Utica Shale Production in a Slump, Waiting for Next Boom
March 26, 2015

Production in the U.S. is going to go down. - Jeff HuntsbergerTo tax an industry that is in decline is a bad idea. Michael Wise

Whatever happened to the shale energy boom of Northeast Ohio?

One day companies were signing contracts and writing checks and “thumper trucks” were evaluating the depth of Utica shale along Geauga County highways.

A few months later, the speculators and the hype just evaporated.

The most recent news — which shale energy experts shared at the Geauga Growth Partnership breakfast March 17 — was unequivocal: The industry will turn its sights back to the region again, probably in a few years.

However, if people do not already have a really big lease deal in writing, they may have to settle for a smaller one when interest in this area sparks again.

Four panelists from McDonald Hopkins, a business-advocacy law firm with offices in Cleveland, talked about the boom-and-bust cycle typical of the oil and gas industry.

Southeast Ohio property owners who signed up while oil and gas companies were fighting for acreage corralled leases for $5,000 an acre and dreamed of making millions of dollars, as some did, said Jeffery Huntsberger, who is a member of McDonald Hopkins’ energy practice, and who served as moderator.

“There was a time most of us thought that would happen in Geauga County,” he said.

Drillers in Southeast Ohio have gone down thousands of feet to plumb the depths of the Utica shale, bringing up enough oil to over-supply markets. Prices have fallen, putting a pinch on drilling, which costs $7 million to $10 million a well, Huntsberger said.

As everyone has seen at the gas pumps, the harvesting of oil within the U.S. at the rate of two million barrels a day has driven crude prices down to about $40 a barrel around the world, he said.

Industry in a Slump

The energy industry, as a whole, has hit a downturn, which has had a terrible impact on the world economy, Huntsberger said.

“It’s a very interesting economic picture,” he said. “Production in the U.S. is going to go down.”

Northeast Ohio is not rich in oil, but the Utica shale layer is predicted to produce more LNG, yielding butane, ethane and white gas, making it a viable region for drilling, Huntsberger said.

Two hurdles to developing the region are funding and transportation. Because energy prices are low, loans have dried up, said Steve Gross, who does business restructuring services at McDonald Hopkins.

“Lenders and investors (are) all going to step back and create more of a liquidity problem than you already have,” he said.

Worried about the recent price drop, they will not be as willing to invest in future projects, Gross said.

Also, this region is largely untested. Only one Utica well has been drilled in Geauga County and it never went horizontal, so it is untried, said Michael Kaczak, who also does business restructuring services at the law firm.

Lenders are more willing to fund work on a reserve that has been tested, and an area with proven wells is even better, he said.

NEO Lacks Pipelines

It takes investors to build pipelines, as well as time to coordinate easements and build the infrastructure, Kaczak said.

Investors are holding onto their cash as the industry players, affected by the energy price drop, rebalance, Huntsberger said.

Southeast Ohio has plenty of pipelines, gathering oil from individual wells and taking it to larger trunk lines and to still larger lines going to the refineries, he said.

Such an infrastructure would be needed to put Northeast Ohio in the game, and the money isn’t there right now for that to happen, Huntsberger said.

Political issues have also been part of the slowdown in shale exploration in this region.

Gov. John Kasich has been pushing a severance tax of 6.5 percent, said panelist Michael Wise, adding if legislators don’t create that tax on well production, Kasich may present voters with a referendum for a 10 percent severance tax.

“To tax an industry that is in decline is a bad idea,” Wise said. “These companies invest a billion dollars at the drop of a hat.”

In the last three years, about $20 billion has gone into the ground in Southeast Ohio and production is healthy, he said.

So there is no shortage of energy fuel in the U.S. right now.

“We’re producing as much oil as the Saudies and as much (natural) gas as Russia,” Huntsberger said.