fbpx
Published in Energy

Michigan’s oil and gas producers weather pandemic amid long-term demand questions

BY Sunday, March 28, 2021 05:15pm

 

After production ground to a halt for Michigan oil and gas producers early in the COVID-19 pandemic, wells resumed activity later in the year for an improved short-term outlook.

COURTESY PHOTOS

State officials report that oil and condensate production reached about 4.3 million barrels in 2020, down from just more than 5 million barrels the previous few years. Natural gas production continues to see a steady 8-percent year-over-year decline, said Adam Wygant, director of the Department of Environment, Great Lakes and Energy’s Oil, Gas and Minerals Division.

Last year’s oil activity was a “direct response to oil wells being shut down due to precipitous low prices we saw because of COVID,” Wygant said. Widespread stay-at-home orders choked off oil demand globally, at one point sending prices negative and throwing the industry — particularly in large producing states like Texas and North Dakota — into a short-term tailspin.

But producers drawing Michigan sweet crude managed to rebound after short-term well closures, largely because the state is a relatively small oil producer.

“Overall, the drop in production during that COVID period could have been a lot worse and closer to production being cut in half,” Wygant said. “We hope it rebounds this year from companies putting wells back online as prices go up.”

Oil prices — or what producers are paid per barrel of extracting supplies from deep underground — are a major determinant of the industry’s future, said Jason Geer, president and CEO of the Michigan Oil and Gas Association

Within the past decade, prices and Michigan’s production had trended downward beginning in 2014 when prices started to drop below $50 per barrel, or what Geer called the break-even point for producers. Prices are now hovering around $60 per barrel. Deciding whether to drill a new well is “risky” when prices stay around or below that break-even point and projects can be 40-year investments, Geer said.

“Oil has been pretty cheap, and that has definitely impacted our ability to drill,” Geer said. “The pandemic crashed prices into negative territory, and that gives you pause on whether you want to make the investment. The price of oil is starting to go up, and high prices mean more activity for us. We feel pretty good that if the price continues to hover in the $60 range, we’ll probably have a pretty good summer.”

Wygant said well inspections have also rebounded since 2016 when the oil and gas division faced annual budget shortfalls because of the drop in production, which helps fund the division’s oversight program. Annual well inspections had dipped to about 14,500, but have since rebounded to about 20,000 per year.

Long-term outlook

As Michigan’s oil and gas industry continues its relatively modest pace, public debates around the industry rage. 

Gov. Gretchen Whitmer, Attorney General Dana Nessel and environmental advocates are in a legal standoff over the future of the Line 5 pipeline, which Geer said many Lower Peninsula oil producers rely on to offload their product.

There’s also speculation about the industry’s long-term role as countries begin to more aggressively tackle climate change, including the U.S., where the Biden administration has announced economy-wide net-zero carbon emission targets by 2050.

Tribes and environmental groups have also injected climate change into the Line 5 debate, arguing that allowing the nearly 70-year-old pipeline to continue operating for another 100 years is counter to climate change policies. Essentially, the debate centers on oil demand in economies that place greater value on low-carbon alternatives.

Although long-term, 50-year forecasts raise questions about the industry’s role, Geer is unconcerned about the industry’s short-term prospects. 

Michigan is also home to unique geological repositories that have the potential to store carbon emissions that are captured from sources and injected deep underground, otherwise known as carbon capture and sequestration. Using those injections to also extract more through enhanced oil recovery present a pair of potentially new revenue streams for companies and landowners.

“I think we’ll see some type of transition, but like everything else, it comes down to cost and what consumers want,” Geer said. “A lot of (consumer products) are also made from oil and gas — that need is not going away. We think we’ll weather it just fine.”

Read 1080 times
SUBSCRIBE TO MIBIZ TODAY FOR WEST MICHIGAN’S FINEST BUSINESS NEWS REPORTING >