World Energy Crisis: Out of Pan, Into Fire

As the calendar turns to fall, an eased energy crisis is turning fierce again worldwide with ominous headlines at every turn.

On the Tuesday after Labor Day, the Arkansas Democrat-Gazette carried front-page news on OPEC+ plans to modestly cut crude oil production, sending a message that pushed futures prices to near $90 a barrel again. Another Page 1 headline reported the battle-related disconnection of a Ukrainian nuclear power plant that’s the largest in Europe.

California, baking in record heat and some of the swiftest warming on the globe, declared a power grid emergency last week as rolling blackouts loomed and power demands hit previously unseen heights.

Scarier still, natural gas futures soared by a third last week after Russia pledged to keep shut the Nord Stream 1 pipeline, Russia’s biggest conduit of natural gas. Russia cited mechanical problems for the shutdown, but then blamed sanctions imposed on Russia by the West over Russian President Vladimir Putin’s war on Ukraine, now more than six months old. The pipeline runs under the Baltic Sea into Germany, delivering up to 59.2 billion cubic meters of gas a year.

The situation is grave with winter coming and supplies elusive and expensive. With inflation rampant, gas looks likely to only go higher in Europe. My son, who lives in Paris, his wife’s hometown, expects his heating bill this year to triple, at least, and views that as a lucky break. As Europe’s greatest nuclear power producer, France enjoys a pricing cushion.

As economies and societies face soaring inflation, the prospects looked daunting last week as European Union energy ministers gathered for an emergency meeting and gas futures surged more than 280%. Fuel prices, of course, drive markups in everything that must be shipped. It’s a vicious, tightening circle. 

Against that backdrop, Exxon Mobil has agreed to sell nearly 5,000 natural gas wells in the Fayetteville shale fields of Arkansas to Flywheel Energy, a closely held company based in Oklahoma City that has been doing business in Arkansas for years. Just 850 of the wells are producing at the moment, but Flywheel clearly sees long-term value in the properties on 381,000 acres in Cleburne, Conway, Faulkner, Pope, Van Buren and White counties. 

Rodney Baker, executive director of the Arkansas Independent Producers & Royalty Owners Association, says that in part because the country can’t export natural gas without costly liquefying, the United States can do little to help Europe.

He doesn’t expect short supplies to rekindle the gas boom that hit Arkansas like a gold rush 20 years ago. Over time, the spread of a new drilling process, hydraulic fracturing, unleashed such a glut of gas that the market was overwhelmed. The Henry Hub spot price fell from $13.42 per million BTUs in October 2005 to a low of $1.63 in June 2020. On Wednesday, gas was trading at about $8 per million BTUs, far better for U.S. producers but not enough to bring a drilling revival here, Baker said.

Exxon’s XTO Energy arm acquired the Fayetteville shale assets in 2010, the height of the fracking surge, for $650 million. Flywheel, which now has about 3,600 producing wells here, came to Arkansas in 2018, when it bought Southwestern Energy Co.’s stake in the shale play for $1.9 billion. Southwestern had pioneered Arkansas’ shale rush in 2004 with $11 million in land purchases.

Exxon has confirmed the recent 5,000-well deal, which it expects to close in October, but won’t reveal its price. Flywheel hasn’t even acknowledged the deal took place.

“Flywheel has been a good corporate citizen here for three or four years, which I guess is a long time now in a quick-changing industry,” Baker said. “So if it happens, we’ll be trading one good company for another. Everybody asks when the wells are going to start being drilled, but I’m not sure about that.” He said drilling companies had moved equipment out of Arkansas during the gas downturn for more lucrative prospecting elsewhere.

“We don’t have that equipment here to just pick up and start working again,” Baker said. “Prices are rising such that companies are considering drilling, but there’s a lot of uncertainty in the world, from the OPEC cartel to Ukraine, not to mention inflation.

“So I’m saying people are going to be cautious about standing those rigs up.”