Shaking Up Energy Business in Ohio

Ohio can't win. Just when it seemed like a new day was dawning in an economically challenged area of the state, the bottom fell out. Literally.

On New Year's Eve, a magnitude 4.0 earthquake shook eastern Ohio -- the second quake in a week in an area not known for seismological activity. Now an expert hired by the state says the rare quake near Youngstown was probably not a natural event.

Won-Young Kim, a research professor of seismology, geology, and tectonophysics at the Lamont-Doherty Earth Observatory at Columbia University, speculates that the quake may have been triggered by high-pressure liquid injection related to oil and gas exploration and production. Fracking, that is.

Fracking -- officially known as hydraulic fracturing -- is a process used to stimulate oil and gas wells. It involves injecting fluid (mainly water with sand and chemicals mixed in) into the ground to break up the rock trapping hydrocarbon reserves. Environmentalists and energy interests are deeply divided over the potential impact of fracking, especially on water supplies. But now the attention is shifting from the possible contamination of groundwater to unusual patterns of earthquakes. (See Quaking Over the Search for Energy and Shaking Out Fracking Fact From Fiction.)

Kim told Reuters in an interview Tuesday that circumstantial evidence suggests a link between the earthquake and the high-pressure well activity. "We know the depth" of the New Year's Eve earthquake "is two miles, and that is different from a natural earthquake."

Ohio's Department of Natural Resources has already suspended operations at five well sites in Youngstown pending further investigation of the safety of high-pressure water injection.

Neither fracking nor temblors related to the process are anything new. In April, the English seaside resort town of Blackpool shook from a magnitude 2.3 earthquake -- one of several quakes that investigators determined were caused by fracking. And the link goes back decades. Reports show that fluid injection caused a series of 1967 quakes in the Denver area.

But it's not an inevitability. Fracking has unlocked the oil and gas potential of the Bakken field in North Dakota. The Bakken is booming -- there are "help wanted" signs almost everywhere, and a palpable sense of opportunity hangs in the air, on and off the oil fields.

Though the first oil from a well in western North Dakota flowed more than 60 years ago, it took the convergence of hydraulic fracking and horizontal drilling to realize the full extent of that find. After decades of small booms followed by quick busts, the Bakken has come into its own. It's yielding almost half a million barrels of oil per day, versus around 80,500 barrels just eight years ago.

North Dakota has become the fourth-largest oil-producing state -- it was ninth just a few years ago -- as well as the state with the lowest unemployment rate. By the end of last year, there were more than 6,000 wells capable of producing oil and gas statewide. Another 20,000 could be drilled within the next 20 years, followed by more than 30 years of pumping.

Oh, and one more thing about North Dakota -- all that fracking hasn't caused any earthquakes.

In Ohio, many state and local officials have been hoping exploration of the Utica Shale would generate the same economic revival from the area around Youngstown south to the West Virginia border. The region, which sits near Pittsburgh, has been struggling to reinvent itself since the US steel industry collapsed in the 1970s. Many seemed to think the solution was buried in the Utica Shale, a vast resource that sits under portions of Kentucky, Maryland, New York, Ohio, Pennsylvania, Tennessee, West Virginia, and Virginia.

Aubrey McClendon, executive officer, chairman, and co-founder of Chesapeake Energy (NYSE: CHK), the country's second-largest natural gas producer, gushed when he described the region last summer on CNBC's Mad Money. "What can it mean in the form of oil? I think this could be 25 billion barrels of oil equivalent -- in the form of oil, natural gas liquids, natural gas. It could be one of our biggest discoveries in US history."

Exxon Mobil (NYSE: XOM), Chevron (NYSE: CVX), and Royal Dutch Shell (NYSE: RDS.A) are also active in the region. In fact, analysts say energy companies haven't been this interested in the Buckeye State since John D. Rockefeller opened Standard Oil in Cleveland in the late 19th century.

The question is whether the quakes will dampen the appetite for exploration in Ohio.

Gov. John Kasich and the Ohio Department of Natural Resources have called the earthquakes isolated events. Though drilling at five sites has been suspended, Rob Nichols, a spokesman for Kasich, said in an interview with Bloomberg that officials plan to continue using the other 177 disposal wells in Ohio. Shale-gas development may produce thousands of jobs, Nichols said. "We are not going to stand by and let someone drive a stake through the heart of what could be an economic revival in eastern Ohio."

How many jobs? Well, that figure, like the impact of fracking on earthquakes, is open to debate.

An industry group said in a November report that Ohio's natural gas and oil reserves are a multibillion-dollar bonanza that could create more than 204,500 jobs in the next four years. But Mark Partridge, a professor at Ohio State University, and Amanda Weinstein, a doctoral candidate at Ohio State, recently predicted in their own report that the shale drilling industry would create 20,000 jobs in the next few years -- fewer than 10% of the jobs forecast by studies underwritten by the industry.

Partridge and Weinstein say that industry-funded impact studies are typically flawed, because they double count the economic effects and make unrealistic assumptions about spending and hiring.