BP pulls out of Trumbull's Utica shale

RELATED: Industry poll shows widespread support

By TOM MCPARLAND

tmcparland@vindy.com

YOUNGSTOWN

As BP looks to sell off its 105,000-acre leasehold in Northeast Ohio, uncertainty surrounds the future of the Utica Shale play’s northern tier, which so far has proved a far-less-than-lucrative venture.

The British energy producer on Tuesday announced it would pull out of the Utica Shale, after a lackluster appraisal of four producing wells in Trumbull County.

In its quarterly earnings report, the company said it has taken a $521 million write-off relating to its Utica acreage.

Just two months ago, Trumbull County’s other major player, Houston-based drilling company Halcon Operating Co., said it would suspend its Utica drilling operations, pending results from two of its wells. Halcon’s CEO and chairman said at the time that early results “haven’t been too wonderful.”

Both companies struggled to unlock the northern end of the play, where the desired rock is thinner and located at a shallower depth than it is in the south, where production in places such as Carroll and Harrison counties has taken off.

Whether the news means the Valley’s shale boom is stalled is open to interpretation.

Mike Chadsey, a spokesman for the Ohio Oil and Gas Association, said he expects the Mahoning Valley to play a supporting role in building out the infrastructure to support the southern tier of the play, via other successes such as the VAM USA LLC steel-pipe-threading facility.

The Vallourec Star subsidiary invested $81.5 million for its construction at the former Genmak Steel building and an additional 67,500 square feet nearby in the city’s Ohio Works Business Park. The facility would employ 84 full-time workers by early next year.

In the meantime, Chadsey believes the industry will continue to develop technology that could one day solve the puzzle of the north.

“There’s something up there — we just haven’t figured it out yet,” he said.

It had been long rumored that BP’s positioning in the Utica would fail to produce the kind of return necessary for continued investment here.

According to fourth-quarter well results published by the Ohio

Department of Natural Resources, BP produced an average of 1,004 barrels of oil and 14,507 Mcf (thousand cubic feet) of natural gas per well. Those figures are well below average production.

For example, of the 352 wells producing across the play, ODNR recorded average oil production at 4,089 barrels per well, and the average amount of natural gas produced stood at 122,514 Mcf.

“Following our decision to create a separate business around our U.S. lower 48 onshore oil and gas activities, and as a consequence of disappointing appraisal results, we have decided not to proceed with development plans in the Utica shale,” BP said Tuesday.

Instead, BP spokesman Curtis Thomas said the company will market its leasehold, adding that BP’s decision “doesn’t mean it’s not a viable play for another oil and gas company.”

But Will Green, an exploration and production analyst for the investment firm Stephens Inc., said the exit of two big players would make for a difficult sell.

Smaller companies with the ability to drive down drilling costs may target some operations in the “better parts” of BP’s acreage, but the area’s track record would hinder companies looking to buy up rights to large swaths of land, he said.

Chadsey said drillers looking to purchase BP and Halcon leaseholds face a combination of uncertainty and the threat of poor returns. He cited the murky status of the state’s severance-tax proposal and the occurrence of local earthquakes as possible deterrents.

“That’s going to put a damper on some risk-taking,” he said.

Tuesday’s news was disheartening for landowners hoping to cash in on royalty interests, built into the leasing agreements they signed with drilling companies.

Negotiated in late 2011 and early 2012, BP’s agreements numbered in the thousands and offered landowners a percentage of the value of the minerals extracted from their property, should the company drill there.

Though landowners often received sizable signing bonuses in exchange for signing over mineral rights, they also were enticed by a possibility of an even greater windfall from royalty interests.

Whether landowners will eventually see those royalties depends on future interest in the northern part of the Utica, but it also comes down to the price tag BP assigns to its acreage, said Alan Wenger, an attorney for the law firm of the Harrington, Hoppe & Mitchell, who helped negotiate the leases.

Most established a window of five years for drilling to begin, with a three-year renewal period. All the original conditions would remain in place if the ownership changes hands, he said.