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After Boom in Shale, Arkansas Gas Industry Faces Halt in Drilling

9 min read

Call it the silence after the boom.

After a decade-long, multibillion-dollar bonanza of natural gas production in an Arkansas field called the Fayetteville Shale, the bust has landed with a thud.

Production skyrocketed 10 years ago after a gas extraction method known as hydraulic fracturing came to north-central Arkansas. The resulting boom pumped billions into the economy just when the recession-racked state needed it most.

State severance tax collections rose dramatically, and thousands of jobs in the gas fields and related industries poured in — not to mention a boom in royalties paid to mineral rights owners — but now production in the wells is in a free fall. Drilling has ended completely.

Employment in the mining and logging sector, where gas jobs are listed by the Bureau of Labor Statistics, is back to where it was in 2006, at around 7,000 jobs statewide, down from a peak of nearly 12,000 in 2011-12.

In those days, oil and gas companies eager to start fracking shale plays all over the country promised a new era of abundant, cheap domestic energy, and they certainly delivered it. The irony is that abundant energy wound up being too cheap: Demand didn’t grow as fast as the torrent of gas, creating a glut that undercut prices and accelerated the bust. Natural gas prices are less than one-fifth what they were a decade ago.

Again, though, the timing may be fortunate for Arkansas.

“If you could think of a time for a bust, from a state economic perspective this is the time you’d want to have it, because so many other sectors are doing so well,” said Kathy Deck, director of the Walton College Center for Business & Economic Research at the University of Arkansas.

Deck, who led a study of the economic impact of the shale gas boom in Arkansas in 2008 and updated it in 2012, pointed to Arkansas’ record-low unemployment rate. “Practically every other sector is creating jobs hand over fist. You never wish for any sector to bust, but the effect on the state’s overall economy is muted.”

The rapid rise and fall of shale gas production is one of the signature energy stories of this century. In Arkansas, thousands of workers were dispatched to the shale region, earning high wages that they lavished on local economies. Landowners reaped lucrative royalties for their mineral rights, at least for a while. Arkansas’ natural gas severance tax revenue went from less than a million dollars in fiscal 2008, before the state raised the tax and recomputed how it’s levied, to more than $11 million in 2009. The climb went on, to $45 million in 2010, $55 million in 2011 and $77 million in 2014. In fiscal 2015, which ended last June, the total was nearly $79 million.

From there, the bottom fell out, according to the state Department of Finance & Administration. This year’s collections over 11 months are less than $31 million, on track for a total of perhaps $33 million. That’s far less than half of 2015’s peak, and the numbers are expected to spiral down further.

“On these shale-play wells there is a steep curve,” Deck said. You get most of the production at the very beginning and, as time goes on, less and less until you get nothing.”

Under the Surface

Larry Bengal, director of the state Oil & Gas Commission, which regulates drilling and production in the state, agreed that the bloom is off the boom. “The bottom line is the Fayetteville Shale production peaked probably in late 2012 and has been slowly declining since. There are currently no wells drilling in the Fayetteville Shale. The last new well actually drilled was in December of 2015. The last wells to be completed, fractured and brought online occurred in January.”

Bengal tracked the rise and fall of shale gas production year by year. In 2006, 165 wells produced 14.8 billion cubic feet of gas; three years later, 2,138 wells were producing 520 BCF. By 2012, when production plateaued, 4,406 wells brought in a trillion cubic feet of gas. In 2014, it took 5,567 wells to produce the same trillion cubic feet, and production for 2015 declined to 923 BCF.

“All of that is price-driven,” Bengal said. “The decline in 2015 was due to reduced drilling. The decline now, which is going to be steeper, is a result of no new wells drilled and no existing wells completed.”

Southwestern Energy Corp. of Houston (and formerly of Fayetteville), the largest producer in the area, announced 600 layoffs in the Fayetteville Shale in January, part of a companywide loss of 1,100 jobs. Those layoffs came on top of 2015 cutbacks at the company, which cited depressed natural gas prices as the trigger.

BHP Billiton, the Australian mining giant, got a huge stake in the Fayetteville Shale in 2011 by buying the assets of Chesapeake Energy for $4.75 billion. It posted a $102 million loss in the play for the second half of 2015 and announced further cutbacks in the region and beyond.

A communications adviser for Southwestern, Christina Fowler, declined to discuss the downturn, instead offering links to the company’s most recent presentation for investors and its 2016 first-quarter earnings report.

That report said that net gas production in the Fayetteville Shale was down to 103 billion cubic feet from 115 billion cubic feet in the first quarter last year. The publicly traded company also reported a quarterly adjusted net loss of $32 million, compared with adjusted net income of $84 million a year ago.

Last month, an affiliate of Southwestern sold two compressed natural gas fueling stations, one in Conway and the other in Damascus, in another signal of the company’s shrinking presence in the shale area.

A spokesman for BHP Billiton, also publicly traded, declined an interview request. But in May, CEO Andrew MacKenzie told investors at a Merrill Lynch conference in Miami that BHP had paid too much for its shale stake in Arkansas, Texas and Louisiana and had bought at the wrong time.

“In reflection about the shale acquisition,” he said, “of course it was poorly timed because we bought at a high time in the market.”

When contacted for this article, shale gas producer XTO Energy, which merged with Exxon Mobil Corp. in 2010, asked for specific emailed questions but then didn’t respond to queries about current gas production, workforce reductions or plans for the region.

Van Buren County Judge Roger Hooper, whose county was a top gas producer in the Fayetteville Shale, acknowledged declines in sales and property tax revenues but said job cuts had been offset by hiring in other sectors.

“We haven’t really experienced an increase in unemployment,” Hooper said from his office in Clinton. “Of course, we’ve got a couple of well maintenance facilities by XTO and the headquarters for Southwestern down at Damascus.” Hooper said that jobs in agriculture, retail, health care and manufacturing had cushioned the blow of the gas bust. He also said the area was promoting tourism at Greers Ferry Lake.

“Yes, we wish we had gas benefits the way it once was, but we’re a resilient people, and we’re going to continue to go forward. We had 14 natural disasters between 2008 and 2012, from floods to tornadoes to ice storms, and we always pick up the pieces and focus on going forward.”

Gas Futures

Hooper has hopes that prices will rebound, pointing out that plenty of gas remains in Van Buren County, but low prices make it untouchable.

Deck foresees no rebound soon. “The bottom dropped out a couple of years ago when natural gas prices had been so low for so long,” she said.

The Henry Hub natural gas spot price in October 2005 was $13.42 per million British thermal units and was as high as $12.69 in June 2008. But by April of this year, gas was trading at less than one-sixth of that, just $1.92 per million Btu, according to data from the U.S. Energy Information Administration. Even though prices have rallied since April, to almost $2.50, the International Energy Agency earlier this month cut its prediction of worldwide gas demand for the third straight year.

“The shale revolution, as they say, brought a tremendous amount of supply in a very short period of time,” said Bengal, emphasizing that huge domestic gas supplies remain untapped. “There are a lot of well locations still to be drilled throughout the Fayetteville Shale — there are vast reserves — but the current low gas price does not support continued development. These wells, you remember, were brought on when prices were high. The demand couldn’t keep pace with the available supply.”

Despite the pain caused by the bust, Deck said the economic boom and its echoes are hard to overstate.

“The employment impacts, the dollars that were being generated in investment and the dollars that were being generated in royalties — all of those good things really helped to buffer the state from the other sectors’ losses during the recession,” Deck said.

“You found effects in transportation, in trucking and pipeline manufacturing, and in the hospitality industry. Workers were staying in hotels and eating restaurant food. That’s the beauty of any economic activity: It’s not contained to just one sector; you see those dollars flowing through the economy.”

The Center for Business & Economic Research’s May 2012 report said that gas-producing companies had invested more than $12 billion in the Fayetteville Shale during the boom years, contributing to $18.5 billion in overall economic activity. The report also noted the estimated $2 billion that state and local governments reaped in permit fees, and severance, property, income and other taxes. Severance taxes amounted to more than $400 million over 13 years, money that was split among state, county and local governments for roads and infrastructure.

Direct employment in the mining, quarrying and oil extraction industry in Arkansas more than doubled between 2001 and 2010, Deck’s research found, peaking at about 8,300. Royalties from mineral leases brought more than $2 billion to Arkansas rights owners between 2004 and 2014, Kelly Robbins of the Arkansas Independent Producers & Royalty Owners told Arkansas Business two years ago. Pipelines went in, including the $1 billion Fayetteville Express, and roads worn down by heavy use were rebuilt.

“State and local governments tried to make sure the benefits went to communities that were bearing the costs,” Deck said. “Now, after the bust, that tax revenue is not going to be there, and the benefit of all those employees and their dollars won’t be there, but that’s the nature of any boom-bust industry.

“The important thing, from an economic development perspective, is to recognize that it’s not forever, and to try to take advantage of the money while it’s there — investing in buildings and roads and infrastructure that will outlive the boom and benefit the community.”

Shale Legacy

Environmental opponents of fracking are not sad to see the boom end, citing ecological dangers that they say will outlive the boom. Emily Lane, who co-founded ArkansasFracking.org in 2011, said that health risks from water tainted by toxic chemicals and air fouled by compressor stations could have a lasting legacy in the shale play. (See Environmentalists Not Sorry to See Fracking Stop in Arkansas.)

The drilling of deep disposal wells for fracking wastes was also linked to a swarm of small earthquakes centered near Greenbrier and Guy in Faulkner County and in other states.

Deck said the boom and now the bust have left Arkansas in an interesting position, outperforming the rest of the country in job creation despite job losses in the shale industry.

“The 10-year boom-bust cycle was shorter than some projections,” she said. “The reason was that so much capacity came on at one time, not just in the Fayetteville Shale but everywhere.”

Deck said prices collapsed long before production capacity was depleted. “We still have abundant, cheap energy. The taps haven’t been turned off. Exactly the opposite.”

Still, she doesn’t expect another boom soon.

“Crystal ball gazing is the worst,” she concluded. “I would never say never, but I don’t believe the Fayetteville Shale will be the first place to pick back up again. There are much larger plays with reserves that can be more cheaply produced. That being said, technology improves in ways that are difficult to foresee. But I don’t think a turnaround is imminent.”

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