “skill sets” of Hess, “coupled with CONSOL’s deep footprint and history in northern Appalachia, result in a powerful combination that will benefit the eastern Ohio economy, strengthen the communities in which we operate and provide more opportunity for our employees and our respective companies,” said CONSOL CEO J. Brett Harvey. According to Harvey, CONSOL acquired around 80,000 acres in Ohio decades ago; the remaining 120,000 acres in the Utica Shale were part of its $3.475 billion land acquisition last year from Dominion (see NGI, March 22, 2010).

“With this joint venture, CONSOL Energy will be able to explore and delineate its Ohio Utica Shale acreage for 25 cents on the dollar, while still retaining a 50% interest. It’s a very low-risk form of exploration,” he said. CONSOL reaffirmed its 2015 production target of 350 Bcf net and said “any success in the Utica Shale will be additive.”

One day after announcing the CONSOL partnership, Hess added 85,000 more net acres to its Ohio leasehold and increased its holdings in other unconventional U.S. plays after paying $750 million to acquire privately held Marquette Exploration LLC, which is based in The Woodlands, TX. The Ohio leases, in which Hess would have a 100% working interest, are in Jefferson, Harrison and Belmont counties. Appraisal activities on this acreage are to begin by the end of the year, the New York City-based producer said.

In addition to the Utica Shale, acquiring Marquette gives Hess a contiguous acreage position of more than 18,000 undeveloped net acres in northern Louisiana’s Haynesville Shale in Bienville, Jackson and Lincoln parishes. Marquette operated two producing Hosston wells on this acreage, the Davis Bros 27-1 and the Davis Bros. 34-1. Marquette was founded in 2006 in partnership with Encap Investments LP.

Hess, who spoke Thursday at the Barclays Capital CEO Energy-Power Conference in New York City, said getting into the Utica Shale was important because it is “a major emerging U.S. unconventional play.” The Utica is high on the producer’s to-do list, he said.

“With these transactions, we have built a strategic acreage position in the Utica Shale, allowing us to strengthen our portfolio of unconventional resources in high quality assets, leverage our operating expertise and create significant potential for future growth in reserves and production,” said the CEO.

The Utica Shale, he said, has the potential to deliver similar production and reserve growth comparable to Hess’ acreage in the Bakken Shale of North Dakota. Late last year Hess paid $1.05 billion in cash to acquire 167,000 net acres in the Bakken from TRZ Energy LLC (see NGI, Jan. 10). Net production from the Bakken averaged 25,000 boe/d in the second quarter, which was flat with the first quarter. Hess also controls about 107,000 acres in the Eagle Ford Shale and plans to drill 25-30 wells there this year.

Based on the Marquette purchase, as well as initial production results from the Bakken and the Eagle Ford, Hess has raised its annual long-term oil and gas production growth target to 3-5%, up from 3%, the CEO told analysts.

The Utica Shale in Ohio is considered a liquids play and because of that fact, “Utica is very much a midstream story,” wrote exploration analyst Irene Haas of Wunderlich Securities Inc. That would fit well into the oily Hess portfolio.

“We expect that, if successful, the Utica could generate as much natural gas liquids as the neighboring Marcellus trend, if not more,” Haas wrote. “U.S. ethane production is enjoying a new found popularity as one of the cheaper feedstocks for ethylene production. However, large amounts of mid-stream investments will be needed to get the Utica wet gas into production mode. We wonder how the gathering and processing infrastructure will evolve. We still need to quantify the aggregate volume of wet gas coming out of the Marcellus and Utica plays. Importantly, we need to understand how to find homes for all the ethane production.”

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