Oil prices freeze the Illinois fracking boom

By Holly LaFon

Illinois may have missed the fracking boom, as oil prices simmer near $50 a barrel. But a heated drama to reclaim the gold rush is playing out downstate with a cast of environmental activists, big oil, farmers, politicians and Saudi Arabians.

Only one company, Strata-X signed up to apply for a permit to drill in Illinois to date. The boomtown era of just three years ago eroded rapidly over the past six months as oil prices lost half their value.

“Oil is the biggest part of our economy around here with agriculture, and maybe some manufacturing,” said Ted Whitehead, chairman of the Clay County Board. Whitehead works for a company that transports oil to a refinery in Indiana.

County Chairman Ted Whitehead works in the oil industry like his father, who also served as chairman of the Clay County Board. Many Clay County residents have worked in oil for generations.
County Board Chairman Ted Whitehead takes a lunch break at Anthony’s Wild West in Flora, Illinois. He works in the oil industry like his father, who also served as chairman of the Clay County Board. Many county residents and their families have worked in oil for generations. (Holly LaFon/Medill)

Clay County in southern Illinois, a coveted area for potential fracking and at the center of the controversy, covers wide swaths of farmland sprinkled by grain silos, farmhouses and oil pump jacks bobbing up and down. It sits atop the Illinois Basin, home to most of the state’s 650 oil fields. The fallen remnants of last year’s crop fill the fields along with an occasional pump jack marking traditional vertical wells that are still in use.

Companies have been drilling in Clay County since they discovered oil there in the 1940s, making it one of the nation’s top producers. Reserves depleted over the years, but the potential for reaching rich new veins trapped in bedrock with high-tech, hydraulic techniques promises a renaissance for the industry. Last year, out-of-town oil representatives flooded the tight-knit county, researching which land to lease to begin fracking. But that abruptly stopped.

Unemployment rose to 8.1 percent – one of the highest rates in the state – as oil prices dropped.

Illinois opened the door in November for companies to obtain permits for high-volume hydraulic fracturing, the process of extracting hard-to-reach oil from shale using high-pressure water and chemicals. Yet unlike other states where fracking is thriving – enough to flood the world’s oil market and contribute to a plunge in crude prices – Illinois appears to be in limbo.

Oil and Farms – The Recipe for the Southern Illinois Economy

“We have some oil pumps on our land but we don’t own any,” said Katie Lewis, 21, who grew up in Clay County. “We don’t own the pumps or the oil, but what they do for us is we get a check every month. It’s a percent of what the oil makes every month.”

Oil pumping units stand in the fields surrounding many farmhouses in Clay County, an oil-dependent region.
Oil pumping units like the one to the left stand in the fields surrounding many farmhouses in Clay County, an oil-dependent region. (Holly LaFon/Medill)

Her family, like many farmers and landowners in the area, leases their land to oil companies to run pump jacks. Lewis, who is studying agriculture at Northwestern University, said the pumps on the 1,600-acre farm near Xenia, Illinois, help supplement income from corn and soybeans.

At Anthony’s Wild West & Fallout Saloon – patrons say it’s the only restaurant in the U.S. with an oil drill for a bar footrest – four men who have been friends for decades discuss life, business and oil. Restaurant owner Anthony Booth stops by to talk and doesn’t conceal his disappointment at a drop in business.

“Ten months ago we had a lot of people here checking out leases,” he said. “Now all of that has changed. We haven’t seen one of them in months.”

The men all seem to agree.

Anthony Booth (middle) saw marked decline in business at his restaurant after fracking companies lost interest in the area, where oil and business are interconnected.
Anthony Booth (middle) saw marked decline in business at Anthony’s Wild West  restaurant after fracking companies lost interest in the area, where oil and business are interconnected. (Holly LaFon/Medill)

Brenda Britton, Clay County clerk and recorder, said in January that no companies had come into the courthouse to search for mineral rights for 10 months.

What Stopped Fracking

Some companies did lease land to test for fracking, though. In July 2014 Denver-based oil company Strata-X Energy purchased leases for 67,000 acres of farmland.

Theories abound about what precipitated the sudden halt in interest from fracking companies. Plunging oil prices tops the list. When Strata-X began production tests on horizontally drilled wells in the Illinois basin, they quoted oil prices of $95.75 per barrel. By January oil process had dropped to around $40 on the global market.

“We missed out on zillions of dollars.”

– Andy Knapp

Southern Illinois oil workers are remarkably well-versed in international relations among players that include Saudi Arabia, Russia, the Middle East and Ukraine. The faraway places directly affect the livelihood of the people harvesting in the breadbasket of America.

Chris Mitchell, president of Geo. N. Mitchell Drilling Co. Inc. in Carmi, about 300 miles south of Chicago, said he believes that the rise of U.S. fracking destabilized the oil market.

“I think [the drop in oil prices] is all fabricated,” he said. “The margin between having too much and not enough oil is about a million barrels a day. To me and you that’s a lot but to the people doing the exporting it’s not a lot.”

Three OPEC countries primarily control its oil output: Saudi Arabia, United Arab Emirates and Kuwait, he said, and they want to keep their market share.

“We put these successful shale plays and increased the production in the U.S.,” he said, “meaning we’re increasing the exports, so wherever that spreads out of the market because the U.S. is taking less. So they’re going to go out and spank the shale players’ butt by putting more oil in the market forcing the price down.”

“They’re already succeeding in that several rigs in Texas, Oklahoma, North Dakota, have been shut down because of the price.”

– Chris Mitchell, Geo. N. Mitchell Drilling Co. Inc.

OPEC producers know that fracking for oil in the Eagle Ford and Bakken shale – oil from the Dakotas – costs more to produce, so it takes more for companies to get their money back.

“Well, if the price is low it’s going to hurt them,” he said. “They’re already succeeding in that several rigs in Texas, Oklahoma, North Dakota, have been shut down because of the price. They’re already getting the point across.”

Companies Clash with Environmentalists

A serendipitous sudden escalation in prices wouldn’t instantly return the momentum, though. David Hettich, chief financial officer and vice president of land for Strata-X, called high oil prices a “primary driver” for renewed interest in fracking, but the reality is more complex. Opponents concerned with the environmental impact of fracking in Illinois stalled the process of passing regulations and continue to thwart interested companies, he said. Years of clashing with opposition groups have exasperated him, he said.

“Now the rules are out – we have oil and gas depressed prices. It’s a combination of depressed oil and gas prices currently and regulatory fatigue,” Hettich said.

For Hettich, the hurdles may outweigh the rewards, since no one has yet even proven that high-volume hydraulic fracking will work in the state. Other states allowed fracking and began implementing regulations after it was underway and worked with businesses to implement them, he said. Illinois, a late-comer, wants every detail in place up front, he added, but the heavy regulations may amount to a barrier.

Illinois had the benefit of seeing the growing pains and regulatory gaps in the states at the forefront of fracking and is trying to address them upfront. But companies say they find the permit application, which spans an arduous 300 to 400 pages, vague in ways that leave them open to litigation.

It’s a combination of depressed oil and gas prices currently and regulatory fatigue.”

– David Hettich, Strata-X

“The Illinois Department of Natural Resources is terribly understaffed to be reviewing this application,” Hettich said. “Say they make a mistake. It can be something totally nebulous. It could be I didn’t get the right approval from a landowner – the same people show up to protest, then sue them. Then sue the company.”

Any error can leave a company a target for a lawsuit, which can drag them into court for years. The first five companies will have the most difficulty navigating the application, and after that companies should have a pattern to follow.

“We’re trying to figure out how to get a handle on it right now. We can drill vertical wells in Illinois and establish production and not be continuously harassed,” Hettich said.

Pressure from environmental advocates has also left companies wary of applying for permits because the process requires them to make their names public, he said.

“In talking to the other companies in the basin, they met the Department of Natural Resources, they all eventually will put in an application,” he said. “Whether in mid or next year or I don’t know. They don’t want to register because they will become fodder for the opposition group.”

Environmentalists Continue the Fight

Environmental concerns played through the passage of Illinois’ fracking regulations. Environmentalists warned that fracking raised risks of poisoning the state versus making it money. With demands of both sides set at equally loud volumes, the contentious debate presented a politician’s worst nightmare.

Strata-X had leased land in 2011 in Illinois and the leases gave them the right to explore for a stated period of years and then produce on it indefinitely. After spending millions of dollars on the exploration rights, the state decided it would pass new regulations. Hettich said.  What the company thought would be a short process for legislation and regulations ended up taking two and a half years from when the land was leased.

“One day [Governor Pat] Quinn would say he was in favor of a moratorium,” Hettich said. “The next day he’d say he was yelling at someone for not going quick enough. He was hitting the break and the gas pedal. He didn’t move the rules forward in expeditious ways. He literally took every day he could but two” before one deadline.

He compared fracking to marijuana and concealed handguns in terms of its controversial nature.  Anti-fracking “elves” delivered a beribboned personal fracking rig to Governor Quinn’s house during the 2013 holiday season, according to the Facebook page of Chicagoland Against Fracking. Some opponents left a coffin, tombstone and flowers – representing the death of Illinois – at the office of a state representative who  proposed a bill to  streamline the regulations process. The first draft of regulations received 30,000 comments, submitted by about 100 people.

Fracking Opponents

Environmental advocates openly admit it’s not just rigorous regulations that they want – they want no fracking at all. Fracking opponent Vito Mastrangelo, a lawyer who has lived in unincorporated Justin County, just north of Clay County, for 30 years. He has no oil wells on his land. Mastrangelo became involved in the anti-fracking campaign after he read in the newspaper about what might happen in Illinois.

[youtube http://www.youtube.com/watch?v=7RaU3tBmoGk&w=560&h=315]

He runs legal affairs for Southern Illinoisans Against Fracturing Our Environment (SAFE), a group that demands a complete fracking ban in the state. The group grew out of meetings his fellow concerned citizens began holding shortly after the news broke.

In contrast to Hettich’s view, Mastrangelo believes fracking opponents were not given enough say in the rule-making process that opened the gateway to the permit process. And he, along with SAFE and several landowners, have filed a lawsuit alleging defects in the way the Department of Natural Resources made the final rules. The violations he believes occurred primarily center around not giving the public enough say in the process.

“You’re probably aware that DNR points out that there were thousands of comments. And there were five hearings around the state. But what most people don’t realize is that there was a hearing in Chicago and there were four others down south – Effingham, Decatur, Carbondale and Ina. And the one in Chicago, they didn’t have enough capacity in the room. They had to turn people away,” Mastrengelo said.

Southern Illinoisans, the people that I know that do not support fracking, feel vastly underrepresented both within environmental organizations and within the legislature in general.

– Vito Mastrangelo, Lawyer

“Basically DNR took the position that they had to allow the public defense, but at these public hearings and in other instances we’re arguing that they did not give us the opportunities to engage this department in how the rules were made,” Mastrangelo said.

The Illinois Department of Natural Resources did not respond to a request for comment.

“My spin on it, and I’m speaking only personally now, not on behalf of SAFE or anybody else, is industry has much more lobbying power than any environmental organization or individuals. Southern Illinoisans, the people that I know that do not support fracking, feel vastly underrepresented both within environmental organizations and within the legislature in general. We believe the industry has – they donate tens of hundreds of thousands of dollars to legislators,” he said. “They basically got the last word, let’s put it that way.”

In addition to legislative procedures, Mastrangelo fears for the environmental consequences of a procedure that has raised alarms in the scientific community.

“For years we’ve been told that there is a pretty good chance that there will be an earthquake pretty soon… So when we learned that injection wells cause earthquakes and even fracking can cause earthquakes it’s kind of a non sequitir: Earthquakes are bad; we’re going to do something that causes earthquakes. There’s a little big of illogic going on there,” he said.

The Chemical Cocktail of Fracking

Chemicals used in fracking have also been found to be toxic, Mastrangelo said.

Hettich argued that fracking uses only three materials – sand, water and chemicals.  He said chemical components used include glycol (soap), an antibacterial, a gel and possibly potassium. The amount of chemicals used equals less than 2 percent of the overall fluid makeup.

The water and chemicals are pumped into the earth at high pressure to break up the bedrock and release the oil.

Hettich said that fracking engineers protect fresh water near ground level during drilling by surrounding the pipe with layers of materials: rock, cement, steel, rock, cement and steel. The oil they extract also exists far below the fresh water table.

Stephen Nickels, a board member of SAFE and vehement opponent of fracking, strongly disagrees. Nickels grew up in the suburbs of Chicago and moved to southern Illinois when he and his wife bought her family farm. In Chicago, he worked on the floor of the Chicago Board of Options Exchange and later opened his own firm. Nickels has studied the science and economics of fracking in-depth and come to support SAFE’s unequivocal position.

“Fracking is an inherently dangerous extraction technology which cannot be made safe through any amount of regulation,” he said.

For instance, the sand Hettich mentioned, while sounding innocuous and natural, is actually silica sand, he said.

“Silica sand, once airborne, can travel 20 miles,” Nickels said. “Silica sand will – will – give the people doing the fracking and potentially the people living in the area of fracking, exposure to silicosis. Silicosis will be the black lung of the fracking generation,” he said. “Silicosis essentially turns your lungs to cement and you die. Period.”

“Fracking is an inherently dangerous extraction technology which cannot be made safe through any amount of regulation,” he said.

– Stephen Nickels, SAFE

The next environmental contaminant he mentioned is methane, a gas that oil drillers flare off when they drill for oil and that has been linked to global warming. He described a satellite image taken of earth that eerily demonstrates the size of the problem.

“You see Chicago and it’s bright and huge, and you see Minneapolis-St. Paul and it’s not quite as bright as Chicago and not quite as big, but it’s still fairly well lit up, and you see North Dakota’s Bakken oil field, and it looks just as bright as Minneapolis,” he said. “Because they’re flaring that much gas…When you see North Dakota looking like Minneapolis-St. Paul, you get the idea.”

Nickels also warned against the effects of the chemicals used in fracking, saying, “They don’t just use soap. That’s bullshit. There are 650 chemicals that have been identified as being part of frack solutions.”

New York  Gov.  Andrew Cuomo banned fracking in New York in December after a  New York State Department of Health review examined the health risks linked to the activity.

“I have 80 acres here in Johnson County where Woolsey [Energy Corporation] sold 199 leases,” Nickels sad. “I wouldn’t lease my land to a fracker for all the tea in China, as it were. For any amount of money. Nobody wants to live right next to a frack, period.”

Nickels also said believes that people have overblown the potential economic benefits of fracking.

“There was a Marcellus Shale study done by multiple universities, I want to say three years ago, and it states unequivocally that there are 3.2 jobs generated per well drilled,” he said. “The majority of those jobs are ‘Mcjobs.’”

He said the largest number of jobs likely to be generated fall in the service industry sector – restaurant help, gas station service workers, strip club dancers, bar tenders and truck drivers.

“And those people end up not even being able to live in the area anymore because of the influx of people that come with fracking,” he said.  Fracking companies “bring their own professional crews with each rig. They’re not looking to hire local people to frack a hole. All those high-paying jobs, they all come with them and leave with them.”

Fracking will never get that far though, he prected, stressing the precarious economics of the situation. He gave the example of Woolsey Energy, a Kansas company that bought mineral rights to 260,000 acres of land in southern Illinois for about$26 million. Purchased three to four years ago, the five-year leases will soon expire or be up for renewal, which costs a fee.

“Certainly nobody who has put up $26 million and got nothing in return for it is going to dump another $26 million in unless he’s damn sure that the price of oil is going to remain high enough to make that a viable investment,” he said. “The whole geopolitical price of oil as it is currently constituted is just one nail after another in the coffin of the shale industry of the U.S.”

John Bayler, a local contract worker on wells for Strata-X, finds some middle ground between the two sides in his views and his life. He is an oilman, organic gardener, photographer and avid recycler.

John Bayler demonstrates the shale from which fracking removes oil that became trapped there millions of years ago.
John Bayler demonstrates the shale (left) from which fracking removes oil that became trapped there millions of years ago. (Holly LaFon/Medill)

He said he would  like Campbell Energy LLC of Carmi to drill a fracking well on his land. “They’re trying to lease a piece of my ground that I got a royalty on,” he said. “I’d love for them to do it on my land.”

Bayler also advocates for fracking in the region and sees the economic benefit as enormous, though acknowledges small, independent oil producers would not likely benefit from the jolt. He estimates cyclical oil prices could go back up to $100 per barrel in four to five years.

“If the price of crude oil comes up, we could have a boom town real fast,” he said.

And quite frankly, even as an oil man, I can’t support drilling on the Arctic National Wildlife Refuge.

– John Bayler, Strata-X

He said he doesn’t believe it will impact the environment. “The last thing you want from an oil well is for anything to come in there but crude oil,” he said. “There are chemicals used, but they won’t get to fresh water. That isn’t going to happen.”

“And quite frankly, even as an oil man, I can’t support drilling on the Arctic National Wildlife Refuge. There’s enough oil in the world. Leave that alone,” he added. “But there’s enough oil other places that we can get it, particularly right now with shale,” he continued. “We don’t need to drill that right now. Maybe in 100 years when there is an oil shortage in the world, then maybe we need to reevaluate some of these places. But I can’t condone drilling in some of these places.”

The Future 

Despite the downturn in oil economics, Hettich predicts Strata-X will forge ahead and begin drilling as soon as they figure out the best way to manage the regulations – likely in the second or third quarter of next year. Even then, the economic windfall hangs in the balance.

“There were a lot of oil-producing areas in the U.S.,” Hettich said. “Not all of them are candidates for high-volume hydraulic fracking. There is no certainty that the resource in Illinois is going to be viable for this type of technology. If we could just get a few of them in there to see, this whole thing could either go away very quickly, or we

Oil forms the majority of southern Illinois' economy, has become a hotly contested battleground for environmental advocates.
Oil, which forms the majority of southern Illinois’ economy, has become a hotly contested battleground for environmental advocates.

could ultimately understand what the resource is and start working through its development process in conjunction with people who are concerned with the environment.”

Anti-fracking activists are unlikely to suddenly feel compelled to cooperate, however, and low oil prices will spell a default win for environmental groups, Nickels said.

Nickels acknowledges the disappointment that would mean for the economy, but added, “Well, it’s great for the planet. Period.”

Photo at top: Traditional oil pump jack on a farm in Clay County. (Holly LaFon/Medill)