Boom Or Bust?

Feb. 5, 2016

Cheap Gas Signals A Dark Time For Northern Michigan’s Oil and Gas Industry

In the 1990s, 1,000 new oil wells were drilled across the state of Michigan. In 2015, only 100 wells were drilled. Many of the people who drill and service those wells live and work in northern Michigan. This is the other side of the incredibly cheap gasoline seen in recent months. The collapse of world oil prices means northern Michigan’s oil and gas industry lies in hibernation.

ABSURDLY CHEAP GAS

A couple of gas stations in Houghton Lake made national headlines in January when they engaged in a price war that drove the price of a gallon of gas to just under 50 cents. Gas has never been that cheap.

In 1972, the average cost of a gallon was 36 cents; adjusted for inflation, that’s $2.04 today.

The Houghton Lake incident was a publicity stunt, but it demonstrates just how low gas prices have plummeted. Gasoline prices are nearly as low as they can go, said Dr. William Harrison, director of the Michigan Basin Core Research Laboratory at Western Michigan University.

Harrison said gasoline has fixed costs that mean it cannot sustainably be sold under a certain price.

“One thing you can figure is a barrel of oil has 42 gallons of oil in it,” he said. “So if oil Photos is $42 by Greyscale a barrel, Group then oil costs one dollar a gallon.”

The price of a barrel of oil on Jan. 29 was $32. In July 2008, it was $145.

Add in fixed costs from refineries, transportation, gas station overhead, the profit along the way and the taxes, and gas should cost more than a dollar even if the resource costs nothing.

“If they were giving crude oil away for free, you’d probably still have to pay a buck 20 or something a gallon, just for all the other costs involved,” Harrison said. “If they’re selling it for under 50 cents, they’re barely paying the taxes on it, much less all the other costs.”

EXPLORATION TAKES A PAUSE

The price crash caused a crash in oil and gas exploration in Michigan.

Mark Snow, a supervisor in the Department of Environmental Quality’s Office of Oil, Gas, and Minerals, didn’t even have to look up the number of permit applications pulled in 2015 for new wells in the state. There were exactly 100, an easy number to remember. It’s also the fewest number of permits pulled in a year’s time since 1927.

Two decades ago, at the height of the Antrim shale boom in Michigan, there were more than a thousand permits each year.

“With oil prices down, the permitting activity kind of goes hand–in–hand with commodity prices,” Snow said.

Harrison said the crash in the state’s oil and gas activity is stunning, but not unprecedented in an industry that lives and dies by the price of oil.

“It’s pretty remarkable. If you go back to 2008, they were drilling almost 800 wells a year,” he said. “I’ve been associated with this for nearly 40 years and there’s been a lot of cycles like this. This one seems to be a little more extreme than others.”

He said it takes downturns like this to sort out the strong companies from the upstarts. People who have been around long enough know they have to be prepared to survive down cycles; they prepare for periods of hibernation.

“During a boom, lots of companies enter, and those get weeded out during down periods,” Harrison said.

Some companies have been around for decades. There are companies being run today by the fourth generation of a family, he said. They’ve seen market fluctuations before.

THE INDUSTRY: NO COMMENT

The ups and downs of the oil economy are something the local oil industry apparently doesn’t want to discuss. Almost all messages left at numerous northern Michigan companies were not returned or were answered with a polite “no comment.”

Even the state’s organization that represents those companies would not directly address the consequences of the oil price collapse.

“We are not a state that has ever experienced a large boom and bust just due to the more consistent manner in which our production occurs here,” wrote Erin McDonough, president of the Michigan Oil and Gas Association, in an email response to a list of questions.

McDonough noted it’s been a while since gas has been so cheap and that’s good for consumers and people who heat their homes with natural gas.

“This is especially important to Michiganders because over 80 percent of Michigan’s homes are reliant on natural gas for heating and cooling,” she wrote.

McDonough said it only makes sense that exploration would slow amid low prices.

“Much of the expense of drilling a new well comes early on in the process and can vary considerably depending on the type and where you are drilling the well,” she wrote. “With a decline in prices, such as we are seeing now, we will likely see a decline in new exploration while the production of wells currently in operation remains stable.” 

FAMILY–RUN COMPANIES

Harrison said people in the industry don’t want to talk about a downturn because oil and gas gets beaten up in the media all the time. People talk about oil company profits or clean energy, but they ignore how much they depend upon oil and gas for the comforts they have in their lives, he said.

“A lot of these companies, they’re not the nameless, faceless corporations that people think about as the oil and gas industry. They are our neighbors; they are regular people and they own these small businesses in the state of Michigan,” Harrison said. “They’re normally trying to do the right thing. They are businessmen and they are trying to stay in business.”

Sam Pasinski, who comes from one of those family-run oil and gas service companies, said the downturn has hit the local industry hard. He’s worked in the industry full time for five years, but his family has worked in oil and gas for generations.

“We’ve gone from having a regular schedule and a reliable backlog of work to having almost no work. It’s drastic,” Pasinski said.

He said the downturn came suddenly. “I remember the first notable change in the climate of the market was just after Christmas of ’14; the price per barrel was dropping really quickly and a lot of people who invest in oil and gas — it’s a pretty volatile investment — they started to pull their money out,” Pasinski said. “It’s remarkable how quickly our work just disappeared.”

At the same time, Pasinski said, the industry’s misfortunes today are connected to the good fortunes of yesterday. If the boom wouldn’t have been so great, the industry wouldn’t have expanded so much, it wouldn’t have drawn so much new investment and it wouldn’t have created the forces that would eventually drive the price of oil back into the ground.

He said, in the richest period of recent times, it was perhaps a bad sign that so many people on the periphery of the industry were making so much money. There was no way those costs would be sustainable.

“For the most part, $60- or $70-a-barrel oil would keep guys like me busy for my entire life,” he said.

POSSIBLE BRIGHT SIDE

Environmental activist Skip Pruss sees opportunity in the cheap oil prices; they could offer a way to keep unconventional oil in the ground as part of a carbon diet addressing climate change.

Cheap oil has increased the amount of miles people drive in their cars and it’s already moved consumers toward more fuel inefficient vehicles, but there is also a silver lining for the environment in the collapse, said Pruss, a Northport resident, co-founder of 5 Lakes Energy and one-time Michigan’s chief energy officer.

That’s because it’s slowed the development of unconventional oil and gas resources like the Alberta tar sands and hydraulic fracking endeavors.

“Development of that unconventional oil is very expensive,” Pruss said. That’s why activity has slowed or stopped in reaction to cratered oil prices. “The collapse of the price of petroleum is helping to keep that oil in the ground.”

Pruss hopes to see political will to keep those unconventional resources in the ground when oil prices return to the levels where developing them becomes attractive again.

“I think it’s really important that the pause become permanent because we have this global consensus now of what we have to do,” Pruss said.