What Ohio’s oil & gas boom means for you

Apr 05, 2012

By Gary Hunt

When Ohio residents think of the industries that have sustained the state’s economy in the past, they might overlook oil and gas and think of agriculture, manufacturing, steel and rubber.

They haven’t been talking to OSCPA member Bob Mapes, CPA, executive principal at Rea & Associates, Inc. in Wooster, where he has been involved in the oil and gas business since 1976.

“Ohio has a lot of oil and natural gas wells, and throughout those 36 years I always have thought the industry was active here,” Mapes said. “Wooster has been a hotbed of activity – at one time we had five or six oil supply stores… We’ve had (sudden growth) in the past and each one has kind of been a boom in itself.”

But now more Ohioans are hearing about the possibility of an even brighter future; recent advancements in drilling technology have made it possible to tap huge oil and gas reserves in the Marcellus and Utica shale formations that lie under most of the eastern half of Ohio.

“This is 100 times bigger than anything else we’ve had going on,” Mapes said. “We’re talking about $200 billion dollars being put into the southeast Ohio area.”

Ohio has long been a solid – if unspectacular – player in the oil and gas industry dating back to the 1800s. According to the Ohio Department of Natural Resources, the first commercial oil well went online in 1860, and by 1950 there were more than 175,000 wells in 45 Ohio counties. The Ohio-based Standard Oil Company was the world’s dominant player in the early days of refining, and even in recent decades Ohio ranked fourth nationally in number of wells behind Texas, Oklahoma and Pennsylvania.

Mapes said the current boom is just beginning, and it will have an impact in two phases.

“Right now we’re in Phase 1: capital leasing,” he said. “That’s where all the publicity is going on. People are gathering ground into units, using that to negotiate prices and leases, and using some of the bigger law firms. Landowners are forming associations in Ohio to negotiate the leases.

“Phase 2 will be the development of the infrastructure,” he said. “The cost of these wells is $6-$10 million apiece. Already 120 or more wells have been drilled, and there are people out there spending millions to acquire the mineral rights to develop those wells.”

That development will attract businesses that need CPAs.

The Ohio Shale Coalition, a group of local chambers of commerce, businesses, development organizations and others including OSCPA, in February released the results of a study that estimated the boom will lead to the creation of 68,680 jobs. That estimate falls between the projections of two other studies, which ranged from 20,000 jobs to more than 200,000.

Oil and gas industry lobbyist Tom Stewart said in January at a Columbus Business First event that while 200,000 seems high, the industry has already created about 10,000 jobs and $100 billion in revenue over the past decade.

In addition to job growth, the Shale Coalition researchers expect drilling to provide a nearly $5 billion boost to Ohio’s economy by 2014 and to add $433.5 million in state and local taxes in that year. The total value of the production is expected to grow to $9.6 billion by 2014.The study didn’t account for any potential job gains from industries that use oil and gas, such as the state’s chemical and polymer businesses, oil refining or fertilizer production.

On the manufacturing side, preparations are already in place in Youngstown, where a $650 million expansion at a V&M Star plant is nearing completion. Production of oil field tubing is expected to begin there this summer, and the operation will create 350 jobs.

“We could see a significant increase in revenue and new jobs,” said Jay Meglich, CPA, with Schneider Downs & Co., Inc. in Columbus, a presenter at OSCPA’s Oil and Gas Conference held in March in Akron. “That would also provide opportunities for CPAs in tax planning, estate planning and wealth management.”

He said accountants need to learn the unique aspects of the industry, as well as its terminology. As an example, he mentioned the concept of “depletion,” which is used in mining, timber and similar industries when an owner needs to account for the reduction of a product's reserves. A CPA also can benefit by having a basic understanding of the geology involved and how an oil or gas well works, Meglich said.

“I think it’s important for an accountant to understand what’s going on in the industry,” he said. “Knowledge of the business certainly helps, because the language is unique. When you get to the accounting aspects it’s unique. Do you need to be a geologist? I don’t think so.”

Mapes said it’s also helpful to understand the process of the business, as the focus goes from obtaining mineral rights to drilling to production.

“The rigs and people keep moving to where the next play is,” Mapes said. “That probably won’t be for another four years in Ohio. But there is a lifecycle to how these things work.”

Both Meglich and Mapes cited the Ohio Oil and Gas Association as a valuable source of information. They also said CPAs should seek CPE courses on the industry.

The Ohio Society of CPAs has positioned itself at the forefront of the business. OSCPA Vice President, Governmental Affairs Barb Benton is part of the Ohio Shale Coalition to represent CPA interests as the group focuses on helping CPAs and others who will be providing goods and services to the oil and gas industry.

“It’s an exciting time to be an Ohioan – it’s almost like a boomtown environment,” Benton said. “There is still so much that remains unknown, but there are many opportunities for those who are flexible and innovative. OSCPA’s goal is to keep members in the loop so they can react quickly as developments happen.”

Though oil and gas will create work for CPAs, Mapes doesn’t think it will require an influx of new accountants in Ohio.

“I think our existing workforce is going to be able to handle it,” he said. “We might add some people from the development of the infrastructure to support the industry. We’re not going to have much work from oil and gas businesses, because they are located out of state. But any of the CPAs that represent producers are starting to see an uptick in work.”

CPAs will also be needed to help local business owners with succession planning.

“Oil is an old industry in Ohio,” he said. “A lot of the people involved in it are 60-plus. They probably don’t need much of that wealth for the rest of their life, so moving it on to the next generation is an issue.”

There are also opportunities for CPAs, attorneys and others to help businesses and private citizens who have suddenly found their lives impacted. Stewart said landowners, in particular, need to be sure they have qualified legal counsel.

“For an oil and gas contract, it’s crucial that it’s done correctly and all parties know what is in it,” he said. “Understand the contract. Understand the law. Understand your rights.”

That’s especially important for someone who finds himself in an unexpected financial position, such as being offered thousands of dollars an acre for their land.

“You have all kinds of common folk who, quite truthfully, have never had that kind of money offered to them,” Mapes said. “They are taxed at the ordinary income tax rate. They don’t know what to do or how to deal with a tax burden that large.”

Ultimately, experts and novices alike are finding there are new developments to consider almost daily. For example, on Feb. 27, the Ohio Tax Credit Authority approved a 65% tax credit for Baker Hughes to build a 700-job regional headquarters in Massillon. Baker Hughes is one of the nation's leading oilfield services companies, and the office would serve as the company's base for providing services to shale gas exploration companies in Ohio and the region.

“It is a very interesting industry,” Mapes said. “There is so much activity and proposed business, we almost can't keep up with the news.”

And Meglich said most of the news has yet to be made.

“Ultimately, my expectation is that we are very early in the stages of development of the shale industry in Ohio,” he said.

Marcellus, Utica shale: What are they and why are they important?

The Marcellus Shale play leaped into public consciousness suddenly in Pennsylvania in 2004, when Range Resources Corp. drilled the first Marcellus well using modern technology. The resulting leasing and drilling activities began a flood of money into the local economy and sparked a discussion over the impact of the development.

Marcellus Shale takes its name from a rock outcropping near the village of Marcellus, New York. It consists of sedimentary rock formed mostly from the compressed remains of ancient sea life mixed with minerals. The organic material decomposed over millions of years into natural gas, which is trapped in the dense rock.

The bulk of the formation is about 5,000 feet below the surface from New York State through most of Pennsylvania and into Ohio and West Virginia. (Figure 1) It’s been long known to contain natural gas, but not until 2004 has its extraction been practical and economical.

Figure 1

“In the past, the only way you could get it was by putting nitroglycerin down wells,” said Tom Stewart, executive vice president of the Ohio Oil and Gas Association. “Well, people died putting nitroglycerin down wells.”

Stewart said hydraulic fracturing – the practice of injecting fluid into a well to break up rock and extract valuable natural resources – has been used since the 1950s in about 80,000 wells in Ohio, and nationally in about 1.2 million wells. In the past decade, however, geologists learned that by combining hydraulic fracturing (or “fracking”) with a new technique of horizontal drilling, it was possible to efficiently extract oil and gas from shale formations.

Stewart, speaking in January at a Columbus Business First event, called this development a “game changer” for his industry, allowing for “superefficient extraction of natural gas” that made wells produce 25 times the output of vertical wells. He said there has been no evidence that fracking causes groundwater contamination, though some environmentalists have called for more studies before widespread drilling is allowed in Ohio.

Stewart said many experts think the Marcellus Shale formation is the second largest natural gas field in the world. But some now think a rock layer that lies mostly below it – except in Ohio – has the potential to be an even richer source of gas and minerals.

Utica shale takes its name from the city of Utica, New York, where it outcrops. It lays under eight northeastern states – including most of Ohio – and parts of Ontario. (Figure 1) In Pennsylvania, it is below the Marcellus Shale, at around 7,000 feet, but in Eastern Ohio it slopes upward to within 2,000 feet of the surface. (Figure 2) Deposits closer to the surface mean less drilling and lower development and production costs.

Figure 2

The Utica Shale is thicker and broader than the Marcellus, and because it holds more “wet” gas, it contains – in addition to oil and natural gas – more propane, helium, butane and other valuable minerals than other shale deposits. Companies that drill in wet-gas regions are more insulated from the natural gas market because they have more products to sell.

Stewart said industry experts will soon have a firm read on what Ohio wells will yield.

He said there was still a chance the potential isn’t as high as some believe, but “most people don't think that's the case. I don't think that's the case. But three years from now we’re going to have a better picture of that.”