Cheap prices halt Mich. drilling, kill oil, gas jobs

Michael Gerstein, The Detroit News
The number of gas and oil drilling permits in Michigan has dropped to the lowest level since the 1920s.

Lansing —Low oil and natural gas prices are proving to be a short-term ally for environmentalists and consumers but a job killer for the industry as new drilling slows in Michigan.

The state is on pace to issue its fewest number of drilling permits in almost 90 years, while the amount of oil extracted from Michigan properties hit at least a 25-year low last year, according to U.S. Energy Information Administration statistics.

Companies have drilled only two hydraulic fracturing or “fracking” sites this year — one in Clare County and another in Eaton County. Since 2010, water usage in the state for the controversial drilling technique hit a new low in 2015, according to the Michigan Department of Environmental Quality.

It is a marked contrast from three years ago when the price of unleaded regular gasoline frequently topped $4 a gallon and averaged nearly $3.60 a gallon for the year in Michigan, the second highest level in history, according to AAA Michigan.

In 2013, Encana Corp., Canada’s biggest oil and gas company, proposed using fracking — the blasting of water, chemicals and sand into rocks underground — to siphon natural gas from as many as 500 wells in the state.

Michigan is not a major player among the states in the oil and natural gas industry, but it has still felt the effects of the recent drilling downturn. The state’s oil and gas jobs that pay an annual average of $87,500 dropped 18 percent from 656 in the first quarter of 2014 to 538 in the fourth quarter of 2015, according to the Michigan Bureau of Labor Market Information and Strategic Initiatives.

The state’s support employment for mining activities, which includes some jobs for the oil and gas industry, declined 22 percent from 2,294 jobs in the first quarter 2014 to 1,798 in the last quarter of 2015. Those jobs pay an average of nearly $74,000 a year, according to the state.

Across the nation, 142,000 oil and gas jobs were lost from October 2014 to May 2016, according to the EIA, which “is nearly three times the 51,000 jobs lost over a 13-month period during the 2008-09 recession.”

Now, “it may take years” for Michigan companies “to get back to where they were because oil prices are low and the companies that were drilling in that area don’t have any money,” said Phil Flynn, a Chicago-based industry analyst.

Mega oil companies such as Exxon Mobil Corp. and BP PLC are saddled with massive debt and generating “obscene losses” that are “unlike anything we’ve ever seen before in history,” Flynn said.

Forty publicly traded U.S. oil producers last year lost a combined $67 billion, according to an EIA report released in April. Exxon Mobil, BP, Royal Dutch Shell PLC and Chevron Corp. hold a combined net debt of $184 billion — more than double than in 2014, the Wall Street Journal reported this week.

The decline in fossil fuel exploration and drilling is welcomed by anti-fracking environmentalists, who worry that local fresh water drained in the drilling process becomes polluted and could contaminate other water sources and land.

“We are glad that they aren’t drilling as many frack wells as we anticipated,” said LuAnne Kozma, who has led multiple failed ballot initiatives to ban fracking in Michigan since 2012, falling short of the needed number of signatures each time.

Firms play waiting game

Companies that hold drilling rights — in Michigan and nationwide — will wait until prices rise again, Flynn said. For now, many of them don’t drill at all.

That’s essentially what happened when natural gas and oil prices began dropping in 2014. Encana left Michigan that year and transferred 27 of its permits to Marathon Oil Corp.

This active well just north of Leslie was recently drilled. The number of gas and oil drilling permits in Michigan have dropped to the lowest level since the 1920s.

Marathon has drilled only three wells in 2015, said company spokeswoman Lisa Singhania, who would not comment on whether Marathon drilled any new Michigan wells this year. Twenty-five drilling permits transferred from Encana to Marathon have expired and the two other drilling sites were plugged.

Singhania said the company drilled the “three exploratory wells” last year in Beaver Creek and Sheridan townships within Crawford and Clare counties — which cover mid-Michigan and the northern lower peninsula. She would not divulge the company’s plans for its remaining active permits.

Other firms have little interest in getting permission to drill in new locations. The state had issued 17 oil and gas well permits near the end of August. It seems likely to set a new low from last year’s record of 100 permits.

The state issued 16 permits in 1927 when it first started issuing the documents part way through that year.

Now the three biggest permit-holders in the state are Riverside Energy Michigan LLC (2,043 active permits), Linn Operating Inc. (1,784 active permits) and Muskegon Development Co. (1,369 active permits). Drilling permits remain active for two years.

Activists keep guard up

The plunge in drilling isn’t lulling drilling opponents.

“We don’t know what the future is going to bring,” Kozma said. “We’re still poised to ban (fracking). We want to stop it before it takes a huge foothold in the state.”

Another big oil and gas boom is unlikely in Michigan, but oil and gas companies aren’t giving up, said Pat Gibson, vice president of Traverse City-based West Bay Exploration Co.

“They’re still out there looking,” Gibson said.

The state has 53 million barrels of known oil reserves, according to an industry report.

Patience will be a key, since the industry has gone through short periods of low prices before, and prices are likely to rise again, said Erin McDonough, president of the Michigan Oil and Gas Association.

Once wells are drilled and start production, they generate fuel for decades and are not affected by low prices like new well development, she said.

“People should remember that Michigan has a 100-year history as a steady oil and gas production state, and eventually the market will rise again and Michigan producers will invest in exploration and new well development,” McDonough said.

She said the oil and gas industry are responsible for nearly 23,000 direct jobs in Michigan.

Antrim Shale oil and natural gas production — a major source of the fossil fuels in the state — has been steadily declining since 1999, according to data compiled by William Harrison III, director of the Michigan Basin Core Research Laboratory at Western Michigan University. In 2015, it produced under 10 million barrels of oil, compared with more than 25 million barrels in 1997.

It costs about $1 million to drill a typical hydraulic fracturing well, Harrison and Gibson said, and companies don’t know whether the well will produce anything until they actually drill into the earth, making it risky exploration.

Harrison said if prices rose to somewhere between $70 and $90 a barrel — from Friday’s level of $47.64 a barrel — that could encourage more oil exploration and new wells, which the industry needs to keep growing in-state.

But for now, it’s a wait-and-see game.

“They’ve hardly scratched the surface,” Harrison said of the state’s shale reserves, which would require fracking.

“It’s definitely going to be detrimental to the state’s industry if we continue to have, for many years, these low prices.”

Twitter: @MikeGerstein