The Ohio Department of Natural Resources (ODNR) releases quarterly production numbers showing the amounts of crude oil and natural gas being extracted in Ohio. The latest set of production numbers was released during the last week of August touting the record production in the state in spite of the sharp fall in oil prices.
The fact of the matter is the current state of the oil and gas industry—in Ohio and across the United States—is struggling and has recently experienced the lowest oil and natural gas prices seen in decades. In August, Ohio producers saw some of the lowest prices with a barrel of oil selling for $37.00 and natural gas prices stalled in the upper $2.00 range. The ramifications of this downturn are wreaking havoc on all drilling operators. A large number of companies have been seen slashing capital budgets for the year, triggering mass layoffs, all of which have greatly slowed or idled drilling operations.
So why are the latest production numbers being portrayed through rose-colored glasses? It is important to take into consideration a few factors before jumping to any conclusions.
The quarterly production numbers from the ODNR reflect the quarter prior to when the information is actually being released. For example, the well production numbers being released at the end of the third quarter are not reflecting drilling activity that occurred in the third quarter (July 1 through August 31). To report that gas production is still rising, coinciding with prices being at an all time low, is a misrepresentation to the average audience unfamiliar with the vagaries of oil and gas drilling and markets.
Another aspect to take into consideration is the lag time between the drop in prices and the effect it has on production.
“When the crash happens, it’s not like there’s a shut-off valve, and production just stops,” said Shawn Bennett, executive vice president of the Ohio Oil and Gas Association. “It’s going to start to gradually come down.”
The end of 2014 and beginning of 2015 is when we saw the true beginnings of the crash in oil prices. The growth continuing to be seen is because the capital had already been deployed for new wells to be drilled for the year and pipelines hadn’t been laid to connect previously drilled wells to larger gathering systems. It has been estimated that a strong drop in production may be seen as early as August or September of this year. If this is the case, the impacts will not be reflected in the quarterly reports until the year’s end.
With all of this being said, when prices rebound, as they tend to do in the oil and gas industry, drilling will follow suit as soon as it is determined to be economical and the Utica will continue to prove to be a viable play.