Economic impact of Fayetteville Shale play ongoing after a decade

Although no one is baking a cake or holding a big celebration, it has now been a full decade since Fayetteville Shale leader Southwestern Energy Corp. announced in 2004 that it was taking a big chance on an undeveloped natural gas play on the Arkansas side of the Arkoma Basin.

That unheralded announcement 10 years ago largely changed the state’s economic fortunes during the Great Recession and hailed the emergence of the natural gas industry in Arkansas – both as one of the largest marketed producers in the U.S. of the methane-rich hydrocarbon and as a major rival to coal and nuclear energy for retail electric generation.

What remains to be seen is whether the Environmental Protection Agency’s new proposal to drastically cut so-called “dirty air” emissions from existing U.S. power plants will benefit the natural gas sector in Arkansas. The gas industry seems to be a favorite of the Obama administration, getting a big boost in the president’s most recent State of the Union address.

“The all-of-the-above energy strategy I announced a few years ago is working, and today, America is closer to energy independence than we’ve been in decades. One of the reasons why is natural gas – if extracted safely, it’s the bridge fuel that can power our economy with less of the carbon pollution that causes climate change,” President Obama said in his Jan. 29 speech to the nation. “Businesses plan to invest almost $100 billion in new factories that use natural gas. I’ll cut red tape to help states get those factories built, and this Congress can help by putting people to work building fueling stations that shift more cars and trucks from foreign oil to American natural gas.”

FROM CHANCE TO WALL STREET STAPLE
In Arkansas, the state is still experiencing huge economic benefits from the 5,853-square-mile geologic formation that was estimated to hold 375 billion cubic meters of unproved, recoverable gas when early exploration began.

Danny Ferguson, a former state lawmaker who is now vice president of government and community relations at Southwestern Energy, remembered during this time that economic development discussion during the Huckabee administration largely centered on landing an automobile plant, often considered the crown jewel of jobs-producing, capital-intensive superprojects.

“I was a part of those discussions about bringing the Toyota auto plant to Arkansas,” Ferguson, who is also a former Forrest City mayor, said. In his role at the state Capitol, Ferguson was a central figure in authoring enabling legislation that defined a superproject as an economic development venture with at least $500 million in initial investment and at least 500 jobs.

Unbeknownst to most, Southwestern Energy was a relatively minor player in the oil and gas industry in the early 2000s that had quietly invested a few million dollars to purchase prime leasehold positions in the untested Arkansas shale play. Harold Korell, Southwestern’s former CEO and current chairman of the board, was cautiously optimistic about the shale formation after the former Fayetteville-based oil and gas company spent about $8.5 million to drill about 20 test wells in the basin in August 2004.

“Although there is a significant amount of data yet to be collected in order to confirm the economic merit of the play, we are encouraged by what we have seen to this point,” Korell said. “If our testing yields positive results, we expect that our activity in the play would increase significantly over the next several years.”

Ferguson said after his legislative term ended, he found himself looking for work and was interviewed for his current position by Korell.

“I remember him saying that if I took this job, I would be involved in the biggest economic development project the state has ever seen,” Ferguson recalled in his office across from the state Capitol. “At the time, it was a secret and I was thinking ‘what could this project be?’”

Korell’s clandestine forecast was vastly understated. A few months later, Southwestern made a decision that would change the company’s destiny. Just before Christmas of 2004, Southwestern announced a planned company-wide capital investment program for 2005 of up to $352.7 million, an increase of 24% over the previous year.

The surprise, however, was that the company’s investment in the Arkansas shale would nearly quadruple to more than $100 million. A year later, after reporting financial and operation records across the board, Southwestern would blow the top off Wall Street expectations by announcing a planned capital investment program for 2006 of $830.1 million, an increase of 66% over the previous year’s spending program that had to be revised several times.

Not long after, the Sam M. Walton College of Business at the University of Arkansas released an industry-sponsored “economic impact” study that forecasted the development of the Fayetteville Shale Play. The report said the infant shale play would have an estimated $5.5 billion total economic impact on the state through 2008 and “the potential to be one of the most significant tax revenue generators in Arkansas history over the next 10 to 15 years.”

By this time, news of the Fayetteville Shale play had spread across the industry. Billionaire Audrey McClendon, then CEO of Oklahoma City-based Chesapeake Energy, led a mad dash to the Arkansas shale play, hoping to reap the same rewards as Southwestern, at the time a much smaller rival. Other big names players followed, including integrated oil giant Shell Oil and oilfield service conglomerates such as Baker Hughes and Schlumberger.

But because of its early leasehold positions, Southwestern held most of the prime drilling areas in the shale and invested well over $800 million and $1 billion annually between 2007 and 2013. Today, even though the number of rigs in the Fayetteville Shale is almost down to single digits, natural gas production levels have actually increased because of improved drilling technology and better knowledge on how to maximize well production, said J. Kelly Robbins, executive vice president of the Arkansas Independent Producers and Royalty Owners (AIPRO).

“Despite the rig count, producers have more knowledge and wisdom on how to get the most out of these geological formations in Arkansas,” Robbins said.

That wisdom has led to nearly 10 years of economic prosperity that has seen Southwestern invest more than $10 billion in the Arkansas shale play, Ferguson said, adding that the company also employs more than 1,500 workers across the state.

IMPACT FELT LOCALLY AND STATEWIDE
Kathy Deck, director and economist at the Center for Business and Economic Research at the University of Arkansas, said the impact of the shale has been much better than previously projected. According to a May 2012 report by the university that revisited early economic projections for the shale development from 2008, the average annual pay in the “oil and gas extraction industry” was $74,555 in 2010, twice that of any other industry.

Also, the report said, Arkansas has benefitted economically from additional income from mineral leases and royalty payments, the highest growth rate in payroll employment and other employment activity generated by shale development. Those other economic offshoots include construction of the $1 billion Fayetteville Express Pipeline to ship natural gas from Arkansas to other markets, and the landing of the India-based Welspun Corp. pipe manufacturing factory, which has invested nearly $300 million at its location at the Port of Little Rock.

Deck’s report said that between 2008 and 2012, oil and gas companies invested more than $12.7 billion, or 29 percent more, than was previously forecasted. Overall, according to the center’s 2012 report, exploration and production activities related to the Fayetteville Shale from 2008 to 2011 generated more than $18.5 billion in total economic activity, exceeding the 2008 projections of $14.2 billion. Total annual state employment from Fayetteville Shale activity increased from 14,500 to more than 22,000 from 2008 to 2011, higher than the 2008 projection of between 11,000 and 12,000.

Also, nearly $2 billion in state and local taxes from permit fees and severance, property, income, sales and other taxes were collected as a result of Fayetteville Shale activities from 2008 to 2011. This is higher than the $1.2 billion projected in the 2008 study, following higher-than-projected expenditures by companies in the area and higher total employment.

“To put this in perspective, from 2001 to 2010, the state of Arkansas experienced only tepid growth in employment. Without the employment associated with the exploration and development of the Fayetteville Shale, Arkansas would have suffered a ‘lost decade’ where employment at the end of the period was lower than employment at the beginning,” Deck said after the report was released.

Although two years has passed since that report, not much has changed since the university released its highly watched economic report. In late May, Fayetteville Shale production boosted severance tax collections to quarterly and monthly highs, according to the state Department of Finance and Administration.

For the first three months of 2014, gross natural gas severance tax revenue came in at $19.9 million, up 29% from $15.4 million in the same period of 2013. At the same time, monthly collections of $7.3 million and $9.1 million in March and April, respectively, were the highest severance tax revenue totals posted since the state began keeping such records. Severance tax collections for January, February, March and April all came in well above $6 million, also a first for the state.

ARKANSAS IS A MAJOR PLAYER
Perhaps the biggest surprise in the past 10 years is the fact that Arkansas is now a major player in the natural gas industry. Today, Arkansas is the nation’s eighth-largest marketed producer of natural gas and is poised to top a trillion cubic feet (Tcf) of marketed natural gas production for the third straight year, according to preliminary data from the U.S. Energy Information Administration (EIA).

Between 2004 and 2008, as Fayetteville Shale drilling and development matured, Arkansas’ annual production of marketed natural gas jumped nearly 140% from 187 billion cubic feet (Bcf) to 446.5 Bcf. Then in 2009, Arkansas first joined the list of the nation’s top 10 marketed natural gas producers when sales of Arkansas natural gas spiked 53% to 683 Bcf of production. In 2010, Arkansas natural gas sales continued on an upward trend, jumping 35.7% to 927 Bcf of annual production, according to EIA figures.

Then in 2011 and 2012, despite fewer drilling rigs, Arkansas marketed production moved over a trillion cubic feet for the first time, jumping to 1.07 Tcf and 1.14 Tcf, respectively. The EIA, which is housed in the U.S. Department of Energy, is expected to release 2013 natural gas production statistics at the end of June.

For the record, Arkansas’ marketed natural production accounts for 4.5% of the nation’s output, the EIA says. And although Arkansas’ share of natural-gas fired electric generation has grown steadily over the last decade, most of the Fayetteville Shale and Arkoma Basin production is shipped out of state by pipeline to Midwest and Northeast U.S. markets.

Still, the industry’s largest trade association, America’s Natural Gas Alliance (ANGA), is lobbying hard to make sure that natural gas is part of the discussion as Arkansas and other states look to cut their greenhouse gas emissions. Nearly 30,000 jobs are supported by the industry and more than 20% of the state’s electricity is generated from the natural-gas fired power.

“As we consider EPA’s proposal with our members and with our power generation customers, we agree the rules should be flexible and fair and we believe they should recognize the ability of natural gas to play an increasing role in the delivery of reliable, safe and clean power,” ANGA President and CEO Marty Durbin said.

Ferguson said Southwestern is “exploring” possible ventures for the future that will allow the company, which has market capitalization of $16.1 billion, to get a seat at the table with regulators to discuss how natural gas producers can market their product directly to consumers. He mentioned current regulatory rules that allow utilities to negotiate deals for distribution and transport of electricity directly with large industrial customers, such as an automobile or steel plant.

“We think it would be great if we could engage directly in the future with the end users,” he said.