By Nils P. Johnson Jr.
Johnson & Johnson Law Firm
YOUNGSTOWN, Ohio – In the first week of June, EOG Resources Inc. (EOG) announced it is taking over Encino Acquisition Partners (EAP) for $5.6 billion, with the deal set to close at the end of the year. EAP is currently the largest oil producer in Ohio and one of the largest natural gas producers.
With the addition of EAP’s leasehold position, EOG will hold 1.1 million Ohio acres in its inventory of potential Utica/Point Pleasant shale drill sites. What will this mean for landowners in the region?
First, let’s recap the history of the play. Chesapeake Energy Corp. (CHK) came into Ohio in 2010 with initial leasing in Jefferson, Harrison and Carroll counties. Its Buell 10-11-5 8H well in 2011 in Harrison kicked off leasing fever when it turned on at 3,000 barrels of oil equivalent a day. Shale wells decline very rapidly, but even given that, these were huge numbers.
Over the next half-dozen years, CHK, British Petroleum, Shell, Hilcorp, Chevron, Devon Energy, Consol Energy and others acquired vast acreage positions in the Buckeye State. British Petroleum, for instance took over 65,000 acres in Trumbull County and parts north, drilled a handful of test wells and then pulled out. Similarly, Devon Energy took a large lease position in the western portion of the play in Ashland County, drilled, was unsuccessful and decamped.
In the northern part of the territory in Carroll and Columbiana, CHK and Hilcorp hung in there and continued to drill and build infrastructure.
Shale gas contains hydrocarbon liquids that must be stripped away before natural gas can be sold and so a billion-dollar treatment plant was needed. It was built in Kensington in Hanover Township of Columbiana County by Access Midstream Partners, M3 Midstream and EV Energy Partners. Hilcorp then built its own plant on East Calla Road in Mahoning County and then snaked its lease position and collection line down to the southwest in Columbiana County.
CHK had heavily leased in Columbiana and Mahoning counties. However, after two or three horizontal wells were drilled by Consol with poor results, signing bonus prices dropped from $5,000 an acre to $0. Landowners that held out for higher prices were sorely disappointed.
In the later 2010s, CHK and other players in the south got too far over their skis with fluctuating hydrocarbon prices, large, expensive land positions and disappointing longer term production results. Eventually they filed for bankruptcy.
Fast forward 10 years, and the drillers who once stage-fracked their horizontal wells every 600 feet now more than double the number of fracks for the same length of hole, greatly increasing production efficiency. Additionally, the fracking technique they use has been improved. Shale contain clays, and if they are not properly stabilized, they can swell and clog things up, requiring sophisticated proppants and other chemicals. Perhaps more impressively, horizontal wells that were once 6,000 feet long have grown to over 20,000 feet, resulting in much better well economics. Moreover, Shell has completed a mammoth ethylene cracker plant that processes natural gas liquids on the Ohio River at Monaca, Pa. This gives drillers more money for the liquids they produce and will likely lead to the construction of plastics operations in the area.
The 10-year leases that went undrilled in the first part of the play expired, and with prices up and completion techniques improved, a second land grab has been ongoing for the last several years. In 2018, EAP bought CHK’s land package and began to quietly add to it. Land speculators moved in and signing bonuses rose last year to the $4,000/acre level.
Moving west from central Columbiana County, hydrocarbons transition from dry gas to wet gas to volatile oil as one proceeds toward the Stark County line. EAP wells drilled on the Mountz and Sanor leases came on at 700-800 barrels a day. Then, several weeks ago, the first production from the Kitzmiller pad to the west was announced. The initial lateral did 65,000 barrels in the first quarter of production. Thus, it seems clear that the western portion of Columbiana County, going over into Stark County and continuing west in the volatile oil window, will eventually be blanket-drilled by EOG.
With over a million acres in its inventory, the timing of the drilling of any particular spot is anyone’s guess. In those periods where natural gas is relatively high, it will favor drilling locations to the east; when oil is up, they will drill to the west.
The Utica/Point Pleasant trend will likely continue into western Mahoning County and perhaps into southern Trumbull. Better drilling and completion techniques may well make those areas viable. EAP is currently drilling a test well on the Wehr farm at Leffingwell Road and state Route 45.
The takeover of EAP by EOG will reduce leasing competition and put pressure on prices paid to landowners for fresh leases. For instance, because Hilcorp is the only company with a pipeline on the gas trend in central Columbiana, it gets away with paying signing bonuses in the hundreds of dollars an acre, instead of thousands. Similarly, EOG has proven parsimonious in the signing bonuses it offers in other areas of the state where it has no competition.
Speculation by companies buying mineral rights will continue, however. Landowners with small parcels, say, less than 40 or 50 acres, may be wise to grab a present payday when approached by a mineral buyer, because a small parcel may never fit into a drilling block. It is easy enough to end up between these blocks and never get drilled. Angling to end up on the receiving end of a monster landowner royalty is playing geometry roulette.
Pictured at top: An Encino well pad in Salineville, Columbiana County.