Ohio Braces for Oil Shale Boom

WINDHAM (Dow Jones Newswires), Feb. 23, 2011

For many residents of this northeast Ohio hamlet, the oil bonanza began with a knock at the door. City Hall received a fax.

Spit from that machine last summer was a mineral rights lease offer -- just like those being hand-delivered to homeowners -- from oil and gas explorer Chesapeake. In the subsequent months Chesapeake's oil-field leasing agents swarmed the region, laying claim to what the company and others say may be one of the last big unconventional oil discoveries in the U.S.

"It was a mad rush," said Mayor Rob Donham. Windham eventually sold Chesapeake the right to drill underneath 100 acres that hold the town's municipal buildings and ball fields for $55,000 -- enough to buy two new police cars -- and the prospect of decades of oil royalties.

Ohio is bracing for an oil boom as companies, led by Chesapeake, gobble up leases covering millions of acres in the eastern half of the state. While no one's yet proven the commercial potential of the Utica formation, an oil-rich layer of rock that underlies this area, some believe it will yield crude on par with the largest shale reservoirs in the U.S. and spark a Rust Belt resurrection.

Oil-drilling in Ohio's Utica, along with natural-gas drilling in the Marcellus shale there "could be a godsend" to the hard-scrabble region, Gov. John Kasich said in a written statement.

The budding boom here is the latest version of a story that has developed across North America in the last decade, as producers have figured out how to crack open deeply buried energy-bearing rocks, first unleashing floods of natural gas and later transferring the techniques to oil extraction. Surging global demand for crude and low natural gas prices have led to the highest level of oil drilling activity the U.S. has seen in more than 20 years.

Kasich has appointed a former oilfield service executive, David Mustine, to head Ohio's natural resources department. Among that agency's tasks: studying whether drilling is allowed on state parks. With an unemployment rate of 9.6% and a projected two-year budget deficit of $8 billion, "everything is on the table," Mustine said.

Ohio's oil and gas business predates the Civil War. But drilling has been limited and many gas wells supply local homes. On the decline since 1984, Ohio's oil production placed 17th among the lower 48 states in the Energy Information Administration's most recent rankings.

Though there's no large-scale production from Utica wells yet, stakeholders say its potential is comparable to the Eagle Ford formation in south Texas, where wells turn out thousands of barrels a day and leases can exceed $12,000 an acre.

"Everybody who knows shale plays is excited about the Utica," said Richard Wilken, president of privately held Marquette Exploration, which is drilling a pair of Utica wells on its 60,000-acre position near the Ohio River. "It's early, but when you look at the log data, the core data, everything looks very good."

Still, there has been skepticism among some residents. Environmentalists contend that a shale drilling process, known as hydraulic fracturing, risks contaminating groundwater. Ohio has seen cases of aquifer methane contamination, though they've not been explicitly linked to hydraulic fracturing.

The industry, meanwhile, says the process, which employs chemicals, water and sand to crack open energy-bearing rocks, is safe. Chesapeake employees recently attended a recent municipal meeting in Plain Township, about 45 miles southwest of Windham, to promise their drilling would not taint the suburb's aquifers.

A Chesapeake spokesman said the company isn't ready to discuss its Ohio operations. But executives have been talking about a major new investment since November, and the company's presence in Ohio is the most conspicuous of any company prospecting the state's resources. The Oklahoma City-based company reports earnings on Tuesday.

Chesapeake's leasing agents popped up in Navarre, a town of 1,800 where the last signs of urban northeast Ohio fade into Amish farmland, offering enough money to run the police department for six months and future royalties in exchange for drilling rights beneath a park and cemetery. "I'd hate to miss the boat," said Mayor Bob Benson, whose administration has not agreed to a lease, "but you worry about the future."

Chesapeake sends waves of leasing agents to snap up drilling rights in emerging reservoirs, eventually selling minority stakes to recoup much of the land costs and to pay for drilling. The company has inked six such pacts in the last four years, most recently announcing a pair of billion-dollar deals with state-run Chinese producer CNOOC in Texas, Wyoming and Nebraska shales.

Chesapeake says its next deal will be revealed in the first half of this year and will involve over a million acres. Analysts say that land is in Ohio.

"If you're looking to park a significant amount of money in a domestic resource play outside of making an acquisition, this is pretty much the last one out there," said CLSA analyst Jeb Armstrong.

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