In Arkansas’ boom-and-bust fossil fuels industry, the bust won’t budge.
Three years after natural gas prices plunged to their lowest point since 1998 — one-sixth the price seen in 2005 — the gas market remains depressed, drilling is dormant, and oil production is flat in the traditional crude belt of south Arkansas.
Economists and regulators don’t expect that to change soon, though vast resources are still underground. It’s just not cost-effective to retrieve them.
“Production and drilling have significantly declined as a result of low oil and gas prices over the last four years,” said Lawrence E. Bengal, director of the Arkansas Oil & Gas Commission, which regulates the industry. “Unfortunately, with continued low prices, especially in natural gas, that trend is expected to continue for the foreseeable future.”
Remnants of the gas boom now dot the roadsides of north-central Arkansas, idle metal buildings and job sites that look abandoned, but relatively new.
They sprang up after natural gas production skyrocketed about 15 years ago thanks to an extraction method known as hydraulic fracturing, which unleashed torrents of gas across the U.S., much of it from a north-central Arkansas formation known as the Fayetteville Shale.
The gas gusher delivered what the industry promised, cheap and abundant domestic energy, but nobody fully realized just how cheap it would go. The glut eventually overwhelmed the market.
Gas that sold for nearly $15 per million British thermal units in 2005 was worth $1.62 per million BTU in February 2016. Last Monday, the Henry Hub spot price for gas was $2.86, according to the U.S. Energy Information Administration.
“We had a gas boom that coincided with the recession [2008-09], so in most of the state it felt like the effects of the Great Recession were not as severe as in the rest of the country,” said Mervin Jebaraj, director of the Center for Business & Economic Research at the University of Arkansas.
“The state invested a bit, and a college degree program to provide workers for the industry was created. A lot of businesses went into this riding high, but now I don’t think we’ll see improvement until prices rise significantly.”
Big Players Exit
Last year, two major producers sold operations generating nearly 80 percent of Fayetteville Shale gas, abandoning their stakes after the bonanza. A $2.4 billion sale by Southwestern Energy to Flywheel Energy LLC of Oklahoma City and a $300 million sale by Australian multinational BHP Billiton to an LLP owned by Merit Energy of Dallas punctuated the end of an era.
A $200,000 commitment from Southwestern had initiated the college program Jebaraj cited, an associate’s degree path in petroleum technology at the University of Arkansas Community College at Morrilton. The college discontinued the program in 2016, after 10 years, as jobs for graduates dried up.
Recent drilling and production statistics are stark. Arkansas issued just 51 oil and gas drilling permits in 2018; 10 years before, there were 1,500, 30 times as many. Arkansas gas production, which hit 1.56 billion MCF (thousand cubic feet) in 2012, had fallen by more than half by 2018, to 577 million MCF, according to the website DrillingEdge.com.
Natural gas severance taxes collected by the state, which hit nearly $80 million a year in both 2014 and 2015, are also halved. In 2017, the last full year in the state’s database, the total was $38 million, and 2018 estimates are even lower. County property tax totals also swooned.
“Smaller and more rural counties really got an economic shot in the arm from natural gas production, and they’re just not getting that now,” Jebaraj said. “Severance tax receipts that were close to $80 million a year statewide are now probably around $25 million.”
Huge Reserves Remain
Both Jebaraj and Bengal emphasized that large amounts of natural gas remain in the Fayetteville Shale, a sediment layer a mile underground running west to east across the northern third of the state. Southwestern Energy began its operations there in 2002, unlocking gas in the shale rock by drilling down, then horizontally into the formation, and forcing tons of water into the wells to pulverize shale rock and unlock the gas within.
The method succeeded so well that companies eventually produced more gas than they could profitably sell.
“There are two gas-producing areas in Arkansas,” Bengal said. “There’s the legacy producing area around Fort Smith [the Arkoma Basin] and the Fayetteville Shale. The legacy area has been producing for decades, and those reserves are being depleted. But there’s a huge resource still available in the Fayetteville Shale waiting to be produced. It’s just waiting for gas prices to rise enough to allow that.”
Even though Arkansas still has plenty of shale gas, Jebaraj said, other states offer fields that are far more accessible. “A lot more natural gas deposits are available to exploit around the country.”
That was one reason Southwestern Energy sold its stake, according to company President and CEO Bill Way. “The sale of Fayetteville represents a pivotal and deliberate step towards fulfilling our promise to reposition Southwestern Energy to capture greater returns from our higher-margin Appalachia assets,” he said in a September statement.
Under that deal, Southwestern sold its entire stake, including thousands of wells clustered in five counties: Van Buren, Cleburne, Conway, White and Faulkner. Sale terms included more than $1.8 billion in cash and Flywheel’s assumption of nearly $440 million in Southwestern’s contractual liabilities.
That investment could pay off handsomely if prices surge, but experts are doubtful. The Energy Information Administration expects strong growth in gas production to keep downward pressure on prices through this year. “EIA expects … natural gas spot prices will average $2.85/MMBtu in 2019, down 30 cents/MMBtu from 2018,” the agency’s short-term energy outlook said last week.
Meanwhile, Arkansas petroleum production is flat and likely to stay so, Bengal said.
“It fluctuates slightly due to price, but averaged between 5 million and 6 million barrels a year over the last few years,” he told Arkansas Business. “The resource base is well established, and at the tail end of the production decline curve, with production remaining relatively flat going forward.”
The EIA expects oil prices to stay low as well, forecasting that spot prices for Brent crude oil will average $63 a barrel in 2019 and $62 a barrel in 2020, down from a $71 average in 2018.
UACC-Morrilton, which discontinued its special industry training program after Southwestern laid off 600 employees in the Fayetteville Shale, graduated its last class of petroleum technology students in May 2016. Over a decade, almost 500 students earned certificates or degrees. As the program wound down, administrator Diana Arn, who became the college’s interim chancellor in January, took the development philosophically.
“In collaboration with Southwestern Energy and other companies, UACCM met a labor market need and trained a skilled workforce,” she said at the time. “Now we have to adapt as industry needs change.”
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