Chesapeake Energy leads the pack in Utica

Rachael Seeley,

Chesapeake Energy Corp., operator of the largest acreage position in the Utica shale, has this year set an ambitious development program that calls for doubling production from the play to more than 100,000 boe/d.

Chris Doyle, senior vice-president of operations for Chesapeake's northern division, said an "aggressive production ramp up" is under way. "I am exceptionally pleased with the continued performance and honestly, outperformance, of the team that we have working in the Utica," Doyle told analysts in May.

Production increased by 422% year-over-year to 50,000 boe/d in the first quarter, comprising about 60% natural gas, 30% NGL, and 10% oil. Since then, output has continued to increase. Production was roughly 75,000 boe/d in May, and the company expects it to exceed 100,000 boe/d by yearend.

Chesapeake was the first company to drill a well targeting the Utica shale in June 2011 and is now by far the most active driller with the highest production from the emerging play.

As of Mar. 31, the company had drilled 485 Utica wells, accounting for 56% of wells drilled to date. These include 274 producing wells and 211 wells waiting for completion or pipeline connection. "The one area that we still have some [well] inventories is the Utica, and we'll be working that down over the year," Chief Executive Officer Doug Lawler told the first quarter call.

Resource base

Around 4 billion boe of net recoverable resources is thought to be contained in Chesapeake's roughly 1 million net acres of Utica leasehold, which is largely concentrated in eastern Ohio. Most of the acreage, 540,000 net acres, is in the dry gas window. About 300,000 acres is in the oil window, and 250,000 acres is in the wet gas window.

In the first quarter of 2014, the company operated an average of nine rigs and connected 47 gross wells to sales. The average peak production rate of wells operated by Chesapeake in the fourth quarter of 2013 was 1,280 boe/d.

Plans call for operating seven to nine rigs across the play this year. In May, rigs were primarily active in the wet gas portion of the play in Carroll, Jefferson, Columbiana, and Harrison counties. The company has plans to further test the oil and dry gas windows of the formation later this year and figures more than 5,500 undrilled locations remain across its entire acreage position.

About 15% of Chesapeake's $5.2-5.6 billion capital spending budget will be allocated to the Utica.

The average Utica well now costs $6.0 million to drill and complete, down from $6.7 million in 2013. Chesapeake could reduce that cost to an average of $5.7 million by yearend but will instead spend an additional $1.4 million/well to improve completions.

Slides from the company's analyst day presentation show that Chesapeake intends to increase the lateral length of its Utica wells by 15% to more than 6,000 ft and raise the number of hydraulic fracturing stages 50% to 22 stages. It is also seeking to reduce the spud-to-spud cycle times on its rigs to 15 days from 20 days.

"Our focus for this year is capital efficiency. And what that means for us in the Utica is extending those laterals out and actually optimizing our completions," Doyle said.

Partnership considerations

The company's aggressive drilling campaign is underpinned not only by the resource potential of the play, but also by two partnership agreements signed in 2011.

The terms of a $2.3 billion joint venture agreement signed with Total SA in 2011 call for Chesapeake to spud at least 540 cumulative Utica wells by July 2015. Regulatory filings show that missing the target for any reason other than a force majeure event would bring a reduction in the reimbursement rate paid by Total for each well drilled in the joint venture area to 45% of total costs from 60%.

A reduction would not affect the value of the remaining reimbursement payments, which totaled $468 million at the end of the first quarter. All funds must be utilized by December 2018.

A separate deal signed with CHK Utica LLC, a subsidiary formed in December 2011, requires that Chesapeake drill at least 50 wells/year in an area of mutual interest.

Rising takeaway capacity

Chesapeake is confident that it will be able to secure the natural gas processing and takeaway capacity needed for its growing inventory of Utica wells.

Plans to increase recovery of ethane encountered a delay late last year due to severe winter weather and the unexpected shutdown of a gas processing facility owned by Blue Racer Midstream. The Natrium gas plant returned to service in in the first quarter, roughly coinciding with the start-up of an expansion of the Appalachia-to-Texas Express (ATEX) ethane pipeline owned by Enterprise Products Partners.

These developments enabled Chesapeake to begin increasing NGL recovery from its Utica operations, and more capacity additions are expected to boost output further. The third phase of Utica East Ohio Midstream's Kensington gas processing facility was expected online in June.

A rig operated by Chesapeake Energy Corp. drills a Utica shale well in Carroll County, Ohio. Photo by Chesapeake
A rig operated by Chesapeake Energy Corp. drills a Utica shale well in Carroll County, Ohio. Photo by Chesapeake

Oil potential

The company is also hopeful about the potential of the Utica's less-explored oil window, after three recent wells came online at an average rate of more than 500 b/d of oil.

"Chesapeake has not forgotten about this position. In fact we are getting pretty excited about it," Doyle told the analyst day presentation.

The company is taking a multidisciplinary approach to the oil window that involves geologists and engineers in the company's Reservoir Technology Center working together to determine the best placement of the lateral and consider every aspect of completion. "It is fluid chemistry, stage design, volumes, placement, frac geometry. This is what we get excited about," Doyle said.

Investors and competitors alike will watch with interest to see if Chesapeake can develop the right completion formula for unlocking the Utica's oil window.

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