MOUNT VERNON — The petroleum industry is one of the most volatile segments of the national economy. Subject to the law of supply and demand, it is also subject to trades in the commodities market, the health of the manufacturing industry and consumer behavior.
The price of the two products derived from petroleum, natural gas and crude oil, can parallel each other, or go in opposite directions. At the end of August, the price for natural gas fell, while the cost of gasoline and crude oil rose.
Knox County residents see this volatility reflected in the price at the pump and in their heating bill. What they may not realize is the effect this volatility has on the county as a whole.
Knox County is one of the top 10 crude oil and natural gas producing counties in Ohio, with 1,135 active wells.
“Knox County is ranked No. 4 in the state in the total number of new wells drilled last year,” said Rhonda Reda, executive director of the Ohio Oil and Gas Energy Education Program. “Knox County had 67 new wells last year.”
Statewide, 1,049 new wells were drilled, ranking Ohio fourth in the nation behind Texas, Oklahoma and Pennsylvania in number of wells drilled.
“The liquid form of petroleum is crude oil,” explained Reda. “The vapor form of petroleum is natural gas. In 2008, Knox County produced 567,418,000 cubic feet of natural gas.”
For crude oil, 162,452 barrels were produced in the county in 2008. There are 42 gallons in a barrel.
In Ohio, 85 billion cubic feet of natural gas was produced and 5.6 million barrels of crude oil.
“Ohio’s natural gas production, nearly all of which stays in the state, created enough energy last year to heat more than 1 million Ohio homes and businesses,” said Reda.
Many of the wells in Knox County were drilled by Knox Energy Inc. Based in Pataskala, the company has a field office in Utica.
“We’ve drilled 125 wells in the last five years in the area surrounding Utica, in Knox and Licking counties,” said Mark Jordan, president of Knox Energy. “We’ve invested probably $18 million.”
According to Jordan, it costs $150,000 to $175,000 to drill a well down to 2,500 feet, the average depth in the Knox County area.
“We have to raise that money, use our own money, or bring in partners,” he said. “When prices are low, drilling activity stops because the price drops.”
Last year, he said, the price per 1,000 cubic, or Mcf, was $13. Now it’s less than $3.
“People don’t realize how volatile it is,” he said. “The economy is down, factory usage of natural gas is down like 35 percent. There was a lot of drilling a few years before because of the high price. So we got the supply, and now the demand drops.”
Less drilling means less supply, which means higher prices, he said.
The number of wells in the county affects the economic picture because in addition to getting free natural gas to heat their home, the landowner is paid either a rental fee per acre, or royalties based on the well’s production. The amount per acre per acre can vary from $5 to $10.
“We tell the landowner we would like to drill on your acres, and we lease the property for so much per acre for say, three to five years,” expained Jordan. “If we get a succcessful well, then they’re entitled to free gas for their house, up to a certain amount. When we get the well drilled, we stop paying the lease rent and start paying a royalty, which is one-eighth off the top. If we make $5,000 in a month, [the landowner] gets one-eighth of that.”
That one-eighth, which equates to 12.5 percent, brought in $3,323,168 to Knox County in 2008, said Reda.
“That’s over $3 million that stays in Knox County, that people are hopefully spending right there in the community,” she said.
Statewide, Reda said, the royalty number is over $202 million, and $84 million in free natural gas.
The Knox County Airport is one business that will soon benefit from this free gas and royalty payment.
According to Marla Elliott, airport manager, the airport authority signed an oil and gas lease with Knox Energy in December 2006. Under a five-year lease, Knox Energy paid the airport $6 per acre.
“The well started producing July 21,” said Elliott. “The airport authority will get one-eighth of what is pulled off.”
Elliott said the first check should be received the end of this month, and monthly thereafter.
“We’ll get 250,000 cubic feet of free gas every year,” she said.
In 2008, the airport paid $1,500 for natural gas, although that was not for the whole year. Prior to switching to natural gas, the airport used propane.
“Since January of 2008 to now, we paid $3,013,” she said. “So for us, that is what we are going to save.”
“These wells don’t pay out overnight, but they are a good, long-term investment,” said Jordan. “Some of the landowners have done pretty well.”