Utica/Point Pleasant Resource Evaluation and Appalachian Upstream
and Midstream Development Updates (August 2015)
Resource Estimates
Recent hydrocarbons-in-place estimates for the Utica, Point
Pleasant, and Logana Member of Trenton/Lexington Limestone range up to a
whopping 1.7+ QCFeq! (QCFeq = Quadrillion Cubic Feet.) Original USGS
technically recoverable resource was 38 TCF, 940 MM Bbls of oil, and 208 MM
Bbls of natural gas liquids. In Dec. 2014, Irene Haas of Wunderlich Securities roughly
estimated the resource at a minimum of about 90 TCF equivalent based on
investor presentation statements of the main large players. The newest numbers,
revised upwards by recent high volume wells, are by the WVGES and assume
recoverability for three main zones throughout the basin and make some assumptions,
but seem to be based on fairly standard reserve estimation principals. Their new
technically recoverable resource estimate is about 782 TCFeq. These numbers
suggest that the Utica/Point Pleasant/Logana resource is even larger than the
Marcellus. Last year the technically recoverable resource was estimated (but
not announced) by the same consortium at 188.6 TCF and 840 MM Bbls of oil. In
any case, the total unconventional shale resources of the Appalachian Basin,
including the Utica-Point Pleasant-Logana resource, the Marcellus, Burkett, and
other Upper Devonian resources seem to be somewhere around 1.5 QCF. Actual
production from these new unconventional shales, mainly over the last five or
six years, is now approaching the equivalence of all the previous hydrocarbons
produced from the Appalachian Basin. Goldman-Sachs just reported a prediction
that shale production will double by 2025. That implies vastly improved
takeaway capacity and increased demand for gas and oil. Many companies are
poised for better market conditions and can likely ramp up quickly to increase
supply if it would be economic. Now that this resource has been defined and
major infrastructure upgrades are commencing, the focus should be on effective
and safe operation, efficiency, multi-year planning, and public
acceptance.
Development Constraints
The initial identification and characterization of this resource
is now fairly well done, with perhaps some geological and technological
refinements to come. The development of the resource is mostly constrained by
the markets. Pipelines, LNG, gas power plants, and diesel-to-gas transportation
are set to slowly open the tap to new markets over the next 5 years. Curtailment
is the current case with Appalachian dry gas which sells for considerably lower
than NYMEX. There are new markets appearing as well for natural gas liquids
such as ethane, propane, and butane. Direct gas marketing and hedging may offer
some advantages to companies well positioned to provide firm deliveries.
Pipeline projects are in various stages of development but should begin
providing some glut relief soon. LNG exports are slated to begin in a few
months. 1 QCF at Appalachian prices around $1.50 per MCF makes that resource
worth 1.5 trillion dollars at current prices. At current NYMEX price it would
be worth closer to 3 trillion. Through time the price and the value will
probably rise considerably as production is consumed and wells decline. For
comparison the global GDP for 2015 is estimated at 74.5 trillion dollars. There
is also considerable resource development constraint by the public, with some
zoning out of oil & gas activity, avoidance of sensitive areas, and
unleaseable property. These public constraints can significantly reduce
recoverability. Perhaps the term-phrase “accessibly recoverable” should be
used, or at least the unrecoverable portion will need to be subtracted from the
technically recoverable delineation.
Market Potential
The new reserves numbers for the Utica sequence along with
the entire massive Appalachian gas source is attractive to several markets. A
stable source of cheap CNG for natural gas vehicles (NGVs), for transportation,
for ships, trains, and significant heavy equipment applications, is one market.
This market is currently small but is expected to rise, especially with
possible state and/or federal incentives likely. Several LNG export terminals
are in various stages of completion with first exports expected to go out at
the end of the year. Plans are being made to ship gas via Chinese LNG tankers
to Germany from Canada with Marcellus and Utica gas through New England after a
major pipeline is built. This pipeline would also make gas much more affordable
for areas of New England, with potential savings of millions of dollars for customers.
Other Marcellus and Utica gas will go through the Buffalo area of National Fuel
Gas (Seneca Resources) to eastern Canada. The Constitution Pipeline is expected
to relieve some of the gas glut in Northeast. It is expected to be in operation
in in the 2nd half of 2016. It will also offer natural gas service
to homes in areas where it has not been available. Marcellus gas has allowed
many large buildings and residences in New York City to switch from home
heating oil to natural gas, giving cheaper energy to customers and
significantly improving air quality in the city. The Atlantic Coast Pipeline
will make Marcellus and Utica gas available for gas power plants in the
southeast so that those areas will be able to meet more stringent emissions
requirements, become more efficient, and save their customer base hundreds of
millions of dollars. There are several other major pipelines reaching out to
other markets. Announcements to build ethane cracker plants, gas processing
facilities, and NGL pipelines will allow NGLs to go to market, be processed
into products, and relieve problems with excess ethane in gas pipelines. These
gases and products are used as feedstock for the chemical, plastics, and
fertilizer industries. Some companies are in the process or have pending deals
to ship NGLs to Europe and other areas. On August 1st (2015) the
Rockies Express pipeline (REX) commenced continued reverse flow of gas and
should provide cheaper gas to the Chicago market. Several other major pipeline
and export deals are in the works. De-ethanization and NGL fractionation
capacities are set to increase beginning later this year and into 1Q 2016. Overall
management of this vast resource is taking shape. This can probably be done
effectively and efficiently since core areas have been defined at least
initially. The fact that the technically recoverable reserves of these
reservoirs (Marcellus, Utica, Burkett) are now loosely defined allows for
better and more efficient planning of infrastructure. The size of the resource
lends support for long-term projects. The nature of unconventional resources as
a continuous resource is well suited to efficient infrastructure planning and
operation over long time periods.
Natural Gas and NGL Demand
Most scenarios show increasing demand from now (2nd
half 2015) into the foreseeable future. Most demand sources are projected to
keep increasing to 2020 and beyond: LNG; retirement of coal power plants and
replacement by gas plants, methanol fertilizer plants (up to a BCF/day in new
demand by the end of 2016); chemical plant feedstock (construction spending for
such plants has more than doubled from 2014 to 2015; CNG and LNG for
transportation (expected to continually increase as refueling infrastructure is
laid out and conversion costs drop); increased usage of electric vehicles are
expected to increase electricity demand and thus demand for gas; carbon
emissions rules strongly favor gas over coal; increased use of small gas
turbines as localized power sources. Possible reductions on demand include
increased power plant efficiencies, development of smart grids and metering,
better utility infrastructure planning, and increased use of renewable energy.
Most of these reductions are necessary and desirable and will not have a large
impact on overall gas demand in the near-term.
Market Share
In particular, the large Utica/Point Pleasant reserves may
give certain well situated companies market share advantages. Range Resources
and EQT just announced plans to build a large feeder pipeline in Southwestern
PA. Both of these companies are well situated to take dominant market share
positions with these resources. Range announced a big well in Dec. 2014 –
59MMCF/day IP in Washington County (10.9 MMCF/day/1000 ft of lateral) and more
recently EQT announced an even larger one in Greene County – 72.9 MMCF/day (22+
MMCF/day/1000 ft of lateral). The EQT well had pressures greater than 8000 psi,
among the highest pressure gradient seen. Consol’s recent well in Westmoreland
County reportedly has an IP between EQT and Range’s wells. These wells in
particular extend the major sweet spot significantly further east and lend more
credibility to the high predicted reserves. Range also recently announced the
highest Marcellus IP in Washington County at 43 MMCF/day. In Northeast PA Cabot
and Chesapeake have dominant Marcellus positions in Susquehanna and Bradford
Counties respectively. The core area companies can drill wells economically at
lower commodities prices. Other market advantages include taking advantage of
liquids-rich areas to increase profit and drilling multiple reservoirs at
closer spacing from the same well pad, thereby sharing infrastructure. It has
been suggested that Marcellus and Burket reservoirs should be drilled in tandem
in the western areas where they are close together due to Marcellus producing
pressures eventually affecting those of the Burket. The Burket has smaller reserves
than the Marcellus but the advantages of stacked pay considerably help their
economics, as does BTU boost from NGLs in the liquids fairways, although NGL prices are more tied to global oil prices so without relief from local processing facilities or long NGL pipelines current prices are likely to remain low. However, hedges and pipeline commitments are only advantageous in times of low gas prices. If demand and takeaway capacity increases as expected, hedges and pipeline commitments could work against the producers that have them as this article from BTU Analytics points out:
Supply and demand will likely continue to be a major issue
in the Appalachian area as gas pricing is very sensitive to supply and demand
market dynamics. Price volatility has often been problematic with natural gas
but as high-reserve areas now more delineated, things are likely to get more
predictable as long as demand does not drop. The EIA predicts a 3 BCF/day (or 4%) overall rise in natural gas demand in 2015. Industrial consumption is expected to increase 2.3% in 2015 and 5% in 2016. Power generation and new chemical and fertilizer plants are expected to drive demand growth. Residential and commercial demand is expected to drop modestly. This article below has some interesting analysis:
http://247wallst.com/energy-business/2015/08/23/why-natural-gas-is-so-cheap-and-why-drillers-keep-producing-more/
Technological Constraints
http://247wallst.com/energy-business/2015/08/23/why-natural-gas-is-so-cheap-and-why-drillers-keep-producing-more/
Technological Constraints
The deep Utica/Point Pleasant dry gas play has had some
significant difficulties with challenging conditions. Very high well pressures
have caused difficulty in completing wells. The high vertical depths might
constrain lateral lengths somewhat and increase drilling and completion times. High
pressure equipment and techniques must be utilized. Safety to workers, nearby
residents and to the environment is necessary. Magnum Hunter Resources has had
significant difficulty turning wells in-line with one dangerous blowout in
Monroe County, Ohio. These difficulties will likely slow down development to
some extent until completion techniques are thoroughly worked out.
Geological Constraints
One constraint to assessment is the lack of data
availability for porosity mapping due to proprietary logs. Accurate porosity
maps could refine reserve estimates and delineation of sweet spots. The most
useful mapping at present is IP (initial potential) mapping, or better yet IP
per 1000 ft of lateral. IP per frac stage is another possibility. Some isopach
maps are available through the Utica Consortium and from state geological
surveys. Utilizing production data, porosity, thicknesses, gas content data,
log data, and pressure gradients, one can estimate resource-in-place and
contour it into sweet spots. Proximity to core areas is often the key to the
most economic success in these plays. Such proximity also gives better
predictability so that pipeline commitments can be met and hedges made for less
economic times. Unfortunately, availability of geological information is a common constraint to ideal accuracy in evaluating oil and gas as proprietary concerns are prevalent. The Utica Consotium data is useful in this respect.
Depositional Characteristics of the Utica/Point Pleasant/Logana
Intervals
Porosity Development
Porosity in all of these three zones appears to be entirely
due to the catagenesis of organic matter from kerogen to oil and then to gas.
Pores are typically very small and very little to no matrix porosity is
present. High pressure aids the producibility of the resource with the
exception of the oil window in central eastern Ohio which is lower pressure and
as of yet has not been economically produced. However, it is clear that
porosity development is the best in the so-called shelf areas of the shallow
basin. The high porosity development seems to correlate very well with the core
areas as investor presentations by Range, Gastar, and others have shown. This
at least suggests some intergranular porosity by wave, storm, and/or current
action but thin-section and core studies suggests that it may be entirely due
to organic degeneration so that the high TOC areas correspond directly to the
high porosity areas. There is abundant evidence of benthic fossils and
bioturbation which suggest shallow oxygenated waters with bottom currents.
Anoxia may have been seasonal and possibly even in successive zones just below
the sea floor. There is probably more core analysis, thin-section, and
petrophysical work to be done in the different zones of the overall Utica and
comparison of different areas to build a better picture but enough is now known
to build good drilling and completion plans.
The Significance of Carbonate Content vs. Clay Content
These reservoirs all average near 50% carbonate content,
with the Point Pleasant and Logana > 50% carbonate. The Utica is higher in
clay content and quartz while the Point Pleasant is lower in clay and higher in
carbonate. The Logana is up to 75% carbonate. It is thought that the carbonate
increases brittleness and allows the rock to frack better. Clay does just the
opposite. In other plays where intergranular porosity is a factor the carbonate may be less brittle than the quartz. However, quartz content is very low in the Point Pleasant. The Point Pleasant is very likely the most economic unit with the
most recoverable reserves. The WVGES assessment pegs it at 85.1 BCF/square mile
in the average sweet spot. Porosity, high TOC, high carbonate, low clay, and
high pressure are likely the main factors. The high carbonate content zones
imply deposition in a shallow water basin, beginning with the initial sea level
transgression in the late Trenton/Lexington.
Zone Targeting
Most of the better wells have been targeted in the high
TOC/high carbonate zones of the Point Pleasant and that will continue to be the
case. A few in Ohio (apparently) have targeted the Logana (if I understood
correctly) which is technically part of the upper Trenton/Lexington. The Utica
shale above the Point Pleasant can be quite thick but is less prospective as a
reservoir, yet it still should contain significant reserves that would be economic to produce at higher commodity prices.
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