Some Utica Shale Drillers are Winners, and Some are Losers

Interesting to note that Crain’s Cleveland Business comes to the same conclusion that MDN espoused a week ago: BP rolled the dice in the Utica Shale–and they bet wrong (see BP Calls it Quits in the Utica Shale – Total Write-off).

The Crain’s piece makes a valid observation: Although shale drilling is far less risky than other types of oil and gas exploration and production–it’s still a risk. With any risk, some will win and some will lose (contrary to the pap taught today in schools that everyone can be a winner). Shale drilling is high stakes in some respects, a lesson that BP learned the hard way…

With the attention so focused on the economic investment in the Utica shale play in Ohio — almost $20 billion, by some estimates — it’s sometimes easy to forget that this entire new economy is still about mining, and that means speculation.

There will be winners, namely the companies that drill wells rich in “wet” gas. And there will be losers, companies whose wells produce smaller amounts of “dry” gas. (Wet gas is liquid-rich and contains not only methane but also lucrative natural gas liquids such as ethane and butane.)

We found out last week that one of the losers is BP America. The company announced it was abandoning its plans to develop Utica shale, just two years after spending about $330 million to acquire mineral rights for more than 80,000 acres in Eastern Ohio.

The few wells BP drilled in the area yielded disappointing results. The company said it would take a $521 million write-down, sell the mineral rights and focus efforts elsewhere.

Some might be tempted to blame state government for the pullout. Columbus recently imposed new regulations on fracking near fault lines, and state lawmakers are considering a hike in taxes on the industry. Neither appears to be true.

“We’ve made it very clear this had nothing to do with pending legislation, or anything other than what the rocks were telling us. This was strictly a business decision,” a BP spokesman told Crain’s reporter Dan Shingler last week.

Others might be tempted to proclaim Utica a bust. That’s likely not true either. Wells south of BP’s acreage are yielding impressive amounts of liquid-rich gas. And once natural gas prices rise (they remain near historic lows) pulling dry gas from shale will become a lucrative endeavor too.

We need to remind ourselves that we are still relatively early in this play. Professionals are still learning about the Utica’s geology. BP isn’t the first company – and won’t be the last – to place chips on the table and crap out. Mining for oil and gas is best left to those with strong stomachs and deep pockets. We will continue to mine – and find – optimism.*

*Crain’s Cleveland Business (May 5, 2014) – Crain’s editorial: BP’s gamble