Utica Shale Potential Awaits Gas Processing Plants
HANOVER TOWNSHIP, Ohio -- Just six months ago, the corner of state Route 644 and Hagan Road in Hanover Township was the picture of rural serenity, commanded by a large, grassy hill that overlooks six or seven ranch houses.
Today, a freshly constructed aggregate road punctuates the green topography and slopes upward to a leveled plateau.
There, heavy boom cranes, earthmovers, trucks and assorted equipment are at work daily, preparing the land for what is the largest single investment in Columbiana County in decades.
Construction of Utica East Ohio Midstream LLC’s processing plant here is moving ahead full-bore, part of a $900 million project on which oil and gas industry executives are depending to help deliver the full potential of the Utica shale.
And the sooner it’s completed, the better for all concerned, they say.
“We need the midstream infrastructure to flow these wells to their capacity,” says John Walker, president and CEO of Houston-based EnerVest Ltd. and EV Energy Partners, which along with Access Midstream and M3 Midstream/Momentum is developing the Utica East project.
Walker and other oil and gas executives spoke with The Business Journal Nov. 14 during Hart Energy’s Developing Unconventional Gas Conference and Exhibition in Pittsburgh.
The CEO reports that the first phase of the plant, under construction near the small crossroads of Kensington in southern Columbiana County, is expected to come online during the second quarter of 2013 and be completed by the second quarter of 2014. A related fractionation plant in Harrison County is also expected to be fully operational by that time.
Workers and heavy equipment were busy on the afternoon of Nov. 19, as they prepared ground for the first phase of the Kensington project. Most of the houses surrounding the site appear unoccupied, and a vantage point across the road at Summit Well Service provides a panoramic view of the entire construction site.
“We’re spending about $1 billion on this,” Walker says. Construction on a network of pipelines throughout Carroll and Columbiana counties is also under way, he adds. The pipelines are intended to collect gas from wells drilled by Chesapeake Exploration LLC, a division of Oklahoma City-based Chesapeake Energy Corp., and pump it to the Kensington plant.
The Kensington plant would then chill the gas to about 150 degrees below zero, reports George Francisco, executive vice president of product development for Momentum/M3, also based in Houston.
“That process extracts all of the liquids [from the dry gas],” he explains.
Then the dry gas stream is pumped into an existing pipeline, while the “wet” gas is transported via an 18-inch transmission line to the Harrison County complex where it’s separated into specific products such as ethane, butane and propane.
“We’re stepping into a 600-million-cubic-feet-per-day of processing capacity for our primary producers, Chesapeake, Total and EnerVest,” Francisco says of the Kensington project. “In the absence of that plant being online, it’s difficult for that gas to reach the market and get processed as it should.”
Francisco says the Utica could conservatively produce between two billion and 3 billion cubic feet of processed natural gas per day. The Kensington plant would process 600 million cubic feet a day at full capacity.
“We’re just a fraction of what we think the Utica really is,” he says.
Other operations such as MarkWest’s giant complex under construction in Harrison County would add another 200 million cubic feet per day of processing capacity. The first phase of MarkWest’s processing plant in Harrison County should be completed before March 31.
The MarkWest project has two major customers: Gulfport Energy, which has drilled two very productive wells in Belmont and Harrison counties, and Antero Resources, which holds 60,000 acres in the Utica.
In the meantime, gas transmitted from Chesapeake’s producing wells in the Utica is transported through Dominion pipelines to a Dominion processing plant in Hastings, W.Va., EnerVest’s Walker says.
“There are limits as to what it can do because Hastings is full,” he says.
“It’s a small plant and processes about 170 million cubic feet per day. Every well in the Utica is being hampered right now by the lack of processing capacity.”
By 2015, Walker projects, there will be enough processing capacity in place to handle most of the dry and wet gas extracted from the Utica shale.
“It’s will have a giant impact on Ohio in terms of jobs,” the CEO adds.
The Utica East project has contracted mostly with construction and supplier companies based in Ohio, and Walker reports his company has listened to state legislators and Gov. John Kasich about their concerns that out-of-state contractors may usurp jobs from Ohioans.
“All of our processing in natural-gas liquids is going to be done in Ohio,” Walker emphasizes.
In the interim, energy companies must also rely on rail, barge and truck transportation to carry natural-gas liquids to processing centers, Momentum’s Francisco says.
“Rail is very important to transport propane, for example, to the Northeast to get it to markets there,” he says, and is also essential in providing energy to the Canadian market. Barges are also in use to move wet gas via waterways. “It’s a key part of the distribution network right now,” he says.
In the Bakken shale play in North Dakota, Walker elaborates, some 5,000 rail cars per day are carrying oil and gas to markets throughout the country because the region hasn’t developed the requisite pipeline infrastructure.
Walker is encouraged by the early results in the Utica as it relates to the wet-gas window, he says. The jury is still out, however, on the western edge of the play and its prospects for oil.
In September, EV Energy Partners announced plans to sell 539,000 acres of its leases in the Utica shale, which some analysts say might fetch as much as $6 billion.
At the time, the company said it had “little appetite for the risk and expense of developing new shale formations, where fracked wells cost upwards of $6 million apiece.”
In a conference call Nov. 9 with analysts, Walker said that the company has secured offers from a potential buyer or buyers he declined to identify.
Nevertheless, EnerVest noted that it would retain its stake in Utica East Ohio and hold on to its leases on the shallower Clinton and Knox formation wells in Ohio.
Earlier in November, Chesapeake CEO Aubrey McClendon told analysts that it isn’t likely the Utica would yield a significant contribution to the U.S. oil supply.
Chesapeake wells are concentrated mostly in the wet gas portions of Ohio – Columbiana, Carroll and Harrison counties, for example – and not the prospective oil window likely to be exploited in counties just to the west, in the east/central portion of the state.
Walker says it’s simply too early to diagnose the oil window of the Utica because much of the experimentation and exploration rests on perfecting completion techniques needed to coax as much product as possible from the ground.
“I think we can say that the Utica drilling stage is going very well,” Walker says. “The completion stage just takes a long time to develop.”
Once a horizontal well is drilled, it requires stimulation from a process called hydraulic fracturing (better known as fracking), where water, sand and a smattering of chemicals are used to crack open tight shale formations 8,000 feet below the surface of the earth.
“It’s all about ultimate recovery,” Walker says. “The better the completion technique, the better the recovery.”
Water, sand and chemicals are delivered through a perforated pipe under high pressure along the vertical leg of the well. Usually, the fracturing occurs in stages of about 300 feet. However, some techniques that use shorter stages have elicited more productive results.
Different techniques such as adjusting the pressures on water or sand, the use of propane or butane to frack a well, and determining the volume of water and sand are critical to the process.
It may take at least another year before energy companies fully understand the oil window of the Utica, he says.
Walker points to the Barnett shale in Texas, the first large shale play in the United States to be tapped by using a combination of horizontal drilling and hydraulic fracturing.
“It’s the oldest shale play and we’re still having discussions on the best way to complete the Barnett,” he explains. “We’re not there yet, and that’s an old play.”
Kent Bowker, manager at Bowker Petroleum LLC, says the attraction of the Utica is that the shale formation is laden with organic-rich limestone, which enhances the permeability of oil and gas hydrocarbons in the rock, making these resources easier to retrieve.
“We’ve never seen anything like this in the Barnett,” Bowker relates. “It helps actuate the permeability and recovery more so than any other shale I’ve been involved with. I’m going to say it’s big.”
Much of developing the Utica also hinges on the price of natural gas, Walker says. When natural gas prices plummet – they continue to hover around record lows – it leaves less capital to reinvest in drilling operations.
That’s why most of the activity in the Utica has centered in the more profitable wet gas areas, but even these prices are affected by overproduction.
The biggest challenge isn’t necessarily from overproduction but over-regulation by the U.S. Environmental Protection Agency, Walker continues.
“I have great concerns over the EPA,” he says. “It’s the greatest threat our industry faces.”
The EnerVest CEO contends that the agency failed to shut the industry down in the wake of questions involving the use hydraulic fracturing, and the EPA, in his opinion, has distorted factual and scientific data.
“They’re really interested in forcing us into ‘green completions’ and closed-loop systems [that place much more cost on drilling and completion operations],” he says. “They have their own agenda, and that agenda is to damage our industry. It’s a very dangerous situation.”
Supply and demand is always an issue, Walker adds. While ventures to boost the use of natural gas by developing compressed natural gas, or CNG, for vehicles and transitioning energy plants from coal power to gas are helpful, it all boils down to a simple question.
“Are we going to have a cold winter?” Walker asked. “Because if we don’t, there’ll be too much gas in storage and that’s not only going to affect 2013 gas prices, it’s also going to affect 2014 gas prices.”
Editor's Note: This story is on the front page of the new December edition of The Business Journal. CLICK HERE to subscribe.
Copyright 2012 The Business Journal, Youngstown, Ohio.