By many accounts, the Utica shale in eastern Ohio is a shale play worth waiting for. While many producers are quietly gathering acreage, and excitedly awaiting test well results, midstream operators are approaching the Marcellus and Utica shales with growing optimism. All signs indicate that the Utica will take off running, with dry, oily and wet trends much akin to the West Texas Eagle Ford shale play.

To meet this growing enthusiasm, many midstream operators are taking their first small steps to support new upstream development. Some of the plans include pipeline conversions to meet natural gas liquids (NGL) pipeline capacity demand.

One of the most beneficial aspects of the Utica is that, from a midstream perspective, in-place infrastructure that currently exists will provide cost-savings, from a producer's standpoint, but the varying trends and large geographic location will provide demand for new midstream projects. Easily comparable to the Eagle Ford shale, the Utica is more liquids prone in its western region, though liquids yields have yet to be revealed.

Early indicators have many producers excited. During Rex Energy Corp.'s most recent conference call, senior vice president of exploration, David Pratt, made big nods towards the play's potential with an announcement of the Warrior Project in Carroll County, Ohio. According to Pratt, "We are in the process of closing on about 11,000 net acres, subject to title, prospective to the Utica shale."

Rex Energy will operate within the wet-gas window of the play, according to Pratt. "We believe that this position should provide Rex with a good entry point into this portion of the Utica. The acreage acquisition, along with Butler County operated acreage, and a small position in Mercer County, Pennsylvania, will bring our potential leasehold to about 83,000 gross acres and 53,000 net acres. Also, we are currently drilling our first Utica shale well in Butler County and hope to fracture stimulate it in the third quarter."

Also, Chesapeake Energy Corp.'s Aubrey McClendon and Range Resources Corp.'s John Pinkerton have been touting the shale's potential. No stranger to the Marcellus and Utica shales, Range has long been credited with the first horizontal well in the Marcellus a few years ago, and is perhaps one of the first companies to reveal its zeal for the resource.

Despite the early buzz, many producers are holding their cards until more definitive proof is revealed. However, midstream operators like Dominion Transmission Inc. have not been slow to react.

Although Dominion Transmission Inc.’s Hastings, West Virginia, plant has been through several renovations, it still exists and operates today as a modern processing and fractionation facility.

Early moves

In fact, new midstream projects that have been recently unveiled, such as Dominion's Natrium processing and fractionation facility, will allow producers the opportunity to develop liquids-rich production in the liquid-rich areas of the Utica shale. The technology is impressive, but such complex operations are entirely old hat for Dominion, which has been in the processing business for almost 100 years.

In 1913, Dominion built the first oil absorption plant in the U.S., at Hastings, West Virginia, about 20 miles south of the new Natrium facility. Although the Hastings plant has been through several renovations, it still exists and operates today as a modern processing and fractionation facility.

The Natrium facility is a natural response to the shift in Appalachian production from dry-gas to liquids-rich product, a shift that occurred due to the economic benefits resulting from the rise of the price of oil and the low price of natural gas. This new facility will be near the Ohio River in Natrium, West Virginia, close to the NGL-rich trend in the Utica and Marcellus shale plays.

The first phase of construction, which is more than 90% contracted, is expected to be in service by December 2012. According to Donald Raikes, vice president of marketing and customer service for Dominion Transmission, "We've been working on this for over a year. The drivers for the project were the northern panhandle of West Virginia, the western Pennsylvania area of the Marcellus shale and the Utica. In these areas, there is significant acreage containing those much-desired liquids."

He adds, "We've already started to revitalize that pipeline network, in terms of converting a dry-gas pipeline system to wet service. These converted pipelines will become a natural header system for the Natrium facility."

Due to the economic uplift from the wet-gas shale, demand for capability to handle natural gas by-products is, and will continue to be, very high. One of the main advantages to the new facility is its position, so Dominion will have multiple options to get those products to market.

Raikes says, "The producers are going to the wet plays because of the liquids uplift. We have a lot of experience in marketing NGLs. Both Hastings and the new Natrium plant will have multiple outlets for the liquids products in order to make sure that we get the most value. Barge, rail, truck and pipeline can be used at both plants to access the premium opportunities for our customers."

Also, Raikes sees big things for the Utica shale's future, though most producers are reticent to speak about well results too early. He explains, "If you look at the announcements made so far, it is like any shale that is in its infancy. It's slowly starting to expand, though I think the producers involved are quiet for good reason, because they naturally want to make sure that they can maximize the value of the asset."

Recently, Chesapeake has come out with some big announcements for development of the play—good news for Dominion as the upstream explorer is an anchor shipper at its Natrium facility.

"That plant is going to be capable of handling 200 million cubic feet (MMcf) of gas per day, with the ability to process 36,000 barrels (bbl.) per day of liquids, in phase one," explains Raikes. "We are working with the producers in both the Utica and the Marcellus to finalize phase one and are now subscribing phase two of the Natrium plant."

“In addition to Natrium, which we have the capability to expand, we are also looking forward based on the potential size of the play. There are other locations that we think are strategic in Ohio, that both overlay the Utica play, and our pipeline systems.” — Donald Raikes, vice president of marketing and customer service, Dominion Transmission Inc.

New stakes, old positions

Concerning bottlenecks in the marketplace, Raikes is optimistic that existing facilities and infrastructure expansion will be able to meet producer demand. "I think Dominion is blessed to have is a significant pipeline network in Ohio. It all goes back to the principle of location, location, location that is so vital in this industry."

Principally, the major challenge to building in the Utica in such an early phase, is managing the risk of over-building, building too soon or building in the wrong location. Raikes, acknowledging this concern, explains, "I think for the industry, when it comes to shale plays, such as the Marcellus and Utica, it's one of those typical chicken and the egg stories, regarding the development time frame."

Producers have spent a significant amount of time and money on acreage, and as they start to develop and delineate their own positions, they also have to think in terms of the midstream and downstream network, also in terms of both processing and pipelines, according to Raikes. The development horizon for those can be anywhere from one to three years, depending on the size and scope of the project.

"Getting sufficient commitments early can be a challenge on the pipeline side," he says. "You need to receive all the necessary approvals and construct the facilities to meet producers' timelines. The timeline for this can be tricky if you don't see those commitments early-on."

Enthusiasm for the Utica, even in the early stages, is catching. Raikes says, "We are really excited about the Utica shale play, and also about what we've seen in the Marcellus, which is in full development mode now. However, the Utica has really only developed steam in the last few months. Though there has been a lot of buzz about it, now you are starting to see people come out and talk about what they think the possibilities are."

Though the shale is in its early stages, and announcements have just begun to pick up steam, acquiring those shipper commitments has not been an issue for Dominion. In the Marcellus, Dominion has lined up binding commitments with producers that represent over 800 MMcf per day of Marcellus supply that it will be flowing during the next three years.

"In addition to Natrium, which we have the capability to expand, we are also looking forward based on the potential size of the play. There are other locations that we think are strategic in Ohio, that both overlay the Utica play, and our pipeline systems. So we are looking at other locations where we can potentially develop additional processing and fractionation," he says.

Early welcome

While political and cultural pushback has been an issue for some pipeline projects, Ohio's climate has thus far been welcoming to the recent shale construction projects and developments. An unfortunate truth of the current economy is that jobs are in short supply.

However, according to Raikes, the Natrium project will provide close to 45 new positions. "The reception in Ohio and West Virginia has been very positive. When you look at the states and the current economy, the potential for jobs and new infrastructure is very exciting. When you've seen what has happened with the Marcellus, you realize the potential of the Utica and the positive impact both will have on the state and local economies for quite some time."

Also, shifting patterns of market areas will impact both U.S. and Canadian markets. "The Northeast was the premium market area. Now, it's converting from a market area to both a duel market and supply area. That is strictly thanks to the Marcellus and the Utica shale plays," he says.

Such is the play's potential that Raikes feels that the Utica will cause continued lessening of Canadian gas imports. "It's been very interesting to see the drop off of Canadian supplies that have been historically imported in the U.S.," he says. "But we've seen that drop off a lot over the past few years. Utica will just help that along, and that will occur at a continued pace. There has been a lot of discussion about the potential to export gas from the U.S. into Canada, and you've seen some projects that are already moving forward."

As a result of the growing supply in the Northeast, Dominion might make its Cove Point terminal a bi-directional facility, based on the projections of gas production from the Utica and Marcellus shales. "We have had a significant amount of interest from both the Northeast producers and overseas markets," he says.

According to Raikes, this is a prime time to be in the midstream business. "When you look at the opportunities in the energy sector versus a challenged overall U.S. economy, it's easy to come to the conclusion that it's good to be in the energy industry. The Utica is a great growth opportunity."