Drilling Down

Oil and Gas Industry Rebound Unlikely in 2016

YOUNGSTOWN, Ohio – The president of the Ohio Oil and Gas Association, or OOGA, says that he can’t recall a more troubled period for his industry and members of his organization.

“I really cannot remember a more difficult and challenging time facing the domestic oil and gas industry in my lifetime,” says David Hill, who wrote the comments as part of OOGA’s Year in Review, published in the organization’s website. “We have seen crude oil prices fall below $40 per barrel and natural gas prices are languishing at record lows, creating a sense of general gloom and doom among our industry on a global scale.”

OOGA represents 3,100 members across Ohio who are involved in the exploration, production, and development of crude oil and natural gas.

Since late 2014, oil prices began a sharp decline because of robust production from lucrative shale plays in the United States, including the Utica shale in Ohio, and the refusal of OPEC nations such as Saudi Arabia to cut production, Hill says. As a result, strapped energy companies have pulled back their drilling programs across the country, especially in Ohio.

“Decisions made halfway around the globe are having real-life implications right here in Ohio,” he writes. “Simultaneously, the collapse of the natural gas price in Appalachia, mainly due to the lack of infrastructure to get the gas out of the basin, is making life practically impossible for many members of the Ohio Oil and Gas Association.

In 2015, Hill says, his organization had to contend not only with low energy prices, but issues such as a proposed increase in the severance tax drillers pay to extract oil and gas from wells. That proposal has since been tabled, given the state of the industry, he says.

OOGA also spent a substantial amount of time wrestling with local control issues, especially Community Bill of Rights initiatives that were advocated in Athens, Medina and Fulton counties. The “Bill of Rights” would have prevented oil and gas exploration and related activity from occurring within city limits. However, under Ohio law, the state is the sole regulatory authority in such matters.

The “Bill of Rights” amendments are supported by groups that oppose the operation of deep water injection wells and hydraulic fracturing – a process that injects water, sand and chemicals into wells at high pressure to break up tight shale formations to release oil and gas molecules and bring them to the surface. These groups maintain that the practices pose a direct threat to the environment, the water supply, and the safety of residents.

Secretary of State John Husted issued an order to keep the items off the ballot in November in these counties, while advocates in the cities of Akron and Columbus failed to gain enough signatures to place their initiatives before voters.

In Youngstown, a Community Bill of Rights initiative was placed before voters and defeated a fifth time.

The energy glut hit hard in Youngstown. Vallourec Star, which produces oil country tubular goods, or OCTG, pipe for the oil and gas industry, earlier this year placed more than 100 workers on layoff. More recently, Exterran, a company that constructed a new manufacturing plant in Youngstown three years ago to fabricate components for the oil and gas industry, announced it would shut down operations in March.

“In these miserable times, giving up and throwing in the towel is not the solution,” Hill opines.

And, the industry isn’t expected to fare much better in 2016, says Shawn Bennett, OOGA executive vice president.

“Unfortunately, the forecast for 2016 looks to be very similar to the end of 2015,” he says. “We have a glut of natural gas in the Appalachian Basin that needs pipelines to be built in order to access additional markets.”

Bennett says that oil prices are likely to remain depressed, thereby reducing capital expenditures for additional exploration in the Utica: “Forecasters are predicting a rebound, but they range from later in 2016 to several years out. The focus right now is to look at areas and situations that can generate any sort of return on investment.”

Still, oil and gas production throughout the state increased substantially during 2015, according to the Ohio Department of Natural Resources.

During the first three quarters, production surpassed the quantities of oil and gas produced throughout all of 2014, notes ODNR Director Jim Zehringer.

In an op-ed piece released to the media this week, Zehringer reports that four years ago, Ohio produced just 9% of the natural gas consumed in the state. This year, Ohio’s wells produced 95%, and it’s anticipated that in 2016, natural gas production here will exceed demand in Ohio.

Moreover, the director says that technology has enabled energy companies to drill wells more efficiently and at less cost, while additional investment poured into the state to develop pipeline and processing infrastructure.

“This progress requires regulatory adjustment, and we continue to grow and improve with the industry,” Zehringer says.

That required additional inspectors throughout the state, Zehringer says. Five years ago, ODNR employed fewer than 20 inspectors while today there are 50 who in 2015 conducted more than 25,000 inspections of well pads, pipelines, processing stations and injection well sites.

Injection wells in the Youngstown area are of particular concern since the 2011 New Year’s Eve earthquake rattled the Mahoning Valley. The 4.0 quake – and many others that occurred that year of a lesser magnitude – were directly tied to an injection well operation in Youngstown.

In the wake of these earthquakes, as well as another small temblor recorded in Poland Township associated with a hydraulic fracturing operation there, the state has helped create a template on induced seismicity for other states in the country to follow, Zehringer says.

“Ohio has deployed an extensive seismic network across eastern Ohio to learn more about induced seismicity and will continue as a leader in the national conversation on this subject,” Zehringer says. “Our goals has not changed: we want to allow Ohioans to benefit from the natural resources with which we have been blessed in our state, as long as those resources are developed safely and responsibly.”

Published by The Business Journal, Youngstown, Ohio.