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Editor's Choice: Encino's Utica Oil
January 2024 Editor's Choice

Encino Leads New Era Of Utica Shale Development Targeting Oil Window

By Danny Boyd

HOUSTON–What are the first words that come to mind at the mention of the term “tight oil play?”

Odds are, the immediate responses to that question may be Permian or Bakken, or perhaps more generally, unconventional reservoirs or horizontal wells. And for good reason: Operators drilling horizontally in the Permian, Williston, Eagle Ford, Denver-Julesburg, Powder River and other basins have played a dominant role in the United States’ record oil output of 13.2 million barrels a day.

But the variety of answers probably do not include “Ohio” or “Utica.” It may be time for that to change. Quietly, one well after another in the Buckeye State is proving the Utica to be a top-tier oil formation. As one of a handful of companies that have steadfastly honed Utica oil development strategies and best practices, Encino Energy is now reaping the rewards with highly productive horizontal wells that have made it the largest oil producer in Ohio and one of the five largest private oil and gas producers in the country.

The company’s Utica Shale results are so encouraging that Hardy Murchison, chief executive officer of Houston-based Encino, says he has an answer for anyone who wonders when and where the next major U.S. tight oil play will emerge. “It already has in the Ohio Utica,” he insists.

The first Utica horizontals were drilled a dozen years ago. Why the sudden buzz? The longer answer is related to the Utica’s distinct mineralogy and the impact of industry downcycles on development; but more on that later. The short answer is well performance that rivals marquee tight oil plays such as those in the Delaware Basin in terms of daily production rates, estimated recoverable reserves and overall development economics.

“The industry is beginning to think now about where the next generation of low-cost development inventory resides, and it is becoming clear that the Utica is going to be a key basin,” Murchison estimates.

Oil Window

Often, the Utica is associated with natural gas production, and rightfully so considering its vast store of gas reserves and established track record of development in Pennsylvania in conjunction with the shallower Marcellus Shale. But much like the Eagle Ford in South Texas, the Utica has distinct hydrocarbon windows associated with its burial depth, ranging from dry gas in the east to gas liquids as its burial depth decreases near the Pennsylvania-Ohio state line, to primarily oil along its western extent in Ohio.

After closing in 2018 on a $2 billion deal to acquire Chesapeake Energy’s Ohio assets, Encino Energy directed its operational focus to the Utica Shale oil window. Encino now ranks as the largest oil producer in the state and is leading the industry’s development of high-rate, high-return long-lateral horizontals targeting the oiliest parts of the Utica formation.

Mirroring the Marcellus above it, the Utica Shale underlies a large geographic swath across Appalachia, extending under adjacent parts of Ontario and Quebec on the Canadian side of the border. Both are organic-rich black shales, but the Ordovician-aged Utica is deeper, older and more brittle with lower clay mineral and higher carbonate contents.

The mineralogic differences meant the hydraulic fracturing designs developed for Marcellus gas wells did not necessarily translate to Utica oil and gas liquids wells. But with Encino Energy and other operators now perfecting repeatable fracturing designs, the Utica Ohio play is off to the races. In fact, according to the Ohio Department of Natural Resources, oil production is on pace to set a state record. DNR statistics show that oil production for horizontal (that is, Utica) wells produced almost 20 million barrels through the first three quarters of 2023, which was some 300,000 barrels more than in all four quarters of 2022 and 3.5 million barrels more than in all of 2021. Ohio oil output grew 31% in the third quarter compared with the same quarter in 2022.

Encino Energy became one of the biggest names in the Utica play after its landmark 2018 acquisition of Chesapeake Energy’s Ohio Utica Shale assets. Chesapeake had been one of the pioneers in proving-up the play’s oil and natural gas liquids potential. According to Murchison, Encino’s ongoing assessments of potential margins and returns strongly supports the company’s strategy to accelerate development and production of oil and liquids now and into the immediate future.

As the top Utica oil producer, Encino has completed some of the best oil wells in Ohio’s history, and its Utica wells have typical 30-day initial productivities ranging between 1,000 and 2,500 bbl/d, Murchison reports.

Winding Path

Despite the impressive well performances being recorded across the play today, the Utica’s oil development history has been a long and winding path. Oil drilling tests began in Ohio in 2011, and successful wells were reported soon thereafter in Carroll and Harrison counties. However, the combination of several factors—including limitations in completions technology and local service capacity, the overnight emergence of giant Permian tight oil plays, and the oil price collapse of late 2014 and associated diminishment of capital availability—conspired to thwart the initial progress in Utica development and render the Ohio part of the play as what Murchison describes as the “stepchild of U.S. unconventional oil plays.”

Studying the potential of unconventional plays around the country, Encino joined forces with the Canada Pension Plan Investment Board in 2017 to acquire large, high-margin oil and gas production and development assets with an eye on diversity. The next year, the partners found their ideal target when Chesapeake decided to divest its Ohio position.

The package included almost 1 million net acres across dry gas, wet gas, condensate and crude oil windows, along with 600 million cubic feet equivalent of daily production from some 700 wells. Surrounding those producing assets were almost 2,000 wells held by other operators. In addition to a wealth of available data from existing wells, more than 85% of the acreage was held by production, giving Encino the freedom to test and develop acreage at its own pace. The deal also included takeaway agreements that shipped most gas out of the basin instead of subjecting sales to Appalachian in-basin pricing differentials to Henry Hub.

“We were looking for scale for undeveloped potential and obviously for valuation that would work for us full cycle as an acquirer, and what we found in the Utica was one asset that checked all those boxes,” Murchison recalls. “It had a lot of diversity. It had oil, gas and liquids, and it had a lot of different pipeline takeaway options and markets.”

Rerating The Ohio Utica

The $2 billion purchase price was based on the valuation for gas, Chief Operating Officer Ray Walker notes, but Encino executives recognized the oil optionality from the outset. After focusing during the first year on transitioning operations and supplying required gas volumes to processing plants and pipelines, Encino’s team began applying machine learning technologies to help predict updip oil production as it stepped out across the oil phase.

The company built infrastructure in preparation for delineation, and from the beginning focused on returns instead of trying to identify the best per-foot costs for drilling, EURs and 30-day IPs, Walker says.

“The Utica has full-cycle returns that will compare with the Delaware Basin all day long,” he insists. “We are excited about it. We think it is the future of our company and is probably the future of the Utica, because the entire Ohio Utica is going to rerate as people start to find out more about it.”

While the lion’s share of Encino’s development activity is in the oil window, significant upside in the Utica’s dry natural gas window provides exceptional flexibility. Dry gas wells in the company’s portfolio have average 30-day initial productivities of 40 million cubic feet a day, and Encino maintains optionality for shipping the gas out of the basin, including to liquified natural gas terminals on the Gulf Coast.

Since assuming the position and embarking on its own development program, Encino has boosted liquids production by nearly 35% to 70,000 bbl/d, with about one-third of that being crude oil, Murchison points out. Liquids now account for 40% of Encino’s total daily production of 1.1 billion cubic feet of gas equivalent, he adds.

Higher margins and returns on oil and liquids, coupled with more than adequate takeaway capacity for additional production, is allowing the company to focus 90% of its capital in the oil window, where the vast majority of its 55 wells were drilled in 2023, Walker relates. In December, the company was running three rigs and one fracturing crew in the oil window, which includes mostly Guernsey, Carroll, Harrison and Columbiana counties.

The large held-by-production position allows for laterals as long as three-four miles, he points out. The 2023 average is close to 15,000 feet with several stretching to 21,000 feet. In November, the company reached total depth on a 20,000-foot lateral drilled from spud to rig release in eight days, Walker reports. Additional footage is the most efficient driver of margins with the least expensive per-foot additions since verticals are already in place.

“We are doing that by staying almost 99% in target, so we are not only going fast, but we are putting it in the right spot 99% of the time,” Walker says, noting that one of the major benefits of the Ohio Utica’s relatively late blooming was the ability to learn from the industry’s experience in developing other resource plays—from ultralong-lateral, extended-reach drilling in the Marcellus to well spacing and hydraulic fracturing designs in the Wolfcamp and Bakken.

The company deploys slickwater fracs and avoids gel in its completions, says Chief Technical Officer Tim Parker. Oil in the Utica comes with a big advantage: After frac water flowback, the wells may produce only a couple of barrels of water a day, he adds. That is a major differentiator with favorable operating expense implications compared with, say, the Delaware Basin, where wells can produce eight barrels or more of water for every one barrel of oil.

Parker says Encino is recycling nearly 80% of its flowback, which is trucked to the next frac site and run through a solids screen in preparation for frac treatment reuse. Chemicals typically are not added to treat the water for the next stimulation, Parker notes, and no large storage or treatment lagoons are necessary.

“That is volume we do not have to get from a freshwater source or transport to the frac job site,” Walker adds. “It also does not end up having to go to a disposal well, so it is a key metric and part of our key performance indicators.”

Exceptional Flexibility

Encino’s large dry gas assets provide exceptional flexibility, Murchison says. Only a few wells a year help the company maintain flat gas production. Average 30-day IPs on dry gas wells are in the neighborhood of 40 million cubic feet a day.

“We have the ability to sell essentially all of our natural gas out of basin at very good pricing,” he comments. “We also maintain a long-term option on significant dry gas reserves that we can develop in the future.”

About half of Encino’s natural gas is transported to the Gulf Coast, including to liquified natural gas terminals, with a substantial portion of the rest being sent to Canada through Enbridge’s Nexus Gas Transmission system, says Chief Financial Officer Michael Magilton. With oil bound for regional refineries, remaining natural gas also is shipped mostly out of basin, he adds, with other volumes bound for the East Coast and Midwest.

A recent agreement for additional ethane transportation includes attractive pricing compared with Henry Hub, Magilton says.

“We benefit from Chesapeake’s history in the play and from how much we have grown production,” he says. “We have a lot of existing relationships in the region and are intent on cultivating those relationships further as we grow production. It has allowed us to be strategic around development plans as we have focused on growing oil production and deploying capital in the oil window.”

The company also benefits from a positive attitude toward the industry from the state of Ohio and royalty owners, Murchison remarks.

“Ohio does a top-notch job of regulating the industry,” he comments. “It holds us to a very high standard, as it should, but it welcomes investment and development. We have developed a very good working relationship with state regulators, including the Department of Natural Resources, and we have become a real part of the communities where we operate. That is a very intentional, ongoing effort. As a company that pays hundreds of millions of dollars a year in royalties and local taxes and lives and works in these communities, we have made that a part of our culture.”

Encino continues to focus on improving its environmental, social and governance performance. The company has reduced methane intensity by 21%, has had no spills outside of containment since taking over the position and has reduced recordable incident rates by 30% in the past two years, Walker says.

“I cannot stress enough just how important a foundational culture of safety is for us,” he comments. “When employees work safely together, efficiencies will exponentially get better and we have seen that in Ohio magnify our efficiencies across all measures. We have seen it even more in the Utica with our asset as Encino has developed several new state-of-the-art processes and designs that allow us to do twice what we were only two or three years ago.”

All these advantages give Encino a clear path to continuing sustainable success over the long haul and create an ongoing competitive edge relative its peers, Murchison notes.

“We have a ton of flexibility so we can shift our drilling focus as commodity prices change,” he says. “We have a ton of acreage. One of the good things that Aubrey McClendon did in his career as Chesapeake’s co-founder was go big, so we have a lot of opportunity and it is nearly all held by existing production. We are private, so we have the ability to be flexible compared to a lot of public peers.”

Armed with significant oil options in a high-margin growth play, more than 40 years of drilling inventory, a massive gas resource base, and the biggest position in the play, the company is in position to possibly go public at some point in the future, Murchison says.

“That has always been the long-term plan and we believe that with this gas and oil resource we are in an excellent position to enter the public markets at some point in the future,” he says.

Editor's Note: Read more on this article as well as a companion piece in the e-Edition of the magazine on Encino’s success strategies.

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