‘Brutal’ times for shale industry likely will continue in 2016

Ohio’s Utica shale play had a tough year in 2015, as low oil and gas prices forced drillers to cut back their operations and the number of working rigs in the state plummeted.

It’s a slowdown that could last well into this year, if not longer. But with three years of drilling under their belts, leaders of the oil and gas industry say they’ve learned enough about Ohio’s shale play to know it will be profitable even when other shale plays are not, and drilling here eventually will gain pace again.

“It’s brutal,” summed up Shawn Bennett, executive vice president of the Ohio Oil and Gas Association in an interview in December. “And 2016 is going to be a continuation of 2015,” he predicted.

“When (the slump) came, in 2015, there was a lot of uncertainty in the air,” Bennett said. “Was this a market correction or was this something larger? It took about six months for people to realize it’s not a market correction — it’s the current state of the economy and an attack on the domestic oil and gas industry in the U.S.”

Bennett and other industry experts say low oil and gas prices, resulting from production in the Middle East as well as in other parts of the U.S., have driven prices down to the point that some wells are not attractive to drillers. The industry is cutting back, including in Ohio, where the number of active shale drilling rigs dropped from about 50 to fewer than 20 in 2015.

So what’s to like about Ohio’s oil and gas prospects? The Utica is the best, most efficient and most profitable shale gas play in the nation, observers and participants say. Ohio, along with Pennsylvania, might become the OPEC of U.S. natural gas — a threat to producers in other parts of the country. The two states’ Utica and Marcellus shale plays are sufficiently prolific that they can satisfy the nation’s natural gas needs all by themselves, drillers say.

And it’s so much cheaper to drill in the Utica, and its wells are so much more productive than the wells in other gas plays, that the Utica likely will cause other shale plays to lose more capital, drilling activity, jobs and resource production.

“Efficiencies and the prolific rock work together,” said Michael Moore, CEO of Oklahoma-based Gulfport Energy.

Moore spoke in December at the 2015-2016 “Shale Update” conference held by the McDonald Hopkins law firm in Cleveland. Also speaking at the event were Jay Salitza, managing director of oil and gas investment banking for KeyBanc Capital Markets, and Neal Dingmann, managing director of Sun Trust Robinson Humphrey, who was named a “Best on the Street” analyst for the energy sector by The Wall Street Journal.

Tough choices ahead

While acknowledging the industry’s tough times overall, the three had good things to say about the Utica shale play.

The Utica is helping drillers such as Moore to combat low commodity prices by allowing them to drill faster and cheaper than in other shale plays, and with better results from wells that are the best-producing in the nation.

“The pressures that we see in this rock, especially in the southeastern part of the play, is very different,” Moore said. “That’s what’s allowing us to produce these wells flat (with little to no drop off in production) for such a long period of time. … It’s been phenomenal.”

Salitza agreed with Moore’s prediction that production from the Utica, and also from the Marcellus, could shut down drilling in other shale plays, because the Utica’s wells have defied the odds in terms of production.

“A decline curve with no decline in the first year is unheard of. … You’re getting the same production for up to18 months,” Salitza said of the Utica’s well results. “You’ll certainly see a retrenchment in other basins, outside of the Utica in Ohio.”

Dingmann, though, predicts that some drillers, including some in the Utica, might face bankruptcy. Drillers with leases or pipeline commitments might have to drill, even if they sell their gas at a loss, he said, and some don’t have the balance sheets to withstand such a situation for long. Also, he expects credit to tighten for the weakest drillers, especially if production and cash flow drops as they slow down their drilling programs.

“It’s really going to be interesting to see what banks do. In the last quarter, production was still high enough that they didn’t have to give it much serious thought,” Dingmann said. But that will change in the spring, when the slowdown in drilling finally begins to affect production levels and causes some cash crunches, he said.

Drillers will have to make some tough choices in the coming year about where to send their few remaining rigs, which crews they can afford to keep and even which acreage they can keep under lease. Some leases require drillers to produce oil and gas in three or five years. Those terms will expire in many cases this year, so drillers probably will abandon some leases in the least-productive areas.

Waiting for price to be right

While the pace of drilling will no doubt be slower in the first half of 2016 than it’s been for the last couple of years, Ohio probably will fare better than most other oil and gas producing states. The slump might be worse than was feared, thanks to a mild winter in much of the nation, but eventually prices will rise.

In the Utica, in particular, prices stand to rise more than in other shale plays because there are still pipelines being built and brought online in Ohio. Drillers here have had to find a way to at least break even, while selling their gas for far less than it fetches in other parts of the U.S. Now, they have their costs low, their drilling programs efficient and can benefit the most from any increase in prices.

Many Ohio drillers already have spent the money to drill their wells, so their investment has been made and they are looking for a pipeline to get their gas to market.

“The last time I looked, there were more than 500 wells that were not online yet. … A good number of them are still looking for gathering lines,” said Jeff Dick, chair of the Geological and Environmental Science department at Youngstown State University, and himself a landowner with active oil and gas leases on his property.

Dick said he has seen a slowdown in activity, both in the shale fields and in the industry’s hiring practices. He said he knows of at least one Ph.D. candidate who is looking for a part-time teaching position because there are not jobs in the oil and gas industry itself at the moment — something that would not have happened a year or two ago.

Dingmann, Bennett and others don’t see the situation improving until at least the second half of 2016 — and even then drilling might come back more slowly than it began. But everyone agrees on one thing: The Utica is too big and too productive to ignore for long.

Oil and gas companies may come and go, but the gas will remain and eventually will be brought to the surface.

“In the long run, these are proven (well) results, and proven results always get produced when the price is right,” Dick said.