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Communities feel impact of Fayetteville Shale drilling slump

CLINTON — When natural gas drilling activity in the Fayetteville Shale play was at its peak a few years ago, Joe’s Pizza on U.S. 65 in Greenbrier would fill up with rig workers around noon.

“We were just covered up literally every day from them coming in and eating lunch,” owner Joe Carter said last week. “We still get a few of them, but not near what we had, so we’ve reduced our staff. We’ve cut three people out, probably, since (the gas drillers) moved out.”

About 30 miles north of Joe’s Pizza on U.S. 65 sits a stretch of tree-covered land in Clinton that Chuck Patel, owner of the Super 8 Motel in Clinton, bought during the drilling boom with the intention of building a new motel there. Those plans are now on hold.

“Business is very slow,” Patel said. “That (drilling boom) was very good for our town. There were a lot of jobs. It was very nice. Because our town, we don’t have any (manufacturing) business, like no factory or anything.”

Gas companies flocked to north-central Arkansas in the previous decade to use hydraulic fracturing, or fracking, to extract natural gas from the Fayetteville Shale. By July 2008 there were 60 drilling rigs in the state; now there are 12.

Employment in the mining and logging industry sector in Arkansas, which includes oil and gas exploration, has declined by about 1,100 jobs in the past two years, according to the Center for Business and Economic Research at the University of Arkansas.

The decline in drilling activity also has affected state tax collections. Revenue from the state severance tax on natural gas was $41 million in 2012, down from $58.9 million in 2011. The tax, paid by gas drillers, is 5 percent of the market value of the gas extracted, with lower rates for wells that are new, marginally producing or especially costly to operate.

The current tax rate was set by the state Legislature, at Gov. Mike Beebe’s urging, in a special session in 2008. Previously, the rate was three-tenths of one cent per 1,000 cubic feet of gas extracted. The change was the first increase to the tax in more than 50 years.

Drilling has declined as the price of natural gas has plummeted. At one point in 2008, the price exceeded $13 per million British thermal units, but in 2012 it reached a low of about $2 per million Btu, according to Kathy Deck, director of the Center for Business and Economic Research.

The price at the middle of last week was $3.49 per million Btu, she said.

Kelly Robbins, executive vice president of Arkansas Independent Producers and Royalty Owners, said that since the onset of exploration and development of natural gas in the Fayetteville Shale, numerous other shale plays have attracted drillers away from Arkansas.

Robbins said the abundance of natural gas and the relative ease of extracting it through fracking has driven the price down.

Also, the gas in the Fayetteville Shale is a “dry gas,” meaning that natural gas is essentially all that is being extracted from wells there, whereas in other parts of the country drillers are extracting “wet gas,” or natural gas containing compounds like ethane and butane which can be separated and sold for extra revenue.

“Dry natural gas really bottomed out,” Robbins said. “Wet natural gas held its value a little bit more because you had these extra byproducts that they were able to pull out and sell. You had rigs going to where the resource had a higher market value.”

Most of the rigs that left Arkansas went to Mississippi and Louisiana, rich in “wet gas,” he said.

Drillers also have increased their efficiency since they began taking natural gas out of the Fayetteville Shale, reducing the number of rigs they need in the state, Robbins said.

Clinton Mayor Roger Rorie said the city’s advertising and promotion tax on hotels and motels is probably about half of what it was when drilling activity was at its peak.

“We’re still higher than we were before that happened because there’s still some activity,” he said. “And we’ve had to do things to help that industry some, like right now we’re (preparing for) a bass tournament that we’ve never had before.”

Rorie, a former state legislator who drives a car that runs on compressed natural gas, said the drilling boom “kind of made us lazy because we didn’t have to look for those things when the peak was here, and now we’re out doing like other folks are, looking for things to bring people in — which we should have been doing all the time.”

As drillers have pulled out of Clinton, local companies that supplied them, such as Wilson Supply, have followed them.

The former Wilson Supply building on U.S. 65 in Clinton now stands empty, with weeds growing in its parking lot. Lucas Stacks, who formerly managed the Clinton location, now manages Wilson Supply in Damascus.

“It’s fell off big time,” Stacks said of drilling activity in the region.

Could natural gas prices rebound and make the Fayetteville Shale play more attractive to drillers?

“In general, I believe low natural gas prices are being predicted for the near future,” Deck said.

But she said there are a number of possible scenarios that eventually could increase the demand for natural gas and lead to higher prices, such as a shift to natural gas-fueled power plants or to vehicles powered by compressed natural gas.

Arkansas has CNG fueling stations in Damascus, Fort Smith, North Little Rock and Conway, with others planned in Little Rock and Jonesboro. Neighboring Oklahoma has 75.

Randy Zook, president and CEO of the Arkansas State Chamber of Commerce-Associated Industries of Arkansas, said the price of natural gas could increase as producers find new markets overseas.

“The price spread between the U.S. and, say, Europe and Asia is enormous,” he said. “That’s why you’re seeing investments being made in LNG, or liquefied natural gas, to be able to ship it in tankers overseas. I think gas sells for like $16 or $17 (per million BTU) in Asia.”

But Zook said that despite the drop from the boom days, natural gas drilling is still a significant contributor to Arkansas’ economy.

“Southwestern Energy still invested over $800 million in Arkansas this year,” he said. “That’s not a small amount. That’s an enormous amount of capital that they’re putting into the Fayetteville Shale.”

Brad Lacy, president and CEO of the Conway Area Chamber of Commerce, said that until recently Arkansas was not thought of as an energy-producing state, but thanks to the Fayetteville Shale it has become one.

“I would say it’s probably a maturing industry, where we’re at some kind of equilibrium on maybe what we can expect,” he said. “I think what we’re experiencing is what it’s like to be an energy-producing state.”

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