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Rebound of Oil and Gas Spells Benefits for Region

Forced to innovate and cut costs when oil and gas prices plummeted, energy companies presently operate in a lean way. With energy prices again rising, those companies are likely to invest in drilling and undertake other projects that create jobs.

The views expressed in this piece are those of the author.

The oil and gas industry is in the early phases of rebound in the Marcellus and Utica shale basins, portions of which are located in the Fourth Federal Reserve District, and that rebound might bring renewed investment and jobs to the region.

Beginning in 2014, a decline in oil and gas prices caused a severe contraction in the industry, including a cessation of new drilling activity. The price of a barrel of oil was more than $100 in early 2014, then it began to sink, reaching a low of nearly $26 by early 2016. As of January 2017, the price had risen to roughly $52.

Both oil and natural gas prices experienced a 2-year decline beginning in the first half of 2014 but have risen fairly steadily since early 2016.

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Unlike some national oil companies in other parts of the world, energy companies in the United States are for-profit operations with shareholders who require growing earnings per share. Drilling for oil is expensive—it’s not uncommon to spend millions on a single well. Thus, companies will halt drilling immediately if costs for extracting hydrocarbons exceed market prices.

Active oil rigs in the United States dropped precipitously in recent years, reaching a low in mid-2016 not recorded since 2000, but their number has climbed since.

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John Shackelford
John Shackelford

Many companies have found innovative ways to extract more oil and gas while spending fewer dollars. The results have been spectacular.

In an effort to maximize profit, many companies have found innovative ways to extract more oil and gas while spending fewer dollars. The results have been spectacular. In certain oil and gas fields, companies have lowered their break-even costs reportedly by 40 percent compared to the previous period of high drilling in 2014.

Recently, too, companies have begun unlocking previously untapped shale formations with new technologies, extracting more oil through rock that had been considered non-producing. That is particularly true in the Permian Basin (West Texas) and in the Bakken (North Dakota) fields.

Therein lies a silver lining to the recent, rapid, and sustained decline in world oil prices: The price drop prompted initiatives, including those to lower company costs and increase innovation, that have made domestic companies very competitive with world market providers.

Exploration and development companies have reduced their operating costs during this economic downturn; they can produce at a price point of $50 per barrel, economically. These companies will soon experience some upward cost pressures in their expenses, as service companies are expected to increase their prices, reportedly by 20 percent, in order to regain profitability. However, the overall structural changes that have been achieved by the industry, involving better equipment, high-speed drilling, enhanced hydraulic fracturing, better mapping of fields, and new pipelines, will bring greater drilling activity in the Marcellus and Utica fields and are expected to keep costs reduced by 25 percent, according to industry analysts.

The US oil and gas industry in 2016 comprised 5.6 percent of gross domestic product. Salaries of the industry’s workers (excluding service station attendants) average more than $100,000 per year and are a large contributor to the economies where drilling is located. When the industry expands, it has a widespread effect on transportation, services, and the steel industry.

In 2016, when prices reached their recent low, there were more than 5,000 wells drilled that energy companies left uncompleted. These wells are basically ready for production and can be brought on line in a matter of weeks. A number of such wells are in the Fourth Federal Reserve District, which comprises Ohio, western Pennsylvania, the northern panhandle of West Virginia, and eastern Kentucky. The Fourth District and the United States stand to benefit as production resumes. The decline of coal utilization has eliminated many long-term jobs, especially in Appalachia. The Marcellus and Utica fields can supply a partial replacement and supplement as the coal industry adjusts.

Recent increases in crude prices to more than $52 per barrel and stabilized gas prices have encouraged the major lease holding operators to increase their 2017 capital expenditures in West Virginia by 7 percent. One announcement promised a $1.3 billion budget for renewed drilling using very long lateral (fracked) completions of up to 7,000 feet, which would lead to more production from each well. Additionally, Shell Oil has announced plans to build an ethane cracking plant near Pittsburgh. Such a facility, during construction and when completed, could create 6,000 construction jobs and more than 600 permanent facility jobs.

The plant also would shorten the distance that oil and gas must be transported from producing wells to processing facilities. At this time, the closest processing plants are in Texas and Louisiana. Building downstream processing facilities here will benefit the long-term health of the region’s production of oil and gas.

While oil and natural gas prices’ recent climb is reason for optimism, it is important to consider that an increase in gas production may lead to a decrease in overall gas prices, and companies may again restrain production. Because prices are dictated by supply and demand, companies must remain diligent in balancing the supply they are producing with global demand.

Sum and substance: Oil and gas prices are rebounding, and recent announcements make it clear that the oil and gas industry is again investing, including in areas of the Fourth Federal Reserve District.

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