In the Appalachian Basin, the Utica shale is rapidly gaining interest as a significant resource of oil and high Btu natural gas. The Utica exceeds the areal extent and thickness of the Marcellus shale, having production potential across a large portion of the northern Appalachian Basin and into southern Quebec and Ontario, Canada.

What has attracted industry attention is the liquids window, found on the shallow western portion of the trend in eastern Ohio and Kentucky and extending into Ontario and the St. Lawrence Lowlands of Quebec.

Geology. The Utica shale is Ordovician in age and lies several thousand feet below the Devonian-age Marcellus shale. It is a thermally mature, organic rich, carbonaceous shale that is often characteristically compared to the Eagle Ford shale of Texas. The Utica is the primary source rock for many important lower Devonian through Cambrian-age conventional oil and gas reservoirs throughout the Appalachian Basin.

In the central portion of the Appalachian Basin, the Utica is typically comprised of three members: the Flat Creek, Dolgeville and the Indian Castle.

The Flat Creek, a dark calcareous shale to mudstone, has the best source rock qualities with total organic content (TOC) of 2% to 3%, high-carbonate content, and a low percentage of clay (15% to 26%). The Utica contains Type II kerogen that is typically prone to oil generation. Depth to the Utica ranges from a couple of thousand feet to more than 12,000 feet with the western portion of the trend being shallowest. Thickness of the interval can range from approximately 200 to more than 700 feet with a general thickening toward the east.

The Utica has been found to be more liquids prone to the west, trending to wet gas, and then dry gas toward the east, although liquid yields remain a closely guarded secret. There are areas where the Utica underlies the Marcellus. Here, development will benefit from existing Marcellus infrastructure cutting costs significantly.

Early U.S. movers. The focus for this new play in the U.S. has been in eastern Ohio, where liquids yield will likely be highest. Operators currently exploring for the Utica include EQT Corp., Chesapeake Energy Corp., Range Resources Inc., Encana Corp. (in the Michigan Basin), Chevron (via Atlas Energy Inc.), and Gastem Inc.

Chesapeake Energy holds interests in 1.2 million net acres in Ohio and western Pennsylvania. Chesapeake has drilled nine operated Utica wells to date and is currently drilling with three operated rigs and plans to increase to six rigs by the end of third-quarter 2011.

Range Resources has a large acreage position in eastern Ohio and Pennsylvania with potential in the Marcellus, Upper Devonian and Utica shales. The company drilled and completed the first Utica test in Pennsylvania with a seven-day average production rate of 4.4 million cubic feet equivalent (MMcfe) per day.

Encana (Petoskey Exploration) has a large position in the Michigan Basin prospective for both the Utica shale and Collingwood shale. The latter directly underlies the Utica, with both contributing to production. The company drilled the first Utica-Collingwood well, a 5,000-foot horizontal that flowed 2.5 MMcf per day and six barrels of oil per day (30-day average).

Early Canadian movers. The focus for the Utica in Canada has been in Quebec where the shale occurs over a large portion of the St. Lawrence Lowlands. Here the Utica is organic rich and overpressured in some areas with thicknesses ranging from 250 to 800 feet. The area has favorable lease terms and is located close to infrastructure and near large existing gas markets.

Although interest is high for developing this emerging play in Quebec, there is currently a moratorium for fracing wells (excluding pilot projects). Major Utica players in Canada include Talisman Energy Inc., Canadian Quantum Energy Corp., Junex, Questerre Energy Corp., Forest Oil Corp., and Gastem.

Talisman has a large acreage position in the St. Lawrence Lowlands. Its initial five vertical wells tested between 300,000 and 900,000 cubic feet equivalent per day per well. The company has since drilled and completed three horizontal wells, the first of which had a 30-day initial production rate of 5.3 MMcfe per day from an approximate 3,300-foot lateral with eight fracture stages.

Questerre holds more than 1 million acres in Quebec with as estimated 18 trillion cubic feet of prospective recoverable resources in the Utica. The company is currently working on an advanced piloting phase in the St. Lawrence Lowlands.

Gastem entered into a joint venture with Epsilon Energy Ltd. to pursue the Utica in the St. Lawrence Lowlands where it has interest in some 935,000 net acres. The company also has interest in 34,400 acres in New York and 1,200 acres in Virginia.

Transaction activity. As an emerging shale play, the Utica has not seen the same level of M&A activity as some of the more developed unconventional plays in the U.S. However, there has been a large land grab throughout Ohio, Michigan and western Pennsylvania as oil and gas companies begin to realize the potential of the Utica.

One of the early signs of activity in the region occurred in May 2010, when the Michigan Department of Natural Resources and Environment (DNRE) announced the auction of 118,117 acres, resulting in total proceeds of $178 million, an average of $1,507 per acre.

The two largest transactions in the Utica to date have been connected to greater Appalachian Basin acquisitions. In October 2010, Chesapeake added 500,000 net acres of exposure to the Utica through the acquisition of Anschutz Corp. for $850 million. One month later, Chevron announced the acquisition of Atlas Energy for $4.3 billion, which included 623,000 net acres with exposure to the Marcellus and Utica. Most recently, in February 2011, Gulfport Petroleum announced that it had entered into an agreement to acquire 13,750 net acres in the Utica shale in Ohio for $31.6 million, equating to $2,298 per acre.

M&A activity in the area is set to pick up in the second half of 2011 as Chesapeake plans to initiate a joint-venture process for its 1.2 million net acres.

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