Illinois hydraulic fracturing off to slow start amid oil-price slump

JIM SUHR, AP Business Writer

Illinois hydraulic fracturing off to slow start amid oil-price slump

ST. LOUIS (AP) — The oil and gas drilling technique known as "fracking," once trumpeted as a job-creating boon for southern Illinois, is off to a feeble start in the state as slumping oil prices and the rigors of Illinois' new regulations have energy interests cautiously waiting on the sidelines.

Two months after a legislative panel approved long-awaited rules for high-volume hydraulic fracturing, the Illinois Department of Natural Resources says only Denver-based Strata-X has registered with the state to pursue such drilling. No one has applied for a permit yet.

The lack of immediate movement contrasts sharply with a land rush in recent years in southern Illinois, where energy interests spent millions snapping up oil and mineral leases spanning hundreds of thousands of acres in anticipation of a shot at the area's oil and natural gas deposits. Fracking proponents were banking on the industry producing tens of thousands of jobs in a region that long has had some of the state's highest jobless rates.

But a downdraft on oil prices has left investors fidgety. Compounding matters is the need to sort through the state's new regulations — which the industry and environmental groups helped negotiate — as well as threats of lawsuits by Illinois fracking foes hoping to block or at least modify the drilling practice, which they consider risky to humans and the environment.

While winter conditions complicate any actual drilling, it wouldn't normally slow down planning or seeking permits.

"We got through one hurdle (the regulatory process), and now we have more," said David Hettich, chief financial officer of Strata-X, which since 2011 has acquired oil and gas exploration rights involving 67,000 acres in southern Illinois. "It's poured some cold water on this."

Fracking elsewhere has helped swell U.S. oil production by 80 percent since 2008, to more than 9 million barrels a day. The practice generally uses a high-pressure mix of water, chemicals and sand to blast open rock formations thousands of feet underground to free trapped oil and gas.

In Illinois, the state Legislature passed fracking legislation in early 2013, and it was approved by the governor that June. The DNR then set about writing rules to implement the regulations; it took more than a year before they were revised, and a legislative committee approved them last November.

That allowed drillers to begin applying for permits, 30 days after registering and paying a non-refundable $13,500 fee for each one.

A recent study by IHS, an industry research firm, concluded four-fifths of the oil estimated to be pumped this year from tight geological formations such as sandstone or shale still can be profitable at $50 to $69 a barrel — a span an IHS executive said would "cast a big chill on the level of activity."

"Low oil prices are going to test the resilience of tight oil production," said Jim Burkhard, IHS' vice president of global oil research.

Some companies have drilled exploratory wells and remain optimistic. Kansas-based driller Wayne Woolsey's company, with 260,000 acres under lease in southern Illinois, has drilled 10 evaluation wells at a cost of more than $2 million apiece, and "everything we've done at this point looks very favorable."

But the lengthy rules-making process has complicated his prospects. Many of the four-year lease deals he's struck with land owners will expire in the next year or so.

"I was hoping to evaluate (that land) in the first year, which hasn't occurred," he said. "It's been extremely time-consuming and costly."

Chris Young, a DNR spokesman, said addressing criticisms about the process's pace is difficult because the industry is in its infancy and the first permit isn't in place.

"There's a structure in place we operate within," he said.

Drillers like Woolsey hope the permit process becomes more streamlined under the state's new governor, Bruce Rauner. The Republican collected hundreds of thousands of dollars in campaign contributions from oil producers and drilling companies. And a committee advising him recommended that should make jump-starting Illinois fracking among his priorities during his first 100 days in office.

Meanwhile, fracking opponents are pledging more legal challenges, after unsuccessfully suing to suspend the state's new guidelines.

Annette McMichael, a spokeswoman for Southern Illinoisans Against Fracturing Our Environment, said her group has "believed all along the price of oil is not going to be sustainable, and once it fell the fossil fuel industry would be leaving Illinois — or at least putting hydraulic fracturing on hold."

"We certainly hope oil prices stay depressed for 2015, which is a good possibility."

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