Horizontal unconventional oil and gas plays launched in the U.S. with the development of the Barnett shale in 2000. Since then, the industry has seen several other significant plays develop, including the Bakken, Fayetteville, Haynes - ville, Marcellus, Eagle Ford and, most recently, the Utica in Ohio.

Typically, unconventional plays have followed a series of steps from inception to full development. Once George Mitchell cracked the code in the Barnett, the plays have begun with a geologic concept, followed by an initial acreage leasing period, then some pilot drilling and completion iteration. Once the concept shows economic success, numerous operators move into the area and begin drilling, ultimately establishing the productive boundaries. Drilling to hold acreage by production follows, and finally, development or pad drilling takes over.

Many factors impact the rate that a play develops. For example, the Barnett saw several years between the first testing of the geologic idea in Wise County, Texas, and significant drilling (defined as more than four horizontal wells drilled per month). Once the play was proved, however, the drilling rate accelerated and saw as many as 2,700 horizontal wells drilled in a given year. While the drop-off in gas prices ultimately arrested the development of the Barnett, other unconventional plays were well on their way to full realization.

Utica momentum. The Utica-Point Pleasant play in Ohio is currently on an accelerated schedule compared to the other notable plays developed in the past 13 years. This acceleration is despite the absence of timely public production records that have historically provided a free data share and helped to shape productive areas. For example, Ohio only requires operators to report one annual production number, compared to Texas where operators are required to provide monthly records. Furthermore, the Utica is being developed utilizing the convention of allowing wells to rest for up to 90 days after hydraulic stimulation, delaying production data even longer.

Originally postulated as an oil play, the Utica has morphed into a wet gas play. This shift has occurred rapidly, as the oil window has been found to be largely sub-economic, leaving wet gas as the primary value driver. With the importance of natural gas liquids (NGLs), gas processing infrastructure becomes a crucial element, fueling a midstream processing boom.

Will this necessary infrastructure build-out slow the pace of development?

Several factors contributed to the results seen in the related graph. For instance, in the Bakken, there were both infrastructure constraints and technical improvements (long laterals and better completions) that slowed initial development.

In the Eagle Ford, where infrastructure was readily available and the industry already had more shale completion experience, drilling increased by more than 70% after the third year of activity.

Acreage values. Lease prices in the Utica have also ramped up quickly. Average price paid per acre in the Utica in 2012 was $5,894 compared to $2,562 in 2010, and has already climbed as high as $10,000 per acre this year. This represents a growth of 130%, whereas the price paid per acre in the Marcellus increased only 38% from 2008 to 2010.

Rapid drilling has de-risked much of the acreage in the Utica, and once sufficient production data are available to project reserves, the transaction metrics will shift from acreage to reserve value. Lease terms in the Utica are generally more favorable than in the other major unconventional plays. This is allowing operators more time to develop their acreage in an orderly manner during the primary terms. Moreover, Utica operators are beginning to utilize pad drilling, with Magnum Hunter Resources, PDC Energy and others beginning to drill pad wells in early 2013.

So it remains to be seen whether the Utica-Point Pleasant play in Ohio will go the way of the Bakken, or more like the Eagle Ford. Our industry is a quick learner—bet on rapid acceleration!

—Chris Simon and Harrison Williams, co-heads of acquisitions and divestitures, Raymond James | albrecht, 713-278-5202

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