The wet Utica was once expected to rival the Marcellus. However, in a world where gas prices in Appalachia remain severely depressed, NGLs provide no real uplift, and the company that founded the play has released all rigs from the area, is there truly a home for Utica production?
BTU Analytics estimates that essentially none of the wells drilled in the Wet Utica in 2015 break even at wellhead prices of $30/Bbl crude and sub-$2/MMBtu natural gas based on our well by well economics model. Comparing 2015 well economics in the play to plays like the Eagle Ford and the Marcellus shows why investment in these plays has been more resilient– both of these plays are much closer to having acreage that breaks even in today’s price environment. At sub $25/Bbl wellhead crude, 23% of wells drilled in 2015 in the Eagle Ford break even, and in Northeast Pennsylvania, 45% of wells drilled in 2015 break even at sub-$2.00/MMBtu gas. Even if gas prices strengthen and Utica producers are realizing $2/MMBtu to $3/MMBtu at the wellhead, only 17% of the wells drilled in 2015 break even. All that being said, looking at the average economics of the wet Utica currently does raise questions about why operators still put so much hype into its development.
Rice Energy spent a considerable portion of the company’s 4Q 2015 earnings call talking Utica strategy. The company’s plan is to optimize their Utica acreage by increasing their well spacing (up-spacing) from 750′ to 1,000′ with the expectation that this will positively impact well performance and consequently improve their economics. Rice is not alone however, as Gulfport has also talked of up-spacing their wet Utica acreage, but without explicitly mentioning motivations beyond HBP drilling for doing so.
Rice Energy gives examples of how up-spacing and increasing lateral lengths improve EURs by allowing them to stretch the time period that a choked well provides flat production from 9 months to 12 months. The company claims this not only boosts the economics of the well overall, but also front-loads the majority of the production and helps speed up the payback cycle of the well.
Typically, downspacing reduces the EURs of infill wells, and this is the impact that Rice is trying to avoid by moving back to 1,000’ spacing from 750’. In the current pricing environment, a slightly lower EUR from a down-spaced well can make or break the economics of a single well. Conversely, in a higher price environment, margins are greater and a well can be economic even with a lower type curve and it may make sense to maximize overall drilling inventory by downspacing.
Will up-spacing allow Utica wells to better compete in the North American supply stack? Instead of looking at all wet Utica wells, we focused in on IP rates for top quartile wells and looked at the breakeven prices for the top performing operators in the play. This shows that the best acreage in the Ohio Utica has significantly higher unrestricted IP rates than the basin average and that the top tier of the Utica is competitive with the top tier of other Northeast plays.
For more in-depth analysis on Northeast fundamentals and economic analysis request a copy of the BTU Analytics’ Northeast Quarterly.
