Analysis shows Utica shale output falls short of projections

A recent analysis of oil and gas production data for Ohio’s Utica shale play casts doubt on earlier optimistic projections from both industry and state government sources.

Ohio’s Utica shale continues to produce large quantities of oil and gas. Recent new-well gas production per rig averaged just over 6 million cubic feet per day, according to a report this month from the federal Energy Information Administration.

But when total production and daily figures for all wells within the play are considered, the outlook for Ohio’s Utica shale is not nearly as promising, according to a Sept. 29 analysis by FracTracker Alliance. The nonprofit organization compiles data, maps and analyses about the impacts of the oil and gas industry.

“A huge amount of uncertainty” remains when “the realities on the ground on a per day basis” are compared with projections from just three years ago, said report author Ted Auch at FracTracker. In his view, that uncertainty could affect decisions by policymakers, land owners and communities dealing with shale oil and gas production.

The numbers could also matter to advocacy groups that are urging the state to require a 5 percent severance tax or other equivalent fees from the industry, an increase of the current effective rate of less than one-half percent based on their calculations. Gov. John Kasich also strongly supports raising the severance tax.

Projections ‘have not held up’

As of 2012, the Ohio Department of Natural Resources’ state Geological Survey projected the Utica shale play held recoverable reserves of about 15.7 trillion cubic feet of natural gas and 5.5 billion barrels of oil, based on volumetric calculations. Initial production data for a limited number of wells showed production ranging from 1.5 million to as much as 9.5 million cubic feet of natural gas per day.

Around that same time, the U.S. Chamber of Commerce’s Institute for 21st Century Energy and other industry groups hailed shale energy as a “game-changer,” with projections that Ohio’s shale resources would provide $4.6 billion in state and local tax revenue by 2020.

Fueled by that positive outlook, drilling efforts increased and Ohio’s natural gas production nearly doubled between 2012 and 2013, ODNR reported last year.

However, the new analysis from FracTracker found that earlier optimistic projections “have not held up.”

Although drilling has continued, production has been far below levels that would produce the anticipated tax revenues, Auch said. He noted that wells often have huge drop-offs in production in just the first year.

“There’s never any talking about the floor” for production and revenues in agency or industry publications about shale oil and gas, Auch said. “It’s all talking about the ceiling.”

Moreover, FracTracker found, production is concentrated mostly in the eastern part of the state, as opposed to a larger area that would have extended farther west.

Not only has the “sweet spot” of highest production “changed quite a bit in the last couple of years, but it’s getting much smaller” than the Ohio Geological Survey’s 2012 review suggested it would be, Auch said.

‘Not representative’

ODNR spokesperson Eric Heis responded that agency experts had reviewed the FracTracker analysis and found it to be “factually incorrect in a number of instances and not representative of the actual state of oil and gas production in Ohio.”

For example, the agency noted that some initial data were based on core samples and various wells that FracTracker viewed as inefficient had been plugged. Other points dealt with whether all data for particular parts of eastern Ohio had been accounted for.

Additionally, Heis took issue with FracTracker’s concerns about whether the state agency provides accurate and timely information for the public. Among other things, Heis noted, ODNR maintains a large database that includes quarterly production data from horizontal well operators, versus once-a-year reports for vertical wells.

“Production data is publicly available through the Division of Oil and Gas website,” Heis said. “In consideration of transparency, the Division of Oil and Gas has responded to over 950 public records requests this year, including five requests” from Auch at FracTracker, he added.

ODNR’s criticisms did not negate the overall conclusions of the FracTracker report, Auch replied, which is that shale oil and gas has not provided the high levels of production and corresponding tax revenues that earlier reports suggested they would.

And in various cases, Auch added, the agency’s publicly available data in fact support his statements. “The data are what the data are, and the model results from compilation” of data provided by ODNR, he said.

Why the numbers matter

In Auch’s view, ODNR should update its projections more frequently and make more data available so that non-expert land owners, communities, policymakers and others have a more realistic understanding of how any benefits from shale oil and gas might compare to costs and risks.

“We structure leases [and] we structure policy based on those initial estimates,” Auch said. More timely information could make a difference for land owners debating whether to lease their property for development, he said.

For example, lower-than-expected production would provide lower royalty payments from developers to compensate owners for their land’s resources, plus the inconvenience and any environmental risks that might come from drilling on or near their land. Lower production levels also make a difference to the state’s coffers, Auch noted.

Indeed, earlier this year the free-market organization Opportunity Ohio reported that shale oil production for last year was less than one-sixth than had been projected earlier.

At the time, the group used the estimates to oppose an increase in the severance tax rate sought by Kasich. Among other things, Opportunity Ohio argued that a higher rate could seriously discourage future investment and production in the state. Lower prices for oil and gas contributed to lower production figures, the group noted at that time.

Advocates have also raised concerns about increased truck traffic, as well as potential water contamination and damage to farmland and ecosystems from fracking. Auch noted that if the Utica shale turns out to be less productive than expected, that would mean less in severance taxes to address those issues.

More recently, several advocacy groups have renewed a call to raise the severance tax rate to 5 percent. The group includes Policy Matters Ohio, the Ohio Environmental Council, Ohio Organizing Collaborative, Ohio Communities United for Responsible Energy, One Ohio Now and the Ohio Public Health Association.

“A portion of Ohio’s severance tax on shale oil and gas should help make communities whole from the negative impacts experienced due to the shale boom in Appalachia,” the groups said in a joint statement released on Sept. 30.

In June, state lawmakers rejected Kasich’s attempt to increase severance taxes on oil and gas obtained at well heads and downstream to 6.5 percent and 4.5 percent, respectively.

And while a legislative report last week found that Ohio’s oil and gas severance taxes are lower than in other states, lawmakers are not rushing to increase it due to market volatility. Kasich reportedly called the panel’s findings “disappointing.”

Note to readers: Midwest Energy News editor Ken Paulman serves on the board of the FracTracker Alliance. This story was edited by Andy Balaskovitz.

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