The Future of Shale Drilling

I've talked to a lot of people lately who are coming to the North East part of the state for work.  Many of the jobs are paying well, offing reimbursement for travel and lodging, and in many ways seeming too good to be true.  There has to be a reason for it right?

When I first talked to the project manager where I work I asked him how long he expected the job to last.  "It's oil and gas," he said, "if the price goes down we could be done tomorrow.  But I just moved my wife and 2 kids up for Texas if that tells you anything.  I expect to be here for a decade."  Well that made me feel a little better.  The fact that it could dry up though didn't.  Then there's the possibility of regulation.  So what exactly IS the future here in Ohio?

First to price.   An article on wealth wire, a website devoted to helping investors lift the veil on financial markets, says that the market for natural gas is underrated.  We're drawn to the big numbers in crude, and ignore all the movement going on in gas.  A Chinese spent billions of dollars for a 1/3 stake of the Eagle Ford, and a Norwegian company spent over a billion to start a joint venture in the same formation.  Exxon, the largest publicly traded oil company by market value, recently spent 25 billion to acquire XTO Energy.  Exxon also stated that they expect the shale markets to increase five-fold in the next five years.  All of that makes me feel good about price.  The big boys are investing lots of money.  That means they expect to make that money back, and they won't make it back if the price bottoms out. 

Not that it's all sugar plums and unicorns on price.  At least not to my entirely ignorant eyes.  The U.S. Energy Information Administration gives weekly reports on prices, storage, consumption, and all those other stats that mean people who know how to read them the right way.  What I could garner is that prices are down, active rigs are down, and storage is up.  None of that means mountains of money to me.  The only bright side is that consumption looks to be up a little.  Well that and that everything is losing money. The fall in price was pretty consistent with the devaluation of the rest of the market.  And honestly, slowing the growth may not be such a bad thing. 

An NPR story called "How to Avoid the Oil Curse" advocated going slowly in the extraction of oil.  Now a lot of the parallels are a stretch, but the impact on the local area, especially the local economy, seems to be hedged simply by slowing it down.  Now Norway managed to slow things down through....yep Regulation. 

What is the future of regulation of shale drilling in Ohio?  Well this article pretty much summed it up for me.  This past Summer the state of Ohio decided that they would lease the state parks to oil companies for drilling.  They're expecting half a billion dollars in return.  Now we don't have to look far at the moment to see states, or nations, in budgetary problems.  While $500 million may not be a game breaker, it's certainly worth considering.  That money, however, is not the only revenue the state is expecting.  Gov. Kasich focused on the economic revitalization this could mean, which of course means more tax revenue.  Estimates are that the Utica formation could add up to $15 billion dollars of value to Chesapeake as well, and part of that would be taxed by Ohio as well.  Even community meetings held out of concern for fracking can't escape the governments support of the oil and gas companies.

So are the jobs going to go anywhere?  No, I don't think so.  Ohio is very much on the side of the companies.  Between being a Republican controlled government hooked on the "Drill baby drill," mentality, the money that should flow into the coffers at the perfect time, and the boom in jobs for the Rust Belt it seems very unlikely that politicians are going to step in and make any changes any time soon.  The prices of oil and gas are always more volatile.  I don't really understand them, I can't predict them, and nothing they could do would shock me, but I DO have a degree of faith in how the giant companies spend their money.  The billions of dollars being invested say that the guys and gals who make their living by knowing this stuff think there's money to be made.  And as long as there are billions to be recouped, there will be jobs and work. 

Quick and Dirty on Utica Shale

So, what exactly is Utica Shale?  If you live in North East Ohio there's a good chance you've started to hear about it.  It wasn't too long ago that Marcellus Shale was the shale in the news, but oh how the tides have turned.  Utica shale is below the Marcellus formation.  In fact it can be up to 7000 feet below it.  Part of the reason that Ohio has become such a hotspot is that in parts of the state the formation is only 3000 feet blow the Marcellus.  It is also a much thicker formation with the potential for yielding more petroleum products.  The formation is from about 450 million years ago and dates to the Late Ordovician period.  The formation is also huge.  It covers area from New York to Ohio and down into Tennessee.  Take a look at this map to see.

So there's the quick and dirty on Utica shale.  It's a deep bed of rock that could yield lots and lots of oil and gas. 

Compulsory Integration

I've seen a lot of articles popping up about the pros and cons of signing an oil and gas lease.  Articles such as the one in the Times Reporter make great points about the potential downside of signing a lease.  However, it's important to know that deciding not to sign a lease doesn't mean that the oil and gas companies won't be able to extract the valuable resources sitting under your land. 

Compulsory Integration is exactly what it sounds like.  When a group of landowners sign a lease, but someone in the middle refuses to, the Ohio Department of Natural Resources (usually known as the ODNR or the DNR) can force a lease on the holdout.  Cleveland Scene magazine reports that compulsory integration can take place with the approval of the ODNR's Oil and Gas Technical Advisory Council.  The committee consists of eight appointed members: six representing oil and gas producers, one representing landowner royalty interests and one representing the public.  Yes.  Of the eight appointed members 6 represent oil and gas producers.  If you decide not to sign a lease and the gas company wants to drill on your land, there seems to be a strong possibility that they will be able to do so without your consent. 

Take some solace in the fact that they can't quite steal the resources.  Compulsory Integration is a lot like eminent domain.  Eminent domain is what the government uses to get those few feet of land at the edge of your property to use to widen the road.  The court (or in this case the DNR) can order the transfer of the land, but it has to be for fair compensation.  If compulsory integration is exercised against your property you WILL get paid, but you won't have the advantage of negotiating.  The Ohio Code provides the full text of the law allowing the practice.

A quick search will yield many stories of people forced to participate in drilling pools.  While most of those forced to integrate have come from NY at this time, it's worth considering that it can happen in Ohio too.  While there are many issues to consider when you are deciding if you want to sign an oil and gas lease, you also need to consider that it may not matter.  If the company achieves that magical percentage of acreage your holdout won't stop them from drilling and you'll have lost the advantage of negotiating rates, returns, term, and location of wells.

Welcome

To begin I'd just like to welcome you to my blog.  However you arrived here, I hope you find something you were looking for. 

This blog is going to focus on Oil and Gas in North East Ohio.  I'm going to try to cover a large number of issues related to the subject, as well as connect readers to any relevant news articles I stumble across.  I'd love to hear from you if you have any feedback.