x Abu Dhabi, UAEWednesday 17 January 2018

Energy 'windfall' claim may be campaign rhetoric, but Fairfield booms

As analysts dispute claims by both President Barack Obama and Mitt Romney that a production boom will enable the US to achieve 'energy independence', a town of 5,000 is raking in the money.

Wayne county clerk Glenda Young, second from right, assists a group of ‘lease hounds’ from Texas as they pore over land records in search of mineral rights holders at the Fairfield courthouse.
Wayne county clerk Glenda Young, second from right, assists a group of ‘lease hounds’ from Texas as they pore over land records in search of mineral rights holders at the Fairfield courthouse.

FAIRFIELD, ILLINOIS // A year ago, farmer Jamie Pollard began receiving calls from strangers interested in leasing his land. Some nights, he would arrive home to find notes taped to his front door.

It became clear the callers had been hired by out-of-state energy companies interested in drilling deep beneath his corn and soybean crops. For what exactly, oil or gas, they wouldn't say.

The first offers were for US$50 (Dh184) for each acre, annually. When the amounts started to more than double to $125, some of Mr Pollard's friends signed the contracts. Then the offers hit $200.

"When they got to $375, we started thinking, 'Okay, we should do this,'" he said. Soon, all 1,600 acres of his land were leased. If he had waited until this summer he would have received up to $500 per acre.

Illinois has become the latest state to feature in a nationwide rush by major oil and gas companies to deploy new extraction technologies in what many describe as an energy revolution that could have major long-term effects on the American economy and foreign policy.

During their election campaigns, both President Barack Obama and his challenger, Mitt Romney, have claimed that this production boom will enable the US to achieve "energy independence" from disruptions and political entanglements with the rest of the world, especially the Middle East.

This idea makes for good campaign rhetoric, but it has little basis in reality, industry analysts say.

"Governor Romney and President Obama are oversimplifying it and misconstruing it," said Daniel Ahn, an expert on energy and national security at the Council on Foreign Relations and co-author of a Citigroup report on the production boom that the Romney campaign has cited extensively in its energy policy plan.

By the end of the decade the US will indeed likely produce enough oil and gas to enable it to meet its demand by imports only from Canada, but this "should not be confused with lack of interdependence with the rest of the world", and an escape from Middle East politics, Mr Ahn said.

Petrol prices, for example, spiked in the US after Libyan exports were blocked during the civil war last year even though the US imported virtually no Libyan oil. Europe, however, suffered a huge shortfall as its important Libyan supplies were cut, and producers around the world diverted US-bound oil to Europe to chase higher profits, thereby causing petrol prices in the US to jump in tandem.

"It's still going to be an issue that exerts a lot of political pressure, so I don't see the US stepping back from its commitments" in the Middle East, Mr Ahn said.

This does not mean that the "energy revolution" will not make the US more energy secure, if not independent. In times of extreme oil flow disruption, as during war or a serious hurricane, the domestic capacity would put the US at a great strategic advantage, Mr Ahn said.

It would also take pressure off of Gulf producers during supply shortages, lessening the impact of price spikes, he added.

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More perilously, if the US boom leads to a decrease in global oil prices, that would mean a weaker economy for countries dependent on oil exports. "It would mean slashed budgets and potentially greater social instability in a part of the world where the so-called Arab Spring has already raised tensions," Mr Ahn added.

But perhaps most importantly for the US, there will be handsome economic benefits, according to the Citigroup study. Along with cheaper energy for consumers, up to 3.5 million new jobs are expected to be created.

In southern Illinois, those economic benefits are being felt even before the first new well has been drilled.

Independent companies have pumped oil here since the 1930s, when crude was first discovered. Since then, production has rarely increased, and the old pump jacks that dot fields here only yield an average of two barrels a day.

"Fifteen barrels is a heck of a good well," said Brad Richards, vice president of the Illinois Oil and Gas Association.

The big oil companies have spent, by conservative estimates, $100 million since 2010 leasing hundreds of thousands of acres here, Mr Richards said. They hope for massive discoveries using new horizontal drilling capability coupled with hyro-fracturing to reach rock formations that were unavailable using conventional methods.

The "game changer" that spurred the current rush was the drilling of huge deposits in the Bakken shale formation in North Dakota in 2008 that now promises to produce as much oil and gas as Texas.

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In Fairfield, a town of about 5,000 in Wayne county, and surrounding towns, it can be difficult to find an empty hotel room. If you do happen to book one, hotel car parks are full with Louisiana and Texas license plates.

These "lease hounds", as the locals call them, have been a boon for the slow local economy. Mr Pollard, the farmer, and his wife have invested in houses that they rent out, furnished, as well as in a title and abstract company that the leasers hire to help with tracking down records.

At one end of Fairfield's small main street, past the second-hand clothing and farm supply stores, past the empty storefronts, sits the Wayne county courthouse. Inside, Glenda Young, the county clerk, manages the land records, the oldest of which dates back to 1886.

Sitting under an original black-and-white framed photograph of Abraham Lincoln, Ms Young said that she used to be able to count the number of leases that were copied from the archives each year on her hands. Since January 2010, 1,554 have been copied, bringing in an extra $100,000 for the office in fees.

In a hushed voice, the Fairfield native says she's worried about how a local oil boom might change her town. "I like it the way it is," she said. "And I can see it overwhelming us." She has also leased out all the farmland she owns to an oil company.

Recently, in the record room behind her office, a handful of lease hounds were pouring through large volumes of land records, engaged in the tedious process of identifying the owners of land and mineral rights.

"It's like a big, chronological puzzle," a man from Louisiana said, refusing to give his name. "I've seen mineral ownership broken up 200 times within one family, so that's the hardest part."

The leasing phenomenon arrived at an ideal time for locals like David White, a fifth-generation farmer who has leased much of his land. Driving his red pickup along a dirt road between patches of farmland, he said that the huge drought this year forced him to destroy most of his corn and soybean crops. "We have some insurance, but a lot of guys don't," he said. "The boost to their income [from leasing] is helping them a lot."

He pointed to a parcel of leased land that had a small white flag planted in the middle of it, indicating where a horizontal well would be drilled.

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But not everyone in Fairfield is happy with all the changes. Michael Podolski, a respected geologist who runs a local oil company started by his father after the Second World War, is afraid that the major companies are speculating wildly. He said if they don't strike huge deposits - and local companies suffer in the process - the net effect on the region's economy might be negative.

"Ultimately their goal is to hold as much acreage with as few wells as possible and this will preclude people from doing [traditional] exploration," he said. "Unless they are hugely successful beyond my imagination, it might put as many out of work as it puts in."

Joan Crockett, a regional energy expert at the University of Illinois, agrees that there are dangers that the Illinois rush could be a bubble. "A big change is that instead of the targeted drilling that the independent operators did, the new exploration is funded by Wall Street," she said. "If it's a banker making decisions, they'll be different kinds of decisions."

Sovereign wealth funds and national banks, including from China, have invested in the current boom, complicating further the notion of 'energy independence'. In Illinois, both Mr Richards and Mr Podolski say that foreign investors are involved with financing.

"They've been buying into these plays much later in the game" and losing money when natural gas prices dipped because of over production, Mr Podolski said. "I suspect they want to get in on the ground floor here in Illinois."

In the end, though, Mr Roberts said, "what the foreign national companies really want is the expertise and technology". According to Mr Ahn, "everyone is looking jealously at the US and trying to see if they can copy it".

Perhaps the biggest loser from America's boom in natural gas and oil is the environment. The economic incentives for research and development of renewable energy sources fall in proportion to petrol and gas prices. Moreover, Mr Romney's explicit focus on hydrocarbons in his energy plan would make the problem even worse from an environmental standpoint, Mr Ahn said.

State regulators have also not been able to keep up with the extraction technology, and hydro-fracturing, or "fracking", has become a highly contentious issue in many states, with little known about the environmental impact of large-scale fracturing.

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But for the most part, the people of Fairfield seem to agree that this community needs the boom to succeed.

On an unseasonably warm afternoon last week, retirees Bill Jordan, 65, and Bob Lichdenberger, 84, sat on a bench across from the farm supply store discussing the past, and the future.

"Young people should be excited - a lot of people make an awful good living out of oil," Mr Lichdenberger said.

Mr Jordan, who worked in the Illinois oilfields as a young man, added: "You used to be able to read a newspaper at night" from the flare fires on the oil wells.

"I don't know what's going to happen here," he said. "But like my mom used to say, 'Nothing stays the same'. And boy... it don't neither."