Ohio to benefit from gas scale-back

Change comes as Chesapeake aims to cut output in other states.

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By Steve Bennish, Staff Writer Updated 6:53 AM Tuesday, January 24, 2012

Because of Ohio’s liquids-rich natural gas deposits, Chesapeake Energy Corp. won’t slow down drilling in the state even as the company announced Monday it will scale back drilling for natural gas in Pennsylvania.

While the market price for natural gas hits a decade low with new production and a mild winter, Ohio’s deposits in the deep Utica Shale are accompanied by a rich mix of oil and other valuable commodities such as ethane, butane, methane and propane.

Ethane, for example, is used to create ethylene, a key ingredient in making chemicals and a factor in more than 90 percent of manufactured goods.

Estimates for state job creation because of the drilling range from 20,000 cited by an Ohio State University study to 200,000 by 2015 according to the Ohio Oil & Gas Energy Education Program, which works on behalf of the industry.

A pipeline is being built through Butler, Warren, Clinton and Greene counties to transport ethane to petrochemical plants on the Gulf Coast. Ohio is also in the running as a location for a Shell Oil Co. “cracker” plant, a facility that commonly costs $1.5 billion or more to build and can process hydrocarbons into ethylene and other synthetics. An announcement, which would mean thousands of jobs and millions in revenue for the state that lands the plant, is expected very soon.

“Today’s announcement is consistent with Chesapeake’s plan to increase activity in Ohio in 2012,” said Canton-based Chesapeake spokesman Pete Kenworthy. “The Utica Shale is part of our national strategy to increase expenditures in liquids-rich plays.”

The company, which has the most leases for drilling in the state, is still on track with plans to have 20 operating drilling rigs in Ohio by year end. Currently, there are eight. Drilling activities in Ohio are concentrated in Carroll, Harrison and Jefferson counties  in the eastern part of the state. The drilling method, hydraulic fracturing, has been a hot point of controversy. Drillers pump millions of gallons of water, sand and some chemicals, into shale layers miles deep in the earth to release the gas. Deep well wastewater disposal has been implicated in earthquake activity outside Youngstown.

Natural gas futures dropped to $2.32 per 1,000 cubic feet last week, their lowest levels since 2002, before rising slightly to $2.34 on Friday. Prices have fallen 23 percent since the beginning of the year. Storage levels of the fuel are 21 percent higher than their five-year average for this time of year, according to the Energy Information Administration.

The drop in price has meant lower revenues and profits for drillers. Analysts estimate that Chesapeake’s earnings fell to $2.81 per share in 2011, excluding special items, from $2.95 per share in 2010. They say at today’s prices only the least expensive, most productive natural gas wells remain profitable for drillers.

Aubrey K. McClendon, Chesapeake’s Chief Executive Officer, said drilling in dry gas regions such as the Marcellus Shale in Pennsylvania will drop to “bare minimum” levels until drilling economics improve. But, he added, relative spending to drill the company’s leases in liquids-rich gas deposits in places like Ohio’s Utica would increase.

Gene McGillian, an analyst with commodities broker Tradition Energy in Stamford, Conn., said market-watchers have been anticipating Chesapeake’s announcement. He added that it could take from one to two years for natural gas prices to rise.

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