In the middle of a drilling boom, high prices for mineral rights, inflated wages for workers and low prices for natural gas are forcing drillers who can’t make enough money from conventional wells and don’t have the cash for a large horizontal shale operation to make plans for survival.
While the oil and gas industry invests billions of dollars in eastern Ohio, the brothers who run GonzOil talk about survival.
“We’ve had to get lean and mean,” said Frank Gonzalez, the Stark County-based drilling company’s secretary and treasurer.
GonzOil sank just two wells last year, down from the 15 or so it drilled four years ago. The company also had to lay off an employee.
They aren’t the only conventional drillers to be squeezed by the new focus on shale drilling in Ohio.
While development of the Utica Shale has so far created 38,000 jobs, a corresponding hike in prices for mineral rights, inflated wages for workers and low prices for natural gas, are putting pressure on drillers who can’t make enough money from conventional wells and don’t have the cash for a large horizontal shale operation.
“This is, economically, very difficult times for many of these operators,” said Rhonda Reda, executive director of the Ohio Oil and Gas Energy Education Program.
Frank Gonzalez and his brother, Douglas, started drilling for gas and oil in 1989, mostly with vertical wells into the Clinton sandstone formation 4,500 feet below the surface. GonzOil’s wells are scattered throughout communities in Stark, Summit, Portage and Cuyahoga counties.
“We’ve kind of become an urban-drilling specialist in the last five or six years,” Frank Gonzalez said.
The arrival of shale drilling a couple of years ago caused prices for mineral rights to skyrocket. Lease rates quickly jumped a hundredfold from $25 to $2,500 an acre, and in some areas the price hit $6,000.
“It changed landowners’ expectations for payments and our Clinton sandstone wells could not justify those land payments,” said Frank Gonzalez.
And drilling an unconventional shale well is just too expensive.
“What they spend for one well is almost our yearly budget, if not more,” said Douglas Gonzalez, GonzOil’s president.
So, the brothers are holding tight, making money from their existing wells and the side-business of plugging wells for other companies.
“The way I sum it up is, there are guys who build apartment buildings, there are guys who rent apartment buildings,” Douglas Gonzalez said. “Well, right now we’re not building any apartment buildings, but we’re still renting all the ones we’ve built in the past.”
Other companies continue to drill conventional wells.
EnerVest and its affiliated company E.V. Energy Partners is one of the leading drilling companies in Ohio and local counties.
While EnerVest has drilled several horizontal wells into the Utica Shale — including producing wells in Marlboro and Bethlehem townships — most of its activity involves vertical wells. Last year, the company received more than 25 permits to drill conventional wells in Stark County alone.
Page 2 of 2 - “Ohio is a good place to work,” said Ken Mariani, president and chief executive officer of EnerVest Operating, which is based in Houston.
The company has offered to sell its Utica leases, but plans to keep the rights to drill in other formations, including the Clinton and Knox sandstone.
Because of the expense involved — a conventional well can cost $350,000 to $1 million to drill versus $10 million to $14 million for an unconventional well — some small drillers are partnering with unconventional drillers, Reda said.
Ohio has about 600 conventional operators, and the industry needs them to stay in the game, both for vertical drilling and for future maintenance, she said.
“These are the folks that probably in 10, 15 years may be operating some of these large wells,” she said.
A handful of shale operators have inquired about GonzOil’s acreage, but the company hasn’t sold and the appetite for leasing has waned in the past year as drillers try to figure out what to do with the land they already hold, Douglas Gonzalez said.
The industry is cyclical. The price of natural gas will rebound.
“Frank and I have survived many of these,” Douglas Gonzalez said. “High prices, low prices, high prices, low prices. The key for us is just to not be stupid when we have money and be prudent when we don’t have as much.”
Staff writer Edd Pritchard contributed to this report.
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