Will Power Crisis Revive Fracking? Don't Bet on It

Will Power Crisis Revive Fracking? Don't Bet on It
A generation rig owned by SWN Drilling Services is put to work in a patch of the Fayetteville Shale field, in northern Faulkner County southwest of Damascus in 2014.

The bust that ended Arkansas’ 10-year boom in natural gas production of the early 2000s has proved stubborn. The past five years silenced new drilling.

But talk of a potential industry rebound surged in the wake of last month’s energy price spikes after record cold and an electricity generation crisis in Texas and across the South.

February’s zooming prices, briefly thousands of times what they had been a week before, have moderated. But longer-term optimism bubbled up on the idea that gas offers new value for electric generation companies reassessing their mix of fuels to assure more reliability and flexibility in emergencies. A supply of gas, like coal, can generate power on demand, something that can’t be said for solar or wind production.

Nevertheless, without sustained higher prices, the promise of a natural gas rebound in Arkansas may be no more than hot air.

Even though the U.S. Energy Information Administration expects gas prices to stay about a third higher than they were last year through the rest of this year and into 2022, prices would need to rise further and stay high to reignite activity in Arkansas’ shale fields, said Lawrence Bengal, director of the Arkansas Oil & Gas Commission.

Bengal started as commission director in 2005, when fracturing was ramping up across the country and making inroads into Arkansas. Since then he’s witnessed the boom and bust of gas drilling in the Fayetteville Shale.

“The bottom line is there has been no increased gas drilling activity” in Arkansas, Bengal told Arkansas Business last week. Some companies have been reworking older wells, improving their efficiency and production, but the state hasn’t issued a new well permit since 2016, he said.

Hydraulic fracturing, which uses horizontal drilling and pressurized water to pry fuel out of porous rock, was largely a victim of its own phenomenal success.

Despite environmental concerns and some regulatory hurdles, fracking delivered plentiful and cheap energy, as its promoters promised. But it also unlocked a gargantuan glut that swamped the gas market. After trading at $19.63 per million British thermal units on the Henry Hub market in September 2005, gas fell below $6 per million BTU in 2010 and has not regained that level. On Wednesday, it was at $2.62 per million BTU.

Arkansas gas production peaked at 1.2 trillion cubic feet in 2012 and has declined by 60% since then. Declines of 12%-15% a year have leveled off recently to 8%-10%, and Bengal said that leveling off may continue. “But without a significant increase in drilling, the decline will continue,” he said. Sustained prices of $4 per million BTU would be required to get producers to “even consider” putting more wells into Arkansas’ Fayetteville shale. “The February price spike was a one-time thing, ‘Oh my God, we’re running out of gas!’” Bengal said.

The state issued 104 existing-well rework permits in 2020. “It brings back production to a certain extent,” Bengal said. “It won’t reduce Arkansas’ production decline to zero, but it could cut the decline to a lower rate.”

Arkansas, which reaped $77 million in excise taxes from gas production as recently as 2017, saw that total fall to just over $14 million in 2020.

Prospects for a natural gas rebound look nominally better nationwide than they do in the Fayetteville Shale.

“The February freeze created a significant spike in prices, with Henry Hub spot prices surging to $5.35, a height not seen since early 2014,” said Phil Kangas, U.S. partner in charge and energy and natural resources adviser for Grant Thornton LLP, the major Chicago accounting firm. Even though prices have fallen since, “we expect continued modest recovery in upstream operations,” Kangas told Arkansas Business. “While higher prices may spur additional production, the shift to renewable energy sources and political headwinds may also affect capital expenditures in upstream activity.”

Kangas noted that power generated from natural gas, 39% of the national mix last year, is expected to decline to 36% this year and 35% in 2022, as power drawn from renewable sources is forecast to rise from 20% last year to 21% this year and 23% in 2022.

Some producers are waiting to see what President Joe Biden’s administration will bring, Kangas said.

“The new administration’s core leadership team has just been confirmed at Interior, Energy, EPA and elsewhere,” he said. “Producers may be reluctant to spend capital to take advantage of higher expected prices before having a clearer view of what the new management will mean for the industry.”