The upcoming development of the Utica shale poses both risks and great promise for the state of Ohio, which needs to make wise choices now if it wishes to fully capitalize on the expected production from the formation, according to a panel of industry representatives. Although the success of the formation is hardly a foregone conclusion, all signs at the moment underscore its great promise, meaning the state needs to have policies, infrastructure and a trained workforce in place to handle the needed capital investments expected in the next few years.

The recent conference, entitled "The Ohio Governor's 21st Century Energy Economic Summit," included a panel on the impact of the Marcellus and Utica shales on the Ohio economy. The energy conference was held at the campus of Ohio State University in an effort to plan for the upcoming production of natural gas, liquids and crude that producers believe the formation contains. The Battelle Memorial Institute, a private, nonprofit applied science and technology charitable trust, organized the forum in part to discuss ways to avoid the excesses seen in the nearby state of Pennsylvania as the Marcellus shale was developed.

“There is oil and gas down there and if we can extract it economically, then it will have a huge impact on economic activity for Ohio.” — Jerry James, president, Ohio Oil and Gas Association

Jerry James, president of the Ohio Oil and Gas Association and president of Artex Oil Co. of Marietta, Ohio, said the unconventional shale formations are a "game changer" for the national energy scene as well as the state of Ohio. The renewed source of energy is shifting, which could have "huge implications for the state of Ohio."

James spoke in support of the state's energy bill, which allows producers to get the reserves and bring them to market while protecting the environment. "Ohio can be proud that its citizens are well protected," he says.

The Utica shale play could be a huge source of growth for jobs-starved Ohio in years if producers can withdraw its reserves economically. "There is oil and gas down there and if we can extract it economically, then it will have a huge impact on economic activity for Ohio," he says. "If we can get this to work, it will have the most dramatic impact on jobs in southeastern Ohio in generations."

The expected jobs would have a huge impact on the state's industrial base, which is largely the result of the oil and gas industry that goes back 150 years. Before large reserves were discovered in Texas and Saudi Arabia, Ohio was the largest producer of world's leading source of oil in the late 1800s. In addition, Ohio was producing and distributing natural gas to homes and businesses in the late 1800s.

"The oil and gas industry is critical to the history of Ohio," he says. Industrial manufacturing came later as a result of the development of the state's natural resource base. Since the 1970s, manufacturing has struggled because the cost and availability of affordable energy rose abruptly. With the development of unconventional gas plays, U.S. natural gas production is at an all-time high, which has "tremendous implications" for the state of Ohio because of its proximity to the Utica and Marcellus plays.

James and other industry representatives expect the abundance of natural gas in the U.S., and particularly Ohio is expected to hold down the price of energy for years and lead to a resurgence of manufacturing in the region.

The energy equivalent of a gallon of compressed natural gas, at today's natural gas prices, is about 40 to 50 cents per gallon, James says. "If you increase the supply of energy, its price will decrease."

“I’ve been doing this now since I was 21 years old and that was 31 years ago and I’ve never been more excited about what I see happening in the industry. I’ve never been more excited about a play that I’ve seen develop than what I’m seeing right here in the Utica shale in Ohio.” — Aubrey McClendon, chairman and chief executive, Chesapeake Energy Corp.

Aubrey McClendon, chairman and chief executive of Chesapeake Energy Corp., agreed the region shows great promise. "I've been doing this now since I was 21 years old and that was 31 years ago and I've never been more excited about what I see happening in the industry. I've never been more excited about a play that I've seen develop than what I'm seeing right here in the Utica shale in Ohio," he says.

McClendon also said it was hard to predict the worth of the Utica shale to Ohio's economy, in part because a lot of it depends on the price of natural gas. The overall value of the play to the state of Ohio could be as large as $500 billion. "If you begin to think about spreading that kind of wealth across five or six counties in east-central Ohio, I think you begin to see that this will be the biggest thing, I think, to hit the state of Ohio economically since maybe the plow or the seed or something," he said. "This is going to be truly extraordinary."

Chesapeake, based in Oklahoma City, currently has five drilling rigs in Ohio. It will have as many as eight or 10 by the end of the year and twice that by the end of 2012 and 40 by 2014.

Today, there are just under 2,000 operating in the U.S. The Utica is a play which will attract over 100 rigs at anytime, each of which will be responsible for 200 jobs every 30 or 45 days, he says. The process of drilling and treating natural gas is a relatively labor-intensive process which requires a wide range of skills. Currently Chesapeake has 800 jobs open nationwide, with average pay around $75,000 annually, he says.

The industry needs individuals for a variety of jobs. Many require specialized skills and a PhD, while others are less demanding and would make good jobs for a high school dropout, he says. McClendon pointed to studies which showed the development of the Marcellus shale in nearby Pennsylvania which created at least 150,000 jobs and says there is no reason why the same couldn't happen in Ohio.

Skilled labor

Karen Buchwald Wright, president and chief executive of Ariel Corp., manufacturer of natural gas compressors, based in Mount Vernon, Ohio, said the development of the Utica means additional growth for her business and for the company's 73 Ohio suppliers.

"Eventually every natural gas well, and many oil wells, need compression," she said, "and that's great news for us. However, the last few years have seen a diminishing pool of skilled machinists and mechanics. The opportunity for Ohio's manufacturers to supply the equipment needed by the development of shale oil and gas has put everyone in a difficult position. We have been having trouble finding the skilled workforce that we need to meet the demand we expect."

“We have been having trouble finding the skilled workforce that we need to meet the demand we expect.” — Karen Wright, president and chief executive, Ariel Corp.

Consequently, Ariel has partnered with an Ohio technical college (Stark State) to develop training programs for machinists and assemblymen (mechanics) to train the workforce Ariel and other Ohio companies will need. Ariel Corp. is one of the largest manufacturers in Ohio and, combined with their Ohio suppliers, accounts for about 8,000 jobs in the state. The development of the Utica shale oil and gas will benefit thousands of Ohioans and provide a tremendous boost to the state's economy.

Jack Miller, chief executive of Ken Miller Supply Inc., full-service oilfield supply stores based in Wooster, Ohio, said the additional drilling in shale plays has meant a huge increase in its business. About 70% of its business is currently tied to shale production which is still in its infancy in Ohio. He expects additional growth as producers develop the Utica.

Gary Heminger, president and chief executive of Marathon Petroleum Corp., says the industry requires a wide range of skills, but recruits aggressively people who have a background in math, science, technology and engineering. "If you can come with one of these skills, we can teach you the rest," he said.

Douglas Matthews, senior vice president, tubular operations at United States Steel Corp., agreed the development of the Utica could have a huge economic impact on the state. The Pittsburgh-based company has two seamless-steel mills at their at Loraine, Ohio, plant. The future of the plant's #4 mill was once in question prior to the development of the Marcellus shale because its location put it at a geographic disadvantage.

"Five or six years ago, we were trying to figure out the future of these two seamless mills," he says. The development of the Marcellus shale changed that, giving the plant renewed economic activity, lower energy costs and a nearby customer base.

"As the Marcellus developed, it gave us the certainty to make significant capital investment," he says. U.S. Steel has invested about $100 million in the plants to develop its capability.

The development of unconventional natural gas in the U.S. benefits U.S. Steel in multiple ways. The industry creates a demand for its products. In addition, the additional production lowers energy costs that U.S. Steel needs to produce those products. U.S. steel is a huge consumer of energy. Last year, it consumed 100 million Btus of natural gas, 8.2 million tons of metallurgical coal and 1.4 million tons of other types of coal. The additional natural gas supplies from the Marcellus shale on the market have lowered their energy consumption costs and helped made their products more competitive. Natural gas usage saves the company money over the use of coal.

Cheap gas

In addition to jobs, executives at the forum said the development of the shale will contribute to the growing supply of natural gas in the U.S.

“For the first time, I see an opportunity where we could actually be exporting from the Midwest. I really see that this can be beneficial to all customers.” — Gary Heminger, president and chief executive, Marathon Petroleum Corp.

The ultimate impact of the additional production is hard to predict, but McClendon said cheap natural gas could last decades. Even as supply is well established, there is a growing dependency on it on the demand side: 61% of American homes are heated from natural gas, and 35% of the electricity generated and 100% of the fertilizer is made using natural gas. It is a component of many petrochemicals, glass, steel, ceramics and plastics. In the next five years, he expects the use of natural gas to rise further.

It's too early to determine precisely how much gas reserves are in the Utica, but McClendon says they are large. "How big is it? We don't know." Initial surveys show the play is similar to the Eagle Ford shale in South Texas, which has a dry gas component, a liquids-rich component and a crude component.

McClendon says he expects operators in Ohio will be dominated by about 10 companies, which could invest as much as $200 billion in the region over the next 20 years. Given this, it's hard to predict the ultimate impact on the state, but he foresees that producers will need to invest as much as $10 billion per year every year for the next two decades to develop the reserves.

John Walker, president and chief executive of EnerVest Ltd., a Houston-based oil and gas company, said the impact of the expected natural gas reserves from unconventional shale plays is hard to predict. Recently, U.S. natural gas production has hit highs "one week after another" because of the unconventional shale plays and reserves have gone from 11 years of supply to "well over 100 and possibly 200," he says. He predicts low natural gas prices for five to 10 years as a result of the additional production. "When you're in the middle of a transformation, you can't always appreciate what is happening."

EnerVest and its partner, Chesapeake, have a good idea of the extent of the Utica shale play because of cores, log analysis and more than 10 horizontal wells drilled. EnerVest has 8,713 conventional wells operating in Ohio. Some of these wells have passed through the Utica to get to the natural gas from conventional sources in Ohio. It has digitized and studied these logs in cooperation from scientists from Chesapeake.

"We have a very good picture of the Utica from all of this," he says. Still, both companies are testing the limits of the Utica in their exploratory wells.

Challenges

One of the challenges facing the industry is to extract crude and natural gas from nano spaces, as little as 1/100 of the width of a human hair. Industry representatives say the process of withdrawing natural gas and liquids from the Utica shale requires hydraulic fracturing, but stress that the technology is well established and safe. Hydraulic fracturing was first implemented in oil wells as early as 1949 and, since then, the industry has completed 1.2 million fracturing jobs as part of the production process. It is so prevalent in the industry that 90% of the natural gas produced in the U.S. comes from wells which use this technology.

Repeated studies have shown the technology to be safe. "We feel very comfortable about this process," Walker says. "I think it's time we stopped studying this—because we get the same result every time—and started studying how to develop the Utica and create jobs.''

Another challenge facing the industry today is to find ways to reduce the costs of drilling. In the early days of the development of the Barnett shale, Walker said it took 40 days to drill a well, at a cost of $5 million to $6 million each.

“When you’re in the middle of a transformation, you can’t always appreciate what is happening.” — John Walker, president and chief executive, EnerVest Ltd.

Now, as operators gain experience and move to pad drilling, it takes as little as 12 days to drill a well, at a cost of only $2.1 million per well. The same has to happen in Ohio, he said, although he is unsure that the cost of drilling in Utica will ever fall to as low as $2.1 million. Currently, operators in the Utica are developing wells in isolation, which raises per unit costs and requires a separate pipeline to each well. With pad drilling, a pipeline can cover a formation as large as 1,280 acres, Walker said.

Another challenge facing Utica operators is that of rising tax regimes. Walker said that the success of the energy sector has made it a target for some policymakers to raise taxes. This effect is to lessen the incentive to drill in the first place because the margins themselves are slim, particularly with natural gas prices at $4 per million Btus.

Changing dynamics

Marathon's Heminger predicts the development of the Utica will change the dynamics of where energy is produced and how it is shipped in the U.S. Traditionally, Ohio has been the last in line for crude and refined products in the U.S. because most of the existing pipelines deliver crude from the U.S. Gulf coast north or from the West to East.

If the Utica shale produces as expected, it will allow crude and products to move up and down the Ohio River, which would change the availability and cost of the energy from the region. "For the first time, I see an opportunity where we could actually be exporting from the Midwest. I really see that this can be beneficial to all customers," he says.

Shortly after the conclusion of the conference, Chesapeake announced the initial results of its horizontal drilling wells in wet and dry gas phases of the Utica shale, in eastern Ohio and Western Pennsylvania. Chesapeake has drilled 12 horizontal wells in the discovery phase of its Utica shale play and has achieved strong initial production success in those areas.

Now, the company is processing the wet natural gas stream from three Ohio wells at a nearby processing facility where ethane is being minimally recovered due to temporary market limitations. It has multiple projects and initiatives underway to process and market future production of NGLs, including ethane.