Friday, November 27, 2015

Ohio's fracking boom hits speed bump

By Dan Gearino:

CAMBRIDGE, Ohio — When shale oil-and-gas investment hit eastern Ohio three years ago, the results could be measured in steaks and Shiner Bock beer.

At least that’s the way they saw it at the Forum restaurant, a hangout for out-of-town oil-and-gas workers just off I-70. In the evenings, the bar at the front of the house was filled with customers from Texas and Louisiana, and they tended to order from the pricier part of the menu.

So what now, as a sharp drop in oil prices is raising worries that the U.S. energy industry’s boom-and-bust history will reappear?

Despite such concerns, business remains brisk at the Forum, says co-owner Alex Theodosopoulos, sitting in a booth after a weekday lunch rush. His sales to oil-and-gas workers have dipped some but remain high.

“The drilling and stuff has slowed down some, but they’re still drilling,” he said.

Over and over, merchants in shale country gave a similar response: Sales are down, but business still is pretty good.

This sentiment is rooted in the history of Cambridge. The city and region have been tied to the energy business for generations, so the ups and downs are not shocking in the way they might be in other places.

“This is a resilient community and one that knew instinctively what it was like to come down from” an energy boom, said Jo Sexton, president and CEO of the Cambridge Chamber of Commerce.

City government is feeling the pinch already. After seeing a big increase in income-tax receipts in 2013 and 2014, city officials are using 2012 income figures as a guide for writing the 2016 budget.

“Income-tax receipts are down drastically in the last quarter and a half,” Mayor Tom Orr told the local newspaper, The Daily Jeffersonian, this week.

Pushing ahead

Oil prices are down because of many factors, most of which are beyond Ohio’s Utica and Marcellus shale, rock formations deep beneath the earth that contain vast quantities of oil and gas. The world oil market has been absorbing a growth in supply from North America, including from shale. As supply exceeded demand, prices fell.

The bottom fell out in the fall, when the Organization of Petroleum Exporting Countries, the world’s largest oil cartel, decided not to cut back on production, which pushed prices even lower. This was an attempt by Saudi Arabia and other OPEC members to put pressure on North American producers, said Juan Pablo Fuentes, an economist for Moody’s Analytics.

“OPEC has been the producer that increases output when prices go up and decreases output when prices are low,” he said. “They decided this time around that they don’t want to continue losing market share.”

It’s a move that has rocked markets around the world. In Ohio, officials issued two drilling permits in the Utica in 2010, and then saw the figures skyrocket, hitting a peak of 712 permits last year, according to the Ohio Department of Natural Resources. The activity clearly has taken a step back this year, with 441 permits issued as of last week.

The decline is a result of a pullback by companies such as Chesapeake Energy, the largest producer operating in the state, which had 190 new drilling permits last year and only 98 so far this year.

A reduction in permits is going hand in hand with a reduction in drilling. Energy companies had 19 rigs drilling new wells in the state last week, down from a recent peak of 47 in January, according to oilfield-services firm Baker Hughes.

As rigs go idle, workers get laid off, including those who work for outside companies that serve the rigs.

The companies are trying to wait out low prices, and most can easily ramp up production when prices are higher. So when will that be?

“I think we have reached bottom,” Fuentes said. “Our sense is that prices are going to gradually improve in the next year.”

The key word there is “gradually.” He anticipates that U.S. benchmark prices will go from the $40-per-barrel range, where they are now, to a high in the $60 range. For some perspective, the price was more than $100 per barrel as recently as summer 2014.

While low prices are holding down oil-and-gas producers, it should be noted that a number of big projects are continuing related to the shale economy, including pipelines and processing plants.

“The infrastructure is where you see most of the development happening,” said Matt Warnock, an attorney for Bricker & Eckler, a Columbus law firm. “On the drilling side, you’ve really seen a slowdown.”

His firm said this month that $33.7 billion worth of projects have been announced or are under construction, of which more than 50 percent have been disclosed since last year at this time.

Riding the wave

The Cambridge area economy was struggling before the boom, and then struggled to digest the boom, which was the largest and most sudden in memory. New businesses rushed into town. New hotels went up, and two more hotels are under construction. Car dealerships had record year after record year.

“We were invaded,” Sexton said about the influx of oil-and-gas workers. “It was a good invasion, but we were invaded.”

The businesses that are hurting are the ones whose sales are the most closely tied to oil and gas.

“This downturn has been traumatic, drastic. I can’t think of enough adjectives,” said David Hill, owner of an oil-and-gas firm in Byesville, just south of Cambridge. He also is president of the Ohio Oil and Gas Association trade group.

Among the other businesses affected is SudZee’s Dry Cleaner and Laundromat. It opened in early 2012, just in time to benefit from the influx of oil-and-gas workers who needed regular laundry service. This year, business is trending in the other direction.

Owner Sam Buckey expects to finish 2015 with business down about 40 percent from the year before. But before you feel sorry for him, he will remind you that he still is doing much better than he ever expected.

“It’s been a great ride,” he said. He spoke in the back office of the business, petting his dog NoNa, which stands for No Name. “When it was booming, it was good. Then, it slows up and you have to wait again for it to take off.”

The region’s economic indicators are strong.

Guernsey County, where Cambridge is the county seat, had 5.4 percent unemployment in October, the most recent data available. This is a dramatic improvement from the 10.9 percent rate in October 2010, when eastern and southeastern Ohio were in a prolonged funk.

“We’re extremely excited about shale, and we think the best days are ahead, not behind us, despite the fact that prices have been down,” said Dana Saucier, managing director for shale energy and petrochemicals at JobsOhio, the nonprofit economic-development organization.

The question, in Ohio and around the world, is when demand will catch up to supply — and growth resumes in earnest.

Sexton and other Cambridge-area business leaders say they expect a gradual recovery in the local oil business. Energy producers such as Hill hope this is true, but they’re preparing for a longer downturn.

“It will probably never get as busy as it did before,” Sexton said, “but it will ramp up considerably.”
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