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Wednesday, June 5, 2013

The Secret Behind 12% of Ohio's Oil Production

Marcellus Black Shale exposure on Interstate 8...
Marcellus Black Shale exposure on Interstate 80 at M.P. 307 (Photo credit: Wikipedia)
By Investment U

Columbus, Jun.5, investment opportunities .- A Forbes 2011 cover story described him as "America's Most Reckless Billionaire." Conversely, former Houston mayor Bill White spoke of him as being "at the forefront of those heroes" of America's natural gas exploration companies.

During his tenure, his company bought land in the nation's largest shale gas plays. But this controversial CEO was hot on one shale gas play in particular. When he spoke of it, he compared it to the Eagle Ford in Texas and the Bakken in North Dakota.

"It's the biggest thing to hit [this state] since the plow," he said of the play a couple of years ago.

At the time, his company had leases on 1.3 million acres in this shale play. He claimed the stake held $20 billion of hydrocarbons. And projections showed the shale play held as much as $500 billion worth of oil.

Regardless of his stormy reign as CEO of Chesapeake Energy Corporation (NYSE:CHK), Aubrey McClendon made some great calls regarding natural gas.

But I'm not here to talk about Chesapeake. I'm here to introduce you to the proverbial sweet spot of this shale play. Few folks have any idea what's going on... or how lucrative this opportunity could be.

The Secret Is Out

Texas is usually the first state an investor thinks of when it comes to oil production. But these days it's all about shale plays in Ohio. It's the region's Utica formation that McClendon was so excited about.

The Utica lies directly under the Marcellus formation throughout much of its region. But it comes closest to the surface in eastern Ohio.

After several years of secretive test drilling, the reality of the Utica is finally surfacing. In an article in Bloomberg, Argus Research analyst Philip Weiss had this to say about early Utica drilling data: "The results were somewhat disappointing. It's not as good as we thought it was going to be."

The acreage-buying boom has turned into an acreage-selling boom.

Wood Mackenzie analyst Jonathan Garrett has also studied the Utica. In the same Bloomberg article, he added his comments on the Utica: "People started to realize that, you know what, maybe the oil window of the play is not all it's cracked up to be."

The big problem isn't that the Utica doesn't contain the hydrocarbon riches once envisioned. In many cases, the rock formation is too dense. In other areas, there are insufficient underground pressures to allow the oil to flow.

Still, 11 companies are actively drilling in the Utica Shale.

What do they know that the analysts mentioned in the Bloomberg article don't? A lot more than they're willing to admit.

Take a look at the map below...

The area where the Utica begins to emerge from under the Marcellus formation represents the liquids-rich sweet spot of the Utica. That's where most of the drilling took place in 2012. According to the Ohio Department of Natural Resources (ODNR), there were 87 producing wells drilled in the Utica Shale last year.

Hitting the Sweet Spot

Those wells produced 636,000 barrels of oil and 12.8 billion cubic feet of natural gas. And not one of the wells was in production for the entire year.

Of the 87 wells drilled, 76 produced oil and 63 are in commercial production.

But here is the figure that is turning heads...

Those 63 horizontal wells accounted for 12% of all the oil produced in Ohio in 2012. That's a huge amount of oil from just 63 wells, especially considering the state has more than 60,000 conventional (vertical) operating oil wells.

Clearly, something big is going on in the Utica.

The numbers are fresh, which makes investing in the Utica formation riskier than buying into proven shale plays. But that's what makes the opportunity so exciting. We're witnessing the birth of what could be a huge moneymaker.

If this hotspot continues to pump out big numbers... somebody is going to get rich. ...

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