Will falling prices put an end to Utica exploration?

Shale gas drilling
Source: Nightman1965-Fotolia

As oil and gas prices slump, shale gas drillers ask themselves whether their activities will remain economical. Consequently, Utica Shale, which underlies much of the north-eastern United States and adjacent parts of Canada, and which is said to hold 38.2 trillion cubic feet of technically recoverable gas, 940 million barrels of oil, and 208 million barrels of natural gas liquids, might experience a slowdown in exploration.

Natural gas prices in the United States are forecast to average $3.83 per million BTU through 2015, the U.S. Energy Information Administration predicted last week, but – as the portal Canton Rep points out – prices for Utica producers are closer to $2 per million BTU because of saturated pipelines.

Several years back, when natural gas prices fell but oil prices held up, shales which – like Utica – produced natural gas liquids (NGL) were more economical as the market value of NGLs is correlated with oil prices, rather than gas prices. But now the oil prices have fallen as well.

The cost of producing a barrel of oil equivalent (an industry unit of measurement) from shale is between $70 and $80, Tom Stewart, executive vice president of the Ohio Oil and Gas Association told Canton Rep. The exact break-even point differs for each company, depending on where they’re drilling, what they’re getting out of the ground and where they can sell it.

The shale gas boom has proven fleeting in some areas already. The example of the Haynesville Shale in Louisiana and Arkansas comes to mind. When the prices of gas fell below economical level, the production pretty much stopped.

So will the Utica meet the same fate?

The jury’s out. Some companies – like Chesapeake – continue drilling, looking towards efficiencies to bring the cost of production down. Royal Dutch Shell announced recently they’ve successfully reduced fracking time and costs using an innovative exploration method in Shell’s Groundbirch assets in Canada.

Other companies are hoping for a price rise once U.S. LNG terminals – currently under construction – become operational starting 2015. Still others look toward the Congress to repeal the oil-export ban which, they hope, will send the prices soaring.

When queried by Canton Rep, Allen Brooks, managing director of PPHB, a Houston, Texas-based energy investment firm, said he wouldn’t be surprised if some companies decided to sell acreage.

Tom Stewart, on the other hand. predicted companies will keep drilling the Utica because they need to develop the acreage they leased, but the pace might slow until more pipelines are built to carry natural gas to more profitable markets. This process has already started with UGI Utilities, Inc. announcing that it has become the first natural gas utility in Pennsylvania to directly connect its natural gas distribution system with a Utica Shale well.

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