The Arkansas Chamber of Commerce wants you to know the latest numbers resulting from the economic impact of natural gas production in the Fayetteville Shale. They hired the University of Arkansas’ Center for Business and Economic Research to update information, and the report obliged last week with an upbeat message. On its face, all looks rosy, but if we are assuming good times will continue, it is advisable to look closer at the gas industry and examine the shaky foundation on which it is built.
One would never guess natural gas is walking a tight rope when reading the economic claims in this report. This revision of an earlier version, paid for by Arkansas Independent Producer and Royalty Owners, is well timed. The first report in 2009 took on the challenge of projecting economic benefits 2008-12 without knowing the market price would soon drop like a rock. By staying within the same 2008-12 timeline, the update doesn’t have to risk projecting where things will go from here or address the controversial debate about the future of natural gas. Perhaps the most important objective was to make Arkansas’ gas impact look good in an effort to squelch the severance tax petition drive.
A positive natural gas economic impact for Arkansas at a badly needed time has been a boon to many small businesses and workers. The same cannot be said for companies holding dry gas leases. In today’s market, exploration and production companies are forced to operate in the red. Just how long they will or can do this is anybody’s guess. Producers during profitable times borrowed heavily with the idea continued demand would keep prices high and allow them to recoup costs, pay debt and finance more wells. Now they are heavily leveraged, forced to offload dead weight assets and plagued with pesky environmental issues that have left many landowners unhappy and pushing for better regulation and oversight. Since the E&P sector is the most vital segment of the industry that direct and indirect service suppliers build on, upbeat predictions for future economic conditions are in question.
Pity the poor producer who has little cash, maxed out credit, lower earnings from wells in decline, spooked investors, the need to drill to hold onto a lease, lower consumption from an economic engine having trouble getting started, the possibility of lower demand with more mild winters, overloaded storage facilities and a market price that will only slowly recover while the overproduced glut is being used. In addition, they must find investors to finance new wells at an increasing rate since shale wells decline rapidly and production will eventually move from the hot spots to lower producing reserves.
An overzealous land grab for gas leases has brought on consolidation by big international players with deep pockets. They are looking to build their energy reserves and can play the waiting game for prices to return to a profitable level. While foreign interests may have come to the U.S. industry’s rescue, will Americans be comfortable when they wake up to realize we sold the farm and must pay world market prices to use our domestically produced resource?
Low market prices force E&P producers out of the Fayetteville Shale to more lucrative liquid-rich deposits. Most prominent is Texas’s Eagle Ford Shale and Ohio’s Utica Shale, but there is potential looming in Arkansas’s Brown Dense.
Whether updating Fayetteville Shale’s economic impact for the Chamber of Commerce was simply putting lipstick on a pig or whistling in the dark, the next chapter of this story will be more important than what was reported.
REFERENCES:
• Economic Impact of the Oil & Gas Industry in Arkansas (2009) www.arkansasedc.com/media/1933/the_economic_impact_of_the_oil_and_gas_industry_in_arkansas.pdf
• Revisiting the Economic Impact of the Natural Gas Activity in the Fayetteville Shale: 2008-2012 cber.uark.edu/Revisiting_the_Economic_Impact_of_the_Fayetteville_Shale.pdf
• Controversy on Shale Gas Boom and Burst Explained seekingalpha.com/article/569451-controversy-on-shale-gas-boom-and-burst-explained
• The Impact of a Looming Natural Gas Supply Problem seekingalpha.com/article/647401-the-impact-of-a-looming-natural-gas-supply-problem
• Where is the North American Natural Gas Market Headed? seekingalpha.com/article/38455-where-is-the-north-american-natural-gas-market-headed
• Southwestern Energy Company Q1 2012 Earnings Conference Call
Friday, May 4, 2012 www.swn.com/investors/Press_Releases/2012/05.07.12.pdf
• Insiders Sound an Alarm Amid a Natural Gas Rush www.nytimes.com/2011/06/26/us/26gas.html?_r=2&src=tptw
Putting On A Brave Face
By Joyce Hale
The Arkansas Chamber of Commerce wants you to know the latest numbers resulting from the economic impact of natural gas production in the Fayetteville Shale. They hired the University of Arkansas’ Center for Business and Economic Research to update information, and the report obliged last week with an upbeat message. On its face, all looks rosy, but if we are assuming good times will continue, it is advisable to look closer at the gas industry and examine the shaky foundation on which it is built.
One would never guess natural gas is walking a tight rope when reading the economic claims in this report. This revision of an earlier version, paid for by Arkansas Independent Producer and Royalty Owners, is well timed. The first report in 2009 took on the challenge of projecting economic benefits 2008-12 without knowing the market price would soon drop like a rock. By staying within the same 2008-12 timeline, the update doesn’t have to risk projecting where things will go from here or address the controversial debate about the future of natural gas. Perhaps the most important objective was to make Arkansas’ gas impact look good in an effort to squelch the severance tax petition drive.
A positive natural gas economic impact for Arkansas at a badly needed time has been a boon to many small businesses and workers. The same cannot be said for companies holding dry gas leases. In today’s market, exploration and production companies are forced to operate in the red. Just how long they will or can do this is anybody’s guess. Producers during profitable times borrowed heavily with the idea continued demand would keep prices high and allow them to recoup costs, pay debt and finance more wells. Now they are heavily leveraged, forced to offload dead weight assets and plagued with pesky environmental issues that have left many landowners unhappy and pushing for better regulation and oversight. Since the E&P sector is the most vital segment of the industry that direct and indirect service suppliers build on, upbeat predictions for future economic conditions are in question.
Pity the poor producer who has little cash, maxed out credit, lower earnings from wells in decline, spooked investors, the need to drill to hold onto a lease, lower consumption from an economic engine having trouble getting started, the possibility of lower demand with more mild winters, overloaded storage facilities and a market price that will only slowly recover while the overproduced glut is being used. In addition, they must find investors to finance new wells at an increasing rate since shale wells decline rapidly and production will eventually move from the hot spots to lower producing reserves.
An overzealous land grab for gas leases has brought on consolidation by big international players with deep pockets. They are looking to build their energy reserves and can play the waiting game for prices to return to a profitable level. While foreign interests may have come to the U.S. industry’s rescue, will Americans be comfortable when they wake up to realize we sold the farm and must pay world market prices to use our domestically produced resource?
Low market prices force E&P producers out of the Fayetteville Shale to more lucrative liquid-rich deposits. Most prominent is Texas’s Eagle Ford Shale and Ohio’s Utica Shale, but there is potential looming in Arkansas’s Brown Dense.
Whether updating Fayetteville Shale’s economic impact for the Chamber of Commerce was simply putting lipstick on a pig or whistling in the dark, the next chapter of this story will be more important than what was reported.
REFERENCES:
• Economic Impact of the Oil & Gas Industry in Arkansas (2009) www.arkansasedc.com/media/1933/the_economic_impact_of_the_oil_and_gas_industry_in_arkansas.pdf
• Revisiting the Economic Impact of the Natural Gas Activity in the Fayetteville Shale: 2008-2012 cber.uark.edu/Revisiting_the_Economic_Impact_of_the_Fayetteville_Shale.pdf
• Controversy on Shale Gas Boom and Burst Explained seekingalpha.com/article/569451-controversy-on-shale-gas-boom-and-burst-explained
• The Impact of a Looming Natural Gas Supply Problem seekingalpha.com/article/647401-the-impact-of-a-looming-natural-gas-supply-problem
• Where is the North American Natural Gas Market Headed? seekingalpha.com/article/38455-where-is-the-north-american-natural-gas-market-headed
• Southwestern Energy Company Q1 2012 Earnings Conference Call
Friday, May 4, 2012 www.swn.com/investors/Press_Releases/2012/05.07.12.pdf
• Insiders Sound an Alarm Amid a Natural Gas Rush www.nytimes.com/2011/06/26/us/26gas.html?_r=2&src=tptw