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

25 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.In the $1.6 trillion-a-year oil business, global titans like Exxon Mobil wield more economic might than most of the nations on Earth, and scores of wildcatters scour land and sea for the next treasure troves of crude. 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. Then there are the “strippers” — scavengers who resuscitate once-prolific oil fields to coax as little as a bathtub full of crude a day from each well.

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. Collectively, they operated nearly a half million oil wells that produced more than 730,000 barrels a day in 2012, the most recent year for which figures were available. That’s one of every 10 barrels produced in the U.S. — equivalent to the entire output of Qatar, or half the crude Royal Dutch Shell, Europe’s largest energy company, pumps worldwide every day. “This is killing us,” said Todd Shulman, a University of Colorado-trained geologist who ran fracking crews in the Rocky Mountains before returning to Vandalia, Illinois, in 1984 to help run the family’s stripper well business. 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. Stripper wells — an inglorious moniker for 2-inch-wide holes that produce trickles of crude with the aid of iconic pumping machines known as nodding donkeys — were a vital contributor to U.S. oil production long before the shale revolution.

Though a far cry from the booming shale gushers that have pushed American crude production to the highest in a generation, stripper wells are a defining image of the oil business, scattered throughout rural backwaters abandoned by the world’s oil titans decades ago. It would be foolhardy to harvest crude from wells that won’t pay for themselves, said Shulman, who scrapes remnants from old Texaco and Shell fields 310 miles south of Chicago, in the heart of what had been a booming oil region in the 1930s. 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.

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. Unlike shale fields that can be quickly shut down and restarted in response to price swings, stripper operations are geologically and technically delicate. 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. Shut a stripper well down and chances are the bottom of the hole will fill with water or permanently clog with sand and you’ll never see another barrel of oil, said Brad Gessel, who operates 200 stripper wells in fields formerly owned by the likes of Shell near Whittington, Illinois. “If you shut it in, you may never get that production back again,” Craig Hedin, a veteran Illinois oil lawyer whose four-decade career included helping negotiate Exxon’s 1989 sale of the sprawling Loudon field in 1989.

Loudon was a 400 million- barrel jewel in Exxon’s crown for half a century until output slowed to such a slow gurgle that it was no longer worth the company’s attentions. 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.

First, they’re suspending new drilling, Gessel said in an office at the back of an industrial showroom stocked with heavy-duty elbow pipes, gauges and other gear sold by the family’s other line of business, Gessel Pump Sales & Service Inc. 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… That’s a higher proportion of stripper-oil supply than any other crude-producing state except Missouri, which also gets 100 percent of its oil from scavenged fields.

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. The price Countrymark, a closely held Indianapolis-based maker of fuel for farmers, pays oil producers averages about $7 a barrel less than the U.S. benchmark, West Texas Intermediate crude. 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.

The discount accounts for transportation costs incurred by Countrymark to gather and ship the oil to the refinery by truck and pipe. “I’m going to try not to lay anybody off because we’ve spent years building a really good workforce,” said Gessel, who started the company with his father and brother in 1980 by kicking in $5,000 apiece. 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.

Bakken crude, which like Illinois oil trades at a discount to the benchmark to account for shipping costs, fetched $39.97 a barrel on Jan. 13 before rebounding to $43.08 the next day. 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. The price’s 2014 peak was $103.01 in June. “I maintain the shale stuff has to have a high price to work,” Gessel said. “The Bakken stuff doesn’t work at $35. 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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