Utica Rising

Thanks to today’s technology that unlocks producible energy from unconventional plays, the U.S. is sitting on a wealth of resources. One of the most exciting up-and-coming plays is the Utica shale in Ohio.

The Utica, which lies about 7,000 feet deep and under the Marcellus shale at the Pennsylvania state line, rises to just about 2,000 below the surface in eastern Ohio. The Utica is a rich target, found at accessible depths, and located in a state comfortable with oil and gas development. Already, corporate deals are under way in the upstream space to optimize development in the play, and deals and joint ventures in the midstream space are closely following.

Big steps into the Utica

This spring, Williams Partners LP acquired Caiman Eastern Midstream LLC in a $2.4- billion deal as a step in its strategy to establish a major footprint in the liquids-rich Marcellus and Utica shales.

The acquisition of Caiman Eastern Midstream, a subsidiary of Caiman Energy LLC, moved Williams Partners, of which 68% is owned by Williams Cos. Inc., well on its way to becoming a leading provider of gathering, processing and transportation services for oil and gas producers in the northeastern U.S.

The deal helped create Williams Partners' new Ohio Valley Midstream business with operations in northern West Virginia, complemented Williams’ existing business in southwestern Pennsylvania and created a platform to expand into eastern Ohio.

As background, the systems are anchored by long-term contracts, including gathering dedications from 10 producers that are developing some 236,000 acres that represent about 100 million cubic feet (MMcf) per day of processing commitments.

In the Marcellus, the partnership has gathering dedications on 1.2 million acres and expects volumes there to reach 5 billion cubic feet (Bcf) per day by 2015. Williams Partners is building the Susquehanna Supply Hub, with plans for 3 Bcf per day of take-away capacity by 2015 to deliver Marcellus production into four major interstate gas-pipeline systems. In western Pennsylvania, the company owns 51% of the 1,400-mile, 230-MMcfper- day Laurel Mountain Midstream gathering joint venture and acts as operator.

Additionally, Williams Partners plans several expansion projects for its eastern Pennsylvania Interstate Transco pipeline and has an ongoing open season to gauge customer interest in its proposed Atlantic Access project, which will have implications for Utica producers as well. On July 10, Williams made a specific entrance into the Utica shale, when it announced that it became a funding partner in a joint venture with Caiman Energy II.

Williams Partners, EnCap Flatrock Midstream, Highstar Capital and Caiman Energy II management will invest some $800 million to develop gas, natural gas liquids (NGLs) and oil gathering and processing infrastructure in Ohio and Northwestern Pennsylvania. Williams Partners anticipates investing some $380 million in the venture during the coming few years.

“After Williams Partners purchased Caiman’s West Virginia business in the second quarter, Jack Lafield of Caiman II decided that he wanted to have some more fun and pursue opportunities in the Utica in Ohio,” says Frank Billings, Williams’ vice president of midstream, eastern region. “Williams was confident about its Caiman purchase so we decided we would invest equity capital with Jack to invest in Ohio.”

The primary driver for the second arrangement was Williams’ desire to broaden its reach across Pennsylvania, West Virginia and Ohio.

“This is a non-traditional method of investment, as opposed to having Williams develop the infrastructure as a stand-alone entity,” Billings explains. “This allows us to utilize Caiman’s capabilities and skills to help us expand our footprint in the Utica, as an investment, and not necessarily draw down on our deployed resources in West Virginia and Pennsylvania at this time. We can continue to focus on our existing customers, while also having the opportunity to invest in Caiman’s development of its relationships with Utica producers.”

Opportunities and challenges

Williams and Caiman Energy are also developing plans for an NGL pipeline. “We think that the NGL pipeline will be needed to support the growth of the Utica,” says Billings. “We tend to be focused on the large-scale gas transmission and NGL pipelines, and we will be looking for those opportunities in the Utica and the Marcellus, to give producers access to liquid NGL and natural gas commodity markets.”

Billings sees the best NGL market opportunities are located on the Gulf Coast, as opposed to “niche markets” such as Sarnia, Ontario, in Canada, where the ethane market is fairly small, he says. “We don’t feel that market is a long-term, sustainable market that can support the expected Utica growth, nor do we think the local northeastern U.S. markets for propane and other heavy NGLs can support it.”

On July 23, Williams Partners announced its intention to acquire Williams’ 83.3% interest in the Geismar olefins-production and petrochemical facility in Geismar, Louisiana. The light-end NGL-cracker facility takes in about 37,000 barrels (bbl.) per day of ethane and 3,000 bbl. per day of propane to produce about 1.35 billion pounds of ethylene annually. A $400-million expansion is under way, scheduled for completion by late 2013, which will grow ethylene production by 600 million pounds to 1.95 billion pounds annually. The addition of olefins production to Williams’ business should ensure better predictability of cash flows by immediately reducing its exposure to the volatility of the ethane market by nearly 70% after the deal closes. And, it would nearly eliminate that exposure altogether by 2014. Williams Partners believes that ethane markets will continue to experience periods of volatility as infrastructure lags new supplies from shale-gas production. Yet, the company expects ethylene demand to remain strong because ethane is significantly less expensive than crudeoil- based feedstock for petrochemical manufacturing. “The biggest challenge in the Utica is that there still needs to be quite a bit of work done to determine the boundaries of the formation and to see how prolific it will be,” says Billings. “Its productive capability is still fairly unknown. But midstream and E&P companies are getting more comfortable operating in the Northeast, and the technical and physical installations of infrastructure issues are being resolved. The industry will have to work well with the local stakeholders and communities to ensure the development is well thought out.”

Overall, the opportunity for Ohio and its communities to see significant economic growth and long-term employment from the shale play is high, says Billings. “It appears that there is quite a resource here that will be producing for a long time, which will provide generational jobs in the area.” Close to home, Billings’ daughter works for Williams in Tulsa, Oklahoma, and she is third-generation Williams. “Some of our assets in Wyoming and New Mexico have been producing since the 1950s, and we have had multiples of families working those facilities during the past 60 years,” he says. “I see that same opportunity being developed for Ohio, Pennsylvania and West Virginia.”

The opportunity for generational jobs is especially true in the midstream business because once the infrastructure is built out, the assets will require operators for years to come, he says. “To me, that is the biggest benefit of everything that we are doing up here, along with great domestic energy growth for the U.S.”

Evolving Utica plans

Today, Caiman Energy II is focused on providing midstream services to Utica producers. While it has great regional experience in the Marcellus, Caiman managers are aware that the Utica has its own quirks and obstacles that will require different tactics.

“It’s just like any other shale play—it’s different,” says Jack Lafield, chief executive of Caiman Energy II. “You can’t take a rig from the Marcellus and go over to the Utica and just drill a horizontal well with the same fracturing technique. Each shale is different.”

While Caiman laid dual gathering and condensategathering lines for the Marcellus, it can’t necessarily do the same for the Utica, where it’s difficult to pull condensate from remote areas. Utica’s volatile condensate requires higher-pressure maintenance, as opposed to normal condensate, which can be placed into an atmospheric tank. In total, Caiman thinks that it will need to manage 10 times the amount of liquids-rich gas from the Utica than from the Marcellus.

“The Utica is considered a particularly challenging play since its development is so young,” explains Lafield. Producers and developers still need time to research and understand the area. They are still determining the best ways to move gas and liquids, as well as the necessary skills and assets they will need. Each aspect is being analyzed to ensure the right facilities are in place. “You don’t really have a second chance; you have got to do it right the first time,” says Lafield.

Currently, Caiman is working with producers and independents as it zooms in on three areas—Noble, Carol and Trumble counties. The latter is expected to pose development challenges, since it has little residue gas take-away. Carol County, meanwhile, is currently a hub of activity. Its popularity is due to its position in the center of Chesapeake Energy’s acreage.

“As everybody maneuvers here, the key is to make sure your facilities are flexible enough to provide the service the producer is looking for,” says Lafield. “There are a lot of facilities being put in. By my estimates, $25 billion could be put in the Utica in the next 10 years by midstream players. It’s a lot of money.”

Caiman’s old Marcellus assets, which were sold to Williams, could come in handy. The companies are considering bringing rich gas over to Williams’ West Virginia facilities, which would give them a jump start on processing. “Interface with existing facilities gave us a great option to provide earlier revenue to the producer than what it would be if we had to wait until all the facilities are in place,” says Lafield. “That was actually our strategy before Caiman I was sold to Williams.”

Although Caiman does not yet have physical assets in the Utica, that’s set to change. The company hasn’t signed agreements yet, but it has a 200 MMcf-per-day cryogenic plant slated for delivery in December 2012. The company’s first uploading facility should be in service by mid-2013.

It is looking to build a facility, pipeline and gathering systems around a region capable of handling a minimum of 600 MMcf per day. Creating such an elaborate system will be a costly and risky adventure. Lafield says it’s a risk he’s ready to take.

“We feel strongly that Utica is a good place to be,” he says. “We build facilities along the line of what producers forecast. We work alongside producers day-to-day to understand and so we can be ahead of the game. Producers know that we put in very high-quality facilities and nothing is shortchanged at all. It’s important to put those top-class facilities in for the big players and then be able to turn it over to the top-notch, long-term midstream group.”

Existing assets and new production

Elsewhere, Spectra Energy Corp. has been an enviable legacy position in the Utica play. One of its main pipelines, the Texas Eastern Transmission Pipeline, runs from the Gulf of Mexico to Staten Island, New York. The large-diameter pipeline runs through southern Ohio and into West Virginia, Pennsylvania and New Jersey; it cuts through the Marcellus and into the southern portion of the Utica. The pipeline has existed for 65 years—historically to move gas from the Gulf Coast to the Northeast— and Spectra is now exploring ways of using it to take gas away from the Utica.

“It’s been recently said that with this development of shale halfway along that pipeline path—first in Pennsylvania and West Virginia in the Marcellus and now in Ohio with the Utica—these pipelines are proving useful for the receipt of production in that area, which is good for the markets, and it’s good for the producers,” says Brian McKerlie, Spectra’s vice president of business development. “It’s becoming very efficient.”

Spectra is looking to expand its pipeline system, which would allow it to deliver additional gas to markets in the Northeast. As part of those plans, Spectra developed the Texas Eastern Appalachian to Market 2014, or TEAM 2014, project, which is expected to be in service in late 2014. The project will result in a capacity expansion of up to 600 MMcf per day with the commitments by two anchor shippers. The expansion will move the Marcellus shale gas to markets in the Northeast, Midwest and South U.S.

“We’re starting to see that in order to access multiple markets, producers are coming to us looking to move gas not only to the east, which is a conventional flow, but also the Southeast markets, which is becoming a new flow for these basins,” McKerlie says.

Although Spectra is doing plenty of forward thinking, it is working with producers on their timelines. Just as development proceeded slowly for the Marcellus, Barnett and Haynesville shales, companies are taking time to learn more about the Utica. Experts are working to understand the area’s geographical lines, especially since the play transitions from oil through wet gas to dry gas. Once the “lay of the land” is mastered, companies will start developing gas-processing infrastructure before taking the gas and NGLs to market, says McKerlie.

Industry teams have already been studying the Utica and working on it for years, he explains. The hard work is expected to materialize within the next year, when products start arriving in markets. “During the past few years, producers have been really focused on staking out what they have and pinpointing the areas of wet gas, dry gas and oil,” he says. “Obviously, with low natural gas prices, producers are working hard to be able to explore the areas that provide the liquids and, if possible, the oil. The development has been following that path to determine where the production and processing will be.”

That led Spectra to its Ohio Pipeline Energy Network, or OPEN, project, which will expand the Texas Eastern pipeline to connect Ohio’s Utica shale gas to the existing Texas Eastern system. “The project is intended to reach up into the processing plants and give the producers an outlet for that gas and a way to move it off to markets beyond just the regional markets,” says McKerlie. The project will allow producers to reach a variety of markets, which will ensure that a surplus in supply will not create depressed regional pricing.

A third project under development, called NEXT, will enable Spectra to move Utica production to Ontario, Canada, where Spectra’s subsidiary, Union Gas Ltd., operates the Dawn Hub, a key natural gas From there, the gas will flow to various parts of Ontario and Quebec. The project is expected to be completed in 2015 or 2016.

“That’s pretty exciting, because that allows producers to access a market directly that they have not been able to access before,” says McKerlie. “It’s consistent with what we’ve been trying to achieve, which is to provide these producers with opportunities to reach markets beyond the production market that they’re in.”

Sustainable development

Certainly, the impact of Utica development on Ohio citizens and communities will be remarkable.

Already, the rigs are at work. As of the end of July, horizontal drilling targeting the Ohio Utica shale reached an unexpected landmark. Specifically, the Utica now employs as many rigs as the Haynesville shale in Louisiana. Both the Utica and the core Haynesville reported 15 rigs drilling horizontally as of July 20, according to Hart Energy’s Unconventional Activity Tracker.

But these two regions are heading in opposite directions as of midsummer, with the Haynesville seeing a gradual erosion in activity in the wake of dry gas and low gas prices, while the Utica is adding incremental rigs and is well on its way to 30 units by year end. In addition, the neighboring Marcellus shale is losing some rigs as producers move away from dry-gas areas to seek the highvalue liquids of the Utica.

In anticipation of the continued success of Utica drilling, many Utica upstream and midstream operators are now focusing on community-friendly and sustainable development strategies and are coordinating and communicating development intentions early in the cycle.

In addition to the work by energy professionals to ensure safe and equitable operations, many city leaders and business owners in Ohio have begun to tout the play’s economic benefits to citizens, especially in areas that have been economically depressed for decades.

As a result, such organizations as the Ohio Shale Coalition and the Foundation for Appalachia Ohio are optimistic about the play’s potential to generate jobs and a steady supply of energy for the region.

“The Utica shale play has the potential to boost the economy in our entire state,” says Linda Woggon, executive director for the Ohio Shale Coalition. “Not only will this resource be helpful for the state’s oil and gas industry, but also for all of those businesses that will become part of the supply chain, and all of the businesses that will realize the economic effect from the induced economic activity.”

As an industry watcher, she has seen the effects of drilling rigs moving into Ohio. “We have three counties where there is a tremendous amount of activity going on. We also see a lot of exploration in a number of other counties to explore the potential of the play for further production,” she says.

The Ohio Shale Coalition works closely with the oil and gas industry and focuses mainly on doing “everything possible” for the Ohio businesses that may become part of the supply chain. “We are helping to build the supply- chain capacity by helping businesses understand what is required to become a vendor or supplier, and by helping to make connections with the energy industry.”

Although the Utica play is still in early development, the coalition expects to see some challenges, particularly with respect to infrastructure issues such as roads. “We have yet to experience significant fast-growth issues that I know will come, but we are preparing for them,” she says. “However, clearly, there was a run on our government offices, such as our deed recorder’s offices, as companies came in to lease land. We saw a tremendous amount of activity there.”

In Ohio, members of the coalition have a lot of experience with oil and gas, she says. “It’s not a new industry for us, and we have infrastructure in place. While I don’t expect that we won’t experience growing pains at all, we are in a good position to be prepared.”

The majority of the Ohio state legislators support Utica development, including hydraulic fracturing and horizontal drilling, says Woggon. “They are anxious to see the economic benefits that we will reap. We have worked hard during the past few years to modernize our regulatory system in Ohio, even prior to rigs moving into the state.”

Since the coalition was formed a little more than a year ago, membership has surged to more than 400. Most members are businesses that will benefit either as direct or indirect suppliers or due to increased economic activities. One of the group’s first projects was an economic assessment study for the state. Researchers from Cleveland State University, Ohio State University and Marietta College contributed to the report. The results were rolled out in late February of this year and can be found on the Ohio Shale Coalition website.

“Although it was a conservative study with conservative assumptions, this study concludes that the Utica development will have a very significant impact on Ohio’s economy. It projects that, by 2014, an additional 65,680 new or supported jobs will be created from a total investment of close to $10 billion,” Woggon says.

Also focused on sustainable development is the Foundation for Appalachian Ohio (FAO). This organization is working with industry partners in making meaningful, long-lasting investments in the region. The non-profit group wants resource profits to spill into the 32 counties of Appalachian Ohio, where communities are struggling with poverty and poor school performances.

“I think shale has helped us say: ‘My gosh, there’s a lot of wealth, and we’ve got to make the very most of this,’” says Cara Brook, president and chief executive of FAO. “We have got a place that has dealt with generations of poverty. Now we see so much wealth coming that it would be irresponsible for us not to figure out how to use it give us generations of prosperity.”

Although development in the Utica is young, FAO is already started to see giveback. Recently, it received a donation from a company involved in packaging lease agreements for residents. “They wanted to set an example of giving back,” says Brook. The money will be used to set up funds to support principals in meeting the special needs of students.

Months earlier, in Harrison County, FAO supported the creation of a community foundation and school system foundation. Ultimately, it hopes to see such foundations exist in all its communities.

It also wants to secure more philanthropic gifts, raise the gross domestic product of certain regions and help new businesses get started. Jobs Ohio has helped accomplish that last goal by raising $3 million that will be used to build an economic development network. As well, FAO is seeking investment for health, arts, culture and education.

“With these opportunities come responsibility,” says Brook. “This is very precious capital, and sure there’s a lot of it, but even if it’s here for decades, it’s still limited. We have got to be really responsible with how we deploy that. We’ve got to work together and encourage collaboration.”