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Natural Gas in Fayetteville Shale Takes Arkansas from Zero to Billions in 10 Years

6 min read

In August 2004, Arkansas Business published its first mention of gas exploration in a rock formation in north-central Arkansas — just a three-sentence brief:

“Southwestern Energy Co., the former Fayetteville company now based in Houston, is testing a new shale gas play on the Arkansas side of the Arkoma Basin. The company is drilling test wells targeting the Fayetteville Shale, an unconventional gas reservoir, ranging in depths from 1,500 to 6,500 feet. The company has increased its acreage position in the area from 343,351 net undeveloped acres last December to approximately 455,000 net undeveloped acres now.”

The following month, the Thomas 1-9 was “fracked” in the solid rock of the Fayetteville Shale Play, using techniques that had been pioneered in the Barnett Shale near Fort Worth, Texas.

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Arkansas was already a gas-producing state with the storied Arkoma Basin routinely producing 150 million to 175 million MCF (thousand cubic feet) of natural gas every year. But the Fayetteville Shale brought gas production on steroids, producing more than a billion MCF a year for the past two years while Arkoma production has dropped to barely 100 million MCF. (See Hanna Still Believing in Arkoma Basin’s Future.)

In the past decade, the players in the Fayetteville Shale have shuffled and consolidated, drilling has peaked and retreated, employment has expanded and contracted, technology has advanced, environmental and infrastructure concerns have reared their heads and government has responded.

Through it all, the formation has generated unprecedented economic impact for the state at the best possible time.

Today the Fayetteville Shale is a mature field, propelling Arkansas to become the No. 8 producer of natural gas in the country, according to the Energy Information Administration.

“At the 10-year mark, I’d say we’re on a development track as opposed to growth, which we’ve experienced since 2008, followed by a small decline,” Larry Bengal, director of the Arkansas Oil & Gas Commission, said.

Southwestern Energy’s Seeco subsidiary, which quietly leased hundreds of thousands of acres of mineral rights before a stampede of competitive “landmen” spread across the shale region, has remained its dominant explorer and operator.

Exxon Mobil subsidiary XTO Energy Inc. of Fort Worth, Texas, is a distant second ahead of Australia’s BHP Billiton and dozens of also-rans.

And the promise of cheap and abundant domestic energy came true, with gas prices collapsing as the rush to tap the Fayetteville Shale and other similar shale formations around the country grew the supply much faster than the demand.

“That is always the price of success,” Bengal said. “Success brings abundance, and the abundance drives down the price, which is good, but it results in reduced development activity because it is purely price-driven.”

Then and Now

Wells are still being drilled at a rate that Bengal called “steady development.” But gone is the frantic pace of 2008, when 60 drilling rigs dotted the state, including the legacy Arkoma reserves in west Arkansas. As this month began, 11 rigs were operating in the state. Of those 11, nine are located in the Fayetteville Shale. Ten are owned and operated by Southwestern Energy; the other belongs to XTO Energy.

In 2005, the Oil & Gas Commission issued about 20 drilling permits each month. At the height of drilling activity, about 100 to 120 drilling permits were being issued each month.

Today, the Oil & Gas Com-mission issues about 500-600 drilling permits each year, and Bengal anticipates drilling in the shale will stabilize, with companies drilling about the same number of wells each year.

Kathy Deck, director of the Walton College Center for Business & Economic Research at the University of Arkansas, said the Fayetteville Shale surpassed expectations by generating total economic activity of more than $18.5 billion, exceeding early estimates of $14.2 billion by about 30 percent.

During the Great Recession of 2007-09 — “when things could have been much worse,” Deck said — Arkansas’ economy was buoyed by the injection of billions of dollars’ worth of investment, job creation and royalty payments.

Direct employment in the mining, quarrying and oil extraction industry in Arkansas more than doubled between 2001 and 2010, according to Deck’s research, from fewer than 3,900 to more than 8,300. By comparison, overall employment in the state increased by only 0.6 percent during that period, which ended with the effects of the recession still lingering.

Oil and gas companies invested 29 percent more from 2008-11 than they had originally planned — nearly $12.8 billion by then — with hundreds of millions of more dollars since.

And the economic development didn’t stop with drilling. Pipelines, including the $1 billion Fayetteville Express, were built. Money poured into industries as diverse as RV parks for itinerant gas field workers and manufacturers of railroad cars used to transport fracking equipment.

Existing infrastructure, particularly county roads, also had to be rebuilt after the pulverizing pounding of heavier equipment than they had been designed to handle. And that took money — an increase in the severance tax rate for the first time in more than 50 years. (See Natural Gas Severance Tax Collections 150 Times Larger.)

With virtually all of the mineral rights in the Fayetteville Shale leased to exploration companies, more than $2 billion in royalties have been paid to mineral rights owners since 2004, according to Kelly Robbins, executive vice president of the Arkansas Independent Producers & Royalty Owners. Regular royalty payments go to owners in all 75 Arkansas counties, he said, and to absentee owners all over the country.

And, Robbins is quick to point out, the natural gas industry developed without the common lure of tax incentives. “Our incentive was we were blessed with the resource,” he said.

Natural Resources

Extracting that resource, however, has been controversial, to put it mildly. In addition to direct environmental protections, the Oil & Gas Commission has amended its regulations approximately 120 times, and the law has been amended three times, Bengal said. (See Regulators Cite Greater Shale Knowledge as Environmental Complaints Dwindle.)

New rules associated with natural gas development in-cluded hydraulic fracturing regulation, chemical disclosure, well spacing, horizontal drilling issues and a number of environmental safety practices.

“Prior to the shale those changes wouldn’t have been necessary with regular oil and gas development,” Bengal said.

After a swarm of small but disturbing earthquakes centered on Guy in Faulkner County, the Oil & Gas Commission voted unanimously to issue a permanent disposal-well moratorium in the summer of 2011. Arkansas was one of the first states to address seismic issues associated with disposal wells, Bengal said.

On the Horizon

A “dramatic spike” in demand for natural gas could encourage more drilling, Bengal said, but even the rush wouldn’t be like it was in the early days since mineral rights in the shale are almost completely leased.

One issue on the horizon could be a blessing to the natural gas industry.

In June, the Environmental Protection Agency proposed a plan to cut carbon pollution from power plants.

Replacing coal-fired generation with gas-fired power plants is presumed to be a part of that answer. That means increased demand for gas.

While electric utilities and business groups have warned that the EPA proposal will drive up the cost of electricity, AIPRO’s Robbins said the new regulation could create the kind of new demand needed to expand the natural gas industry even more.

“We are going to continue to produce,” Robbins said. “The market will dictate how much.”

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