Can Ohio copy Oklahoma’s surging energy economy?

By John Funk

Plain Dealer

Oklahoma City

The origin of Ohio’s hoped-for shale gas and oil bonanza is here, more than a thousand miles southwest of the Buckeye State.

This city is home to Chesapeake Energy Corp., along with other large, independent oil and natural gas producers who have pioneered shale gas development over the past decade in other states and now in Ohio.

What has happened in Chesapeake’s hometown and home state might give Ohioans some insight into what to expect as oil and gas development ramps up here.

In Oklahoma City, you can bear witness to the energy debate at full roar. On one side, proponents talk of true energy independence in which a steady supply of cheap energy ends the boom-and-bust years and guarantees a golden economy. On the other side, at least one experienced energy analyst predicts the latest boom will be over in a little more than a decade.

Which is it for Ohio?

Looking for answers in Oklahoma City means you must first understand how the Oklahoma companies operate.

Oklahoma City is the energy capital of an energy state. In the past its economy has alternately soared and flopped, but leaders are confident this time will be different.

Oil has been a leading industry in this state for at least three generations. It’s ingrained in the culture, a way of life for people who live and work there.

And now the industry is drawing a couple of thousand new residents each month to Oklahoma City.

“In some way, shape or form, nearly everybody in the state either works in oil and gas or knows somebody who works in oil and gas,” said Cody Bannister, vice president of the Independent Petroleum Association, a trade organization.

In Oklahoma City, men wear cowboy boots and hats with suits and jeans, a cattle stockyard conducts daily auctions, and people carry handguns openly or concealed, as long as they have a permit.

Wellheads and pump jacks are everywhere, so many that they appear to outnumber the trees.

The oil- and gas-producing equipment is in shopping center parking lots, along city streets and interstate highways, at the

Will Rogers Airport, even on the grounds of the state capitol building. Oklahomans seem unfazed by their existence.

Oklahoma City got a wake-up call in the early 1990s when it was passed over for Indianapolis as the location for United Air lines’ major maintenance facility.

So elected leaders asked voters to approve a five-year, 1-cent sales tax increase, which has been extended several times and generates hundreds of millions of dollars for development.

Now the largest city in thestate is well on its way to becoming a big metropolitan player.

It is rebuilding its downtown through a series of major construction projects financed withcash rather than debt. The reconstruction began even before the1995 bombing of the downtown Alfred P. Murrah Federal Building in which 168 people were killed.

Public development has attracted heavy private investment.

Gas and oil companies have built new headquarters or renovated older buildings. Downtown has gone from one hotel to 15. And United Airlines has added a direct flight to Cleveland.

Unlike in Ohio, where the drilling industry is still a target of environmental organizations, isolated citizens groups and evena few cities concerned about groundwater, Oklahoma’s oil and gas producers get little opposition from the public.

The technology used in shale development — horizontal drilling and hydraulic fracturing — is not an issue in Oklahoma either.

In fact, hydraulic fracturing has been used to stimulate water wells there, said Roy Williams, president of the Oklahoma City Chamber of Commerce.

Differences between Ohio and Oklahoma go well beyond concerns about technology.

Oklahoma Gov. Mary Fallin launched Oklahoma First, a comprehensive energy policy, in 2011. The plan not only addressed natural gas and oil, as Ohio Gov. John Kasich’s energy policy did, but it also embraced wind power, energy efficiency and reductions in carbon dioxide emissions.

The goal of Oklahoma’s plan is energy independence — using Oklahoma and U.S. energy sources before using imported fuel.

“Of course our biggest single energy resource here is natural gas,” Michael Ming, Oklahoma secretary of energy, said in an interview in his office tucked almost anonymously inside a downtown office building. “It’s the centerpiece [of the plan] but not the only piece.”

Wind is just another form of energy, he said. The public and government want it developed.

“We are the sixth-largest state in the U.S. now in installed [wind] capacity,” he said. “We have doubled our wind capacity in the last two years.”

Ohio’s lawmakers, on the other hand, have been trying to figure out a way to scrap the state’s policies on renewable energy and halt or end efficiency mandates, something FirstEnergy Corp. is also campaigning for.

Oil and gas companies, especially Chesapeake Energy and rival Devon Energy, are leading corporate citizens in Oklahoma City. They have created some of the well-paid jobs, including for those in engineering and financial real estate management, derrick and drill operators and oil field laborers.

Devon Energy’s new 50-story tower in the heart of the city is a source of pride and faith in the future. The company has leased mineral rights in Ohio but recently has been trying to sell them, saying it has better opportunities elsewhere.

Direct and indirect jobs in thes tate that supply the industry number nearly 40,000, according to the global economic consulting company IHS. But that estimate doesn’t seem to include nearly 30,000 other people who are self-employed in the industry.

try, as reported in an Oklahoma

City University study.

Energy “has been positive for

us,” State Treasurer Ken Miller

said. “And if you look at what the

state economy has done over the

last couple of years compared to

the U.S. economy, it is a tale of

two different economies.”

Oklahoma’s oil and gas indus

try accounts for about a third of

the state’s $150 billion-a-year

economy ‘” one that has soared

during times of high oil and gas

prices and crashed when prices

fell too low.

The economy crashed in the

1980s and again in the ‘90s, so

diversification has been a goal

for some time.

“We often have people talk

about how Oklahoma should di

versify its economy. We have and

we are and we will,” Miller said.

“But that is not going to

change the natural endowment

that this state is blessed with. It

is our anchor industry. It always

has been and it will continue to

be for the foreseeable future.”

Still, the state is pushing diver

sification. Dave Lopez, Okla

homa secretary of commerce and

tourism, said the state recently

went through a major data analy

sis to identify what its “wealth-

creating parts of the economy

are.”

The study identified five of

those areas: aerospace and de

fense, energy, agriculture and

bioscience, information and fin

ancial services, and transporta

tion and distribution. There are

six military bases, including Tin

ker Air Force Base, a major

driver of economic development.

Wind development is necessi

tating construction of new high-

voltage transmission lines, some

thing that is paying farmers roy

alties for right-of-way leases.

“In Oklahoma, we have found

a common understanding and a

common ground between agri

culture interest and the energy

industry at large,” Lopez said.

“It’s not an either/or.”

Work force that’s growing

While no state’s economy is re

cession-proof, Oklahoma has

come close.

The oil and gas industry’s

headquarters in Oklahoma City

is credited with creating a young

and growing work force of educa

ted professionals with skills that

other industries can also use.

Unemployment levels have

trended about 3 percentage

points below the national aver

age in the last five or six years,

said Eric Long, an economist for

the Oklahoma City Chamber of

Commerce.

The statewide unemployment

rate was 5.1 percent in January,

below the 7.9 percent national

average and below Ohio’s 6.7

percent rate. The Oklahoma City

metropolitan area’s unemploy

ment rate of 5.2 percent was well

below the Cleveland metro rate

of 8.2 percent.

And unlike Cleveland, which

has seen its population decline

since the 1950s, when it peaked

at about 1 million people, Okla

homa City’s population is grow

ing. It’s just under 600,000 ‘” or

about one and a half times the

number of the 394,000 people in Cleveland.

Roughly 2,000 new people a

month are added to Oklahoma

City’s metropolitan area popula

tion of about 1.3 million, Long

said.

Underlying the optimism that

characterizes the area is the be

lief that the old days of boom and

bust at the hands of the oil and

gas industry are gone for good.

The boom may be tempered

from time to time by normal

business cycles, but the depres

sions that plagued the state in

earlier decades are not coming

back, say industry, state and in

dependent experts.

They believe new drilling tech

nologies are a game-changer for

maintaining steady production,

arguing that previous price

spikes were caused by shortages,

which can now be avoided.

The experts point to three-di

mensional seismic underground

mapping, real-time information

from the well bore during drill

ing, the ability to drill horizon

tally, and more-precise hydraulic

fracturing as tools that increase

production and drive down

prices.

“The new technology has un

leashed an enormous opportu

nity for many energy-producing

states and for our country,” said

treasurer Miller. “It really did

used to be a pipe dream, no pun

intended, to be energy indepen

dent, but now because of the new

technology it is very much a pos

sibility.”

Some energy analysts disagree

with the belief that shale produc

tion has tapped a vast, 100-year

supply of gas and oil.

“That’s rubbish,” said Deborah

Rogers, a former investment

banker, Wall Street financial

consultant and adviser to the

U.S. Department of Interior and

Federal Reserve Bank of Dallas.

“You hear that everywhere.

That is the industry line across

the board ‘” that this is a game-

changer and a national treasure,”

Rogers said. “I think it is just a

PR exercise disproportionate to

the performance of the wells. It is

not based on the actual perform

ance of the 60,000 shale wells”

that have so far been drilled na

tionally.

Rogers said it’s not possible to

keep up production levels in a

field of shale wells.

“You have to engage in contin

uous drilling just to stay at cur

rent production levels,” she said,

and that is a costly proposition.

She thinks the U.S. shale boom

will be over by 2024.

All that glitters isn’t gold

Oklahoma has been a major oil

and gas player for all of its 113

years as a state. But there have

been environmental conse

quences, prompting critics to say

that people in Oklahoma just

don’t know what they have lost

over decades of major drilling.

Or that they have been lulled into

complacency by the industry’s

public-relations campaigns.

State officials, including the

regulators, say that hydraulic

fracturing has never ruined

groundwater. But there have

been earthquakes, as there have

been in Ohio. In Youngstown, a

series of 12 quakes, ranging from

2.1 to 4.0 magnitude, occurred in

2011 and were linked to a new

injection well there.

The University of Oklahoma in

late March said a 5.7 magnitude

earthquake in the state in 2011

was potentially caused by injec

tion of wastewater from drilling

and hydraulic fracturing that be

gan in 1993.

The Oklahoma Geological Sur

vey earlier investigated whether

hydraulic fracturing itself caused

a series of 43 quakes, from 1.0 to

2.8 magnitude. The probe noted

there was a strong correlation be

tween the well fracturing and the

quakes but it concluded the seis

mic data were not clear enough

to say for certain.

“You do have disasters,” said

Patrice Douglas, chairwoman of

the Public Corporation Commis

sion, which regulates the indus

try and oversees the state’s

electric and gas utilities.

The commission’s three mem

bers are elected statewide rather

than appointed, as in Ohio, and

they have public meetings every

day to vote on issues in one of the

industries.

“We have had blowouts

throughout the years,” said

Douglas, referring to when drill

ing crews lose control of the pres

sure. “You have things that hap

pen along 100 years of oil and

gas development. When we see

something like that happen, we

really work to ensure that it

doesn’t happen a second time.”

Natural gas good for Amer

ica

Natural gas not only makes

good business sense in Okla

homa City, but it also happens to

be patriotic ‘” the right thing to

do for America.

That’s the message of the Okla

homa Energy Resources Board, a

government agency funded en

tirely by voluntary contributions

from the oil and gas industry and

overseen by an industry board

appointed by elected officials.

The resources board not only

produces national advertising for

television, it also has a fully de

veloped educational mission in

classrooms from kindergarten to

college. In Ohio, an educational

arm of the Ohio Oil and Gas As

sociation is in the early stages of

such a program.

Chesapeake Energy is convert

ing all of its vehicles to run on

compressed natural gas.

Throughout Oklahoma City, CNG

is available at a price between 79

and 99 cents a gallon of gasoline

equivalent. Across the state are

hundreds of CNG stations. Cleve

land has two CNG stations, and

Ohio has 12.

In early March, Oklahoma

took delivery of its first 242 CNG

vehicles from Chrysler, the result

of a 22-state national initiative

organized by Gov. Fallin, a Re

publican, and Colorado Gov.

John Hickenlooper, a Democrat,

to buy CNG vehicles if carmakers

would make them.

Ohio Gov. John Kasich, a Re

publican, signed the agreement,

but Ohio has yet to take delivery

of a CNG vehicle, partly because

it still has only a few CNG sta

tions.

“We are exploring the possibil

ity of retrofitting two or three

snow plows either in northern

Ohio or central Ohio, or both,”

said Kasich spokesman Robert

Nichols.

A renaissance for Ohio?

Accelerating manufacturing is

Kasich’s primary hope for natu

ral gas.

Ohio has been a heavy manu

facturing state for decades, with

its cities’ historic melting pots of

immigrants seeking work in the

state’s heavy industries. And to

day the state is struggling to

move into high-tech manufactur

ing while hanging on to what’s

left of its older industries.

Gas and oil production have

had a place in Ohio’s develop

ment since the first well was

drilled in Trumbull County in

1859. There were intermittent

state oil booms in the 1880s and

1890s.

More than 220,000 wells have

been drilled in Ohio, but the in

dustry has never been the state’s

economic mainstay. IHS Consult

ing said Ohio shale jobs num

bered about 18,000 in 2012, of

which 4,200 were directly in the

industry.

Whether the suspected mother

lode of shale oil and gas under

the rolling hills of eastern Ohio

will lead to an Ohio manufactur

ing and economic renaissance as

hoped is the real question.

Russell Evans, an economist

with Oklahoma City University,

said Ohio manufacturing logi

cally should get a boost from

shale development.

“I would assume given a manu

facturing background, given the

existence of those facilities, given

a trained work force, that some

of that production [of parts and

components] would be readily

transferable” to Ohio, Evans said.

Rural Ohio counties, such as

Carroll and Harrison counties,

where Chesapeake has been drill

ing, have in fact seen a lot of new

spending, but few new jobs,

according to a recent Cleveland

State University study.

But the ongoing drilling could

stop the slow economic decline

in these rural Ohio counties,

Evans said, as it has in Okla

homa.