Arkoma Basin, States Oldest Gas Field, Persists in Shadow of Fayetteville Shale

The pump is barely audible from Wendell Carruth’s front porch. But it’s there, down a dirt road behind a cluster of trees, chugging away 24-7.

A gas well has been on Carruth’s property for about 40 years. Out on his 80-acre spread near Lavaca in eastern Sebastian County, the well is as constant as the martins, the coyotes and the wind in the pines.

The well doesn’t generate a lot of cash, Carruth said, but it pays enough to cover the property taxes on his piece of country paradise. Not bad, he said, when you’re a 74-year-old retired law enforcement officer.

The right to drill for natural gas on Carruth’s land was originally held by Fort Smith-based Stephens Production Co., but over the years, the lease on those rights has changed hands a few times, Carruth said. Nowadays XTO Energy Inc. of Fort Worth, a subsidiary of Exxon Mobil Corp., holds the lease. Carruth doesn’t really care who leases the mineral rights. As long as the well is maintained and the royalty checks arrive on time, he’s happy.

For thousands, owning mineral rights is a way of life in Sebastian County. And it has been for a century. Located in the heart of the Arkoma Basin — from McAllister, Okla., to Russellville — Sebastian County and Fort Smith are in part defined by the production of natural gas.

“You cannot put your finger on a map and not find someone who is drawing a royalty,” Carruth said. “The wells are everywhere. As far as you can see, they’ve got their property leased to someone.”

That’s not expected to change anytime soon. But people like Carruth and the industry experts all seem to agree on one thing — the Arkoma Basin, the state’s oldest natural gas field, is in the midst of an important transition.

 

Down with Prices

The price of natural gas bottomed out in the first quarter of 2012 at about $2 per 1,000 cubic feet, or MCF. The magnitude of the decline is apparent when compared to the peak in 2008, when natural gas sold at a robust $12 per MCF.

The steep decline was caused by a sudden abundance of natural gas, which was brought about by two revolutionary technologies: directional drilling and hydraulic fracturing, also known as fracking.

Directional drilling and fracking penetrate gas beds horizontally rather than vertically, which is the case with old fields like the Arkoma Basin.

The drilling innovations opened up entirely new geological formations across the country and transformed the industry with the resultant shift in capital investment and exploration. The same thing happened in Arkansas. The Fayetteville Shale — its production core is in Conway, Faulkner, White, Cleburne and Van Buren counties — was tapped for the first time in 2004, and has since become the state’s highest-producing gas field.

In 2005, according to statistics from the Arkansas Oil and Gas Commission, the Fayetteville Shale produced just 2.2 million MCF compared to the Arkoma Basin, which produced 175 million MCF. By 2012, however, the shale out-produced the basin ninefold, 1.03 billion MCF to 113 million MCF, respectively. There are about 4,100 producing gas wells in the basin compared to about 4,400 in the shale.

The numbers speak volumes about the efficiency and effectiveness of the new technology, said Kelly Robbins, president of the Arkansas Independent Producers and Royalty Owners, a nonprofit advocate for the oil and gas industry.

“We’ve done so well in developing technology to find resources and get it out of the ground,” Robbins said. “Without directional drilling and hydraulic fracturing, there would be no Fayetteville Shale, or any other shales.”

The companies that were fully invested in the basin were forced to adapt during a time of low prices, low yields and tight exploration budgets.

Bill Hanna, the second-generation president of Fort Smith-based Hanna Oil and Gas Co., recognized the issue and dealt with it head on.

“The drilling budget kind of went away,” Hanna said. “If you’re an exploration company and there’s no exploring, that’s a problem.”

Hanna responded by acquiring more producing wells in the Arkoma Basin, and when Hanna does drill new wells, they are shallow, and thus affordable.

Hanna has made a large investment in oil production, and has invested in energy in Nebraska, Kansas, North Dakota, Wyoming, Montana and Canada.

Even with Hanna’s foray into other areas, the heart and soul of the Hanna interests is in the Arkoma Basin, where Hanna has produced natural gas for more than 50 years. He said he refuses to go along with the widely held opinion that the basin is dying a slow death.

“The best place to drill for gas is where there’s gas,” Hanna said. “I like this basin and that’s why we’re buying assets. I wake up every morning thinking of new opportunities.”

 

New Use for Old Commodity

In oil and gas, innovation is perpetual. And that’s the case at Fort Smith-based Arkansas Oklahoma Gas Corp., which buys most of its product from the Arkoma Basin.

The company is an advocate for compressed natural gas, or CNG, which powers 60 of the company’s 115-vehicle fleet. It burns cleaner than standard gasoline and is more affordable, at around $1.50 a gallon.

With the Fayetteville Shale and other shales producing high volumes and keeping prices low, it’s time to take advantage of the supply and use natural gas across a wider range of applications, said Michael Callan, president of Arkansas Oklahoma Gas.

Callan wants to see CNG available at key locations across the state along Interstate 40 and Interstate 30. Currently there are only three such stations in the state — in Fort Smith, Damascus and North Little Rock.

By comparison, in Oklahoma there are 73 CNG fueling stations, and in Texas, there are 31.

Callan championed Senate Bill 792, which was passed by the Legislature earlier this year. Signed into law as Act 532 of 2013, it offers a rebate of up to $4,500 for the purchase or conversion of a CNG vehicle and up to $400,000 for the construction of a CNG fueling station.

Only time will tell if CNG catches on with motorists. But at the least, Callan said, CNG could prove to be an important product for public entities like school districts, cities and counties.

With more than 30 years in the energy business, Callan is an expert in the field. He said the Fayetteville Shale is the “real deal,” and expects those wells to continue producing at a high level for a long time.

His assessment of the Arkoma Basin, on the other hand, is more reserved.

“It’s an aging, mature basin,” he said. “We’ll continue to have great production, but it will continue to decline.”

 

Report Underway

The Arkansas oil and gas industry will be the focus of the next Fort Smith Regional Economic Outlook Report, produced by the Center for Business Research and Economic Development at the University of Arkansas at Fort Smith.

“I’m hoping to examine this particular cluster for the next issue due to the fact that there is a lot going on in it right now,” said Kermit Kuehn, director of the center.

In particular for Fort Smith and the River Valley, energy and mining is identified as an industry that has a higher regional concentration of employment than the national average, making the sector an important part of the economy.

According to research in Kuehn’s latest economic report, energy and mining produced $862 million in exports in 2010 and accounted for 8.9 percent of total exports, making it the region’s third-strongest sector behind food manufacturing and metal and metal products manufacturing.

Based on statistics included in Kuehn’s report due this fall, energy and mining proved to be resilient as actual employment from 2007 through 2010 held steady at the 2,500-plus mark. By contrast, over the same time frame, the food and metal production industries lost thousands of jobs.

While Kuehn knows change is afoot in the industry, he is not prepared to say what that change will look like.

“I have yet to conduct enough research to speculate,” he said. “Suffice it to say, energy has played a role in the Arkansas economy in the past, still does, and will likely continue to do so going forward.”