Illinois 'fracking' off to slow start amid oil-price slump | Business News

Illinois ‘fracking’ off to slow start amid oil-price slump

26 Jan 2015 | Author: | No comments yet »

Illinois ‘fracking’ off to slow start amid oil-price slump.

ST. Lyle Weber paid off a sizable chunk of his son’s college loan three years ago with money he got from an oil company intending to drill on his farmland. “You get this oil lease check, and all of a sudden you think, ‘I deserve one of these things every day,'” said Weber, 55, a corn and soybean farmer in Gallatin County near the Kentucky border. LOUIS The oil and gas drilling technique known as “fracking,” once trumpeted as a job-creating boon for southern Illinois, is off to a feeble start in the state as slumping oil prices and the rigors of Illinois’ new regulations have energy interests cautiously waiting on the sidelines.

Weber won’t say how large his check was, but many farmers sold leases for $100 to $200 an acre, which can add up to a nice fat one-time check for those with 500 or 1,000 acres. Two months after a legislative panel approved long-awaited rules for high-volume hydraulic fracturing, the Illinois Department of Natural Resources says only Denver-based Strata-X has registered with the state to pursue such drilling. The lack of immediate movement contrasts sharply with a land rush in recent years in southern Illinois, where energy interests spent millions snapping up oil and mineral leases spanning hundreds of thousands of acres in anticipation of a shot at the area’s oil and natural gas deposits.

By the time the permitting process was in place in November 2014, oil prices were dropping rapidly, ironically a byproduct of fracking’s success in the U.S. Today oil is selling for under $50 a barrel, half of what it was priced at when Illinois dreamed of an oil boom that would help solve its budgetary woes and bring much-needed jobs and revenues to the southern part of the state. The DNR then set about writing rules to implement the regulations; it took more than a year before they were revised, and a legislative committee approved them last November. Seth Whitehead, Illinois field director for Energy in Depth, a public relations arm of the Independent Petroleum Association of America, said Illinois would have fared improved had some fracking wells been drilled. “The shale play is unproven,” Whitehead mentioned, referring to a geological formation that consists of oil or all-natural gas deposits. “If there were wells in production by now, we’d be in considerably greater shape. A recent study by IHS, an industry research firm, concluded four-fifths of the oil estimated to be pumped this year from tight geological formations such as sandstone or shale still can be profitable at $50 to $69 a barrel — a span an IHS executive said would “cast a big chill on the level of activity.” Some companies have drilled exploratory wells and remain optimistic.

There’s no doubt about it.” Illinois’ timing couldn’t have been worse. “They finally got the rules passed, and it was days later that the price of oil started falling,” Whitehead said. Chris Young, a DNR spokesman, said addressing criticisms about the process’s pace is difficult because the industry is in its infancy and the first permit isn’t in place. The process can pull up vastly larger amounts of hydrocarbons than traditional drilling, making it wildly profitable once a well is drilled. “I wouldn’t be waiting by the mailbox,” said Timothy Hoops, chief executive of Denver-based Strata-X Energy. Instead, his company is looking to frack properties they’ve leased in proven shale plays in states such as North Dakota and California, where production costs are low enough so the company can still make a profit.

Still, Strata-X will probably continue to drill lower-producing traditional vertical wells in Illinois, Hoops said, because those wells would be profitable even if prices drop to $40 per barrel. Hoops declined to say how much oil prices would have to rise before the company would move forward with high-volume fracking in Illinois, saying only that “we’re far off” the mark.

Tres Knippa, a Chicago-based hedge fund manager and trader, said few lenders are going to dole out more money to companies that were counting on higher oil prices to pay back existing loans. It was just two years ago that President Obama mentioned, “we can not just drill our way to reduced gas prices” in a speech bashing Republican calls for… According to a Goldman Sachs report issued this month, oil prices will “slow shale, not kill shale.” Prices, Goldman said, won’t retreat far enough to cause widespread closings of existing wells. Production costs for fracking are expected to continue to decrease as the industry matures and learns how to cut costs, the investment banking firm said. He said it’s probably higher-yield debt shouldered by significant fracking operations will most likely be downgraded, and there’s a opportunity the debt will not be repaid.

On his first day on the job last week, Director Wayne Rosenthal found himself with 36 employees and five attorneys who were hired for work that doesn’t exist — handling fracking permits. Goldman Sachs stated it expects oil costs to recover beginning in 2016, reaching $65 a barrel just after hitting bottom at about $40 a barrel in the second quarter of this year. Illinois has already lost a potential $500 million windfall over a 10-year period, according to an analysis conducted for the Tribune by Mark Haggerty of Headwaters Economics in Montana. Haggerty said it wouldn’t make much sense for Illinois to reduce its severance taxes to lower fracking costs because the tax accounts for only about $2 per barrel of a driller’s costs. “If the price is swinging by 50 percent and your tool belt can affect the cost by 2 percent, you probably aren’t going to be able to do that much,” he said.

His mother just turned 90, and he decided he could be close to her and also consult for oil drillers, which he viewed as an easy way to make a living. From 70 to 80 percent of the sand market is contracted in advance, according to Samir Nangia, a principal at the Houston-based research company PacWest Consulting Partners, a unit of IHS. Bellamy said he expects sand mining companies with expansion plans to put those on hold. “If I worked at a small mine, I’d be polishing up my resume in case oil prices linger in this unattractive range further into the year, which we think they will,” he said.

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