Oil and gas prices are coming back, and that should soon translate to fresh investments in drilling and related job-creating projects by extractors in states like Ohio where portions of the Marcellus and Utica shale basins are located.
That’s what at least one expert with the Federal Reserve Bank of Cleveland sees happening in the Fourth Federal Reserve District, which is composed of Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
In a new report, Cleveland Fed senior examiner John Shackelford examines the decline in energy prices that began in 2014, which led to companies finding innovative ways to extract more oil and gas while spending less money. Shackelford works with the federal banking regulators’ Shared National Credit Program and serves as the program’s subject matter expert on the oil and gas industry.
As recently as this time last year, the outlook for the oil and gas sector was growing increasingly negative, which made lenders worry.
Banks were beefing up loan-loss reserves in anticipation of more loans to oil and gas producers going bad and sought ways to minimize their overall exposure to the energy sector.
Investors, meanwhile, started selling off shares of banks with portfolios heavy in energy.
“The market sold off the shares of many banks because they are worried about their underlying energy loan portfolios,” Brent Luce, a senior portfolio manager at Carnegie Investment Counsel in Pepper Pike, told Crain’s last February. “In some cases, they seem to be throwing the baby out with the bath water.”
Today, as prices rebound, Shackelford postulates companies that made those changes to maintain production despite lower prices are “likely” to invest in drilling and take on new projects tied to oil and gas extraction efforts.
“The structural changes that have been achieved by the industry, involving better equipment, high-speed drilling, enhanced fracking, better mapping of fields, and new pipelines, will bring greater drilling activity in the Marcellus and Utica fields,” Shackelford writes, “and are expected to keep costs reduced by 25 percent according to industry analysts.”
Shackelford notes that in 2016, when energy prices reached their recent low, there were more than 5,000 wells drilled that energy companies left uncompleted. He said those wells, of which several are located throughout the Cleveland Fed’s district, can be brought on line in a matter of weeks.
He also references Shell Oil’s plans to place an ethane cracking plant near Pittsburgh, which would shorten the distance oil and gas has to travel before processing. Shackelford projects a facility of that sort could create 6,000 temporary construction jobs and more than 600 permanent facility jobs.