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Black Gold

More than six decades of oil and gas production in Alabama extends from Huntsville to the Gulf of Mexico.

A natural gas production platform in Alabama state waters of the Gulf of Mexico.

Photo by Jason Norman

Between the Appalachian foothills to the north and the waters of the Gulf of Mexico, Alabama is endowed with a diverse supply of natural resources. Deep below the mineral-rich topsoil of the Black Belt hide two precious geological boons: oil and natural gas.

Years before the 1859 Drake Well drilled in Pennsylvania signaled the birth of an industry, denizens of Alabama had already explored the marketability of crude oil. While Native Americans found oil seeping into water supplies to be a nuisance, the crude that issued from asphaltic rock was collected and sold as medicine. Geological reports from the mid-1800s recall tar seeping from limestone fissures in Lawrence County, and pills derived from these “tar springs” were hawked as a cure for indigestion, sores and a host of other maladies.

The discovery of natural gas in north Alabama followed later in the century, and by the early 1900s Huntsville’s streets were illuminated by gaslight. This was a modest output by today’s standards, and it would be decades before the state’s largest supplies of gas would be tapped in the Gulf of Mexico.

The first oil wells in Alabama were dug in 1865, when the industry itself was still emerging in the U.S. Through the remainder of the century, oil and gas exploration spread throughout Alabama, and while major commercial value remained largely elusive, the state established its first oil and gas legislation and supervisor in 1911. By the 1940s, the state government found it necessary to create a regulatory body for the industry, which has evolved over time into today’s Oil and Gas Board.

H.L. Hunt Punches In

Talk of Alabama’s mineral potential caught the attention of Texas oil tycoon H.L. Hunt, who struck black gold in Choctaw County in 1944. Hunt’s wells brought serious commercial oil production into the state, and in the following decade, a new field would be discovered farther south in Mobile County.

The Hunt Oil Co. would continue exploring Alabama soil until it struck pay dirt in 1994. This Conecuh County prospect wasn’t expected to produce enough oil to pay off long-term, so Hunt Oil sold the rights to the independent Midroc Operating Co. The company’s co-owner, former Sooners quarterback and geologist Jimmy Harris, discovered that the underlying rock defied the geological trend of that region. Instead of a small, isolated patch, the prospect proved to be a high-yielding extension of the Smackover Formation. This geological formation is rich with fossils and minerals, and its vast petroleum reserves have fed oil wells across the South.

The Smackover extension was responsible for drawing large oil companies into Alabama during the ’70s and ’80s, including Amoco, Exxon, Shell and Texaco. When oil prices doubled following the energy crisis, Alabama’s Smackover potential was largely abandoned. Independent companies would pick up the slack, tapping the “updip” of a massive fault line running through the southwest of the state. Improved methods and low operating costs made drilling irresistibly affordable and promised a quick ROI on successful wells.

Today, two fields in Conecuh County make up the state’s biggest oil production. The Little Cedar Creek Field was the site of the initial drilling in 1994, with the nearby Brooklyn Field discovered in 2010. The land currently holds 165 wells, reaching about 11,500 feet into the earth.

“Each well has a 400-barrel-per-day allowable,” says Kirk McQuillan, deputy director of the Alabama Oil and Gas Board. “Together, they’ve produced a cumulative 40 million barrels to date.” As of January 2018, Little Cedar Creek had produced 21,080,995 barrels of crude oil, while Brooklyn followed with 20,467,941.

To maximize the longevity of these fields, enhanced oil recovery operations began in 2005 in Little Cedar Creek Field and are under consideration now for Brooklyn Field. “Through this process, water and gas are injected into the reservoir to sustain pressure that would otherwise be lost over time,” says McQuillan.   

According to the U.S. Energy Information Administration, the state’s three operable oil refineries produced more than 131,000 barrels per calendar day in 2016 and 2017. That’s a high-water mark for the decade, but well below the averages of the 1980s. Production peaked in 1988, when six refineries turned out 180,000 barrels per day.

Skip Schexnayder, production superintendent for Sklar Exploration in 2013, rode herd on 42 wells in Alabama’s most prolific oil patch, in Conecuh County. From Business Alabama March 2013, “Working and Living in Alabama’s Biggest Oil Patch.”

Photo by David Bundy

Methane Billions

Alabama also maintains about 6,100 coalbed methane wells across seven counties. Once considered nothing more than a hazardous byproduct, the resource now makes up about 44 percent of all natural gas produced in Alabama. Since the first extraction permits were issued in 1980, operators have invested around $3.5 billion in the state.

“Extracting coalbed methane is very important to the state,” says Marvin Rogers, the Oil and Gas Board’s general counsel. “It degasifies mines and makes them safer. It’s especially valuable in Jefferson and Tuscaloosa counties and the surrounding communities where we have a lot of the mining centered.”

Prior to the 1980s, coalmines were vented via vertical wells that simply released the methane into the air. Research conducted by the U.S. Bureau of Mines and Department of Energy indicated a high commercial value for the extraction of coalbed methane, and in 1983, the State Oil and Gas Board of Alabama passed regulations specifically for the drilling of the resource. Alabama set the precedent for CBM extracting for energy, and other states later adapted its rules and regulations for their own efforts.

“Petroleum landman” Martha Dornish researches mineral titles in the Conecuh County Probate Court in 2013. From Business Alabama March 2013, “Working and Living in Alabama’s Biggest Oil Patch.”

Photo by David Bundy

Offshore Bonanza

At the time of its discovery, the natural gas field off the coast of Alabama promised to be one of the largest producers in the U.S. “The first productive well was drilled in 1979, but it took several years to evaluate the reservoir and set up a production system,” says McQuillan. “Production began in 1987.” Developed by Mobil Oil Exploration and Production Southeast Inc., the field was expected to produce 23 billion cubic feet of natural gas per year for the next 40 plus years.

From 1987 to 2017, Alabama’s offshore wells have produced more than 3.8 trillion cubic feet of natural gas. After more than 30 years of extraction, however, the finite reserves are showing signs of maturity.   

“Peak offshore production has likely passed at this point,” says McQuillan. “It’s been on a decline for a long time now, at an annual rate of about 8.5 percent.” According to the EIA, only two-fifths of Alabama’s natural gas was derived from offshore wells last year.

State waters extend only three miles from shore. Beyond that, waters are federal. The state gets some revenue from federal waters though, shared with Louisiana, Mississippi and Texas through the Gulf of Mexico Energy Security Act.

The states and their coastal political subdivisions shared $37 million between 2009 and 2017. Another $188 million was allocated in 2017 under the second phase of the act.

This spring, the federal government held its biggest oil and gas lease sale in history, offering 77 million acres in the Gulf of Mexico. Despite the effort to spur offshore drilling, only 815,000 acres drew bids. This relatively cold reception appears to be the latest in a trend. Statistics from the U.S. Department of the Interior Bureau of Land Management show that the number of active oil and gas leases on federal lands in Alabama has dropped steadily over the last decade, with 204 leases in effect in 2008 and 109 active in 2017.

Despite the volatility of availability and demand, the oil and gas industry continues to pump significant revenue into the state through several channels, including employment, royalties and severance tax on the extraction of resources.

A 2017 study commissioned by the American Petroleum Institute reports that the industry supports almost 86,400 jobs in Alabama, yielding more than $4 billion in wages. Accounting for construction, transportation, wholesale, retail and other services, the API totals the industry’s economic impact at nearly $8.9 billion.   

In 2016, the severance tax contributed more than $38 million to the state’s general fund. Nearly $48.6 million came from investment income from trusts, and almost $43.4 million was derived from oil and gas proceeds to trusts.

The majority of revenue from oil and gas royalties is primarily directed to the Alabama Trust Fund, with a remaining one percent allocated to the Lands Division of Conservation. Funds flowing into the ATF are divvied up for the Alabama Capital Improvement Trust Fund, County and Municipal Trust Fund, the ATF’s portfolio and other distributions. Among the designated distributions, royalties may fund Alabama cities, counties, Forever Wild Land Trust and senior services. Any remaining balance of ATF distributions is directed to the general fund.

Fluctuating fuel prices and maturing fields make future production difficult to predict. While current offshore wells continue to produce, albeit at a diminished rate, operators aren’t leaping to grab new leases as aggressively as the federal government had anticipated. If prices can stabilize any time soon, companies may be more willing to invest in new exploration. “This all depends on the value we place on it,” says McQuillan. “The industry goes along with the rest of the economy.”

Tom Little is a freelance contributor to Business Alabama. He is based in Birmingham.

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