A headline in Tuesday’s online edition of The Houston Chronicle, “Drillers Choke Off Dollars To Permian Basin Operations,” may have unintentionally caused confusion regarding the current state of play in the country’s most active drilling and oil-producing basin.
The story to which this headline was attached references a report by the firm Wood MacKenzie that discusses how upstream merger-and-acquisition activity in the Permian has trailed off somewhat dramatically in recent months. This is entirely true. As The Chronicle points out, Wood MacKenzie’s data indicates: “Drillers spent $35 billion in West Texas over a nine-month period that ended in early spring. By comparison, the collective value of land deals of the last six months is less than $5 billion.”
Someone at The Chronicle apparently realized that the initial headline was somewhat confusing ― the Wood McKenzie report does not talk about any slowdown in drilling ― because the headline was later changed to read “Rising Costs, Land Prices Have ‘Taken The Edge Off’ Permian Basin.” It was inevitable that the upstream M&A fever that developed in the Permian last summer was bound to eventually slow down. As geographically huge as the Basin is, there is a limit to the amount of acreage within it that could rationally be evaluated to meet acquisition costs that in some deals exceeded $40,000 per acre. So it is not surprising at all that the pace of land and reserves transactions has slowed dramatically.
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In its infinite wisdom (OK, I’m kidding just a little here), the Texas Legislature showed great foresight during its 1981 session, creating what the state calls the Texas Economic Stabilization Fund but what has since come to be commonly known as the Rainy Day Fund. At the time, policymakers took advantage of a great boom time in the petroleum industry, using the state’s oil and gas severance tax receipts as the funding source for virtually the entire fund balance.
Over the last 36 years, the Rainy Day Fund has proved to be exactly what it was billed to be back in 1981: a fund that has had the effect of stabilizing the state’s budget situation. As an example, the Great Recession created huge revenue shortfalls for the state government going into both the 2009 and 2011 legislative sessions, forcing policymakers to cut spending on state services deeply. But the ability to take billions of dollars from the Rainy Day Fund ensured that cuts to the bone did not become cuts into the marrow of those services.
The Rainy Day Fund has also allowed legislators to address other pressing state issues without impacting the budget’s General Fund. The 2013 session of the legislature funded the state’s entire $50 billion State Water Plan by tapping the Rainy Day Fund for $2 billion, establishing a revolving line of credit that will be used to finance a large variety of dams and other water projects in the coming decades. That same session also, with the approval of the state’s voters, tapped the Rainy Day Fund for $2.25 billion to fund much-needed road improvement projects all over Texas.
Even after all those and other large, special withdrawals over the last decade, the Rainy Day Fund today retains a balance of over $10 billion, money that is available to help Houston and other areas of Southeast Texas rebuild from Hurricane Harvey. In short, the Texas Rainy Day Fund is a pretty phenomenal success story for which the oil and gas industry rarely receives much credit.
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I’ve written entirely too much about the Jones Act this year, but like a bad penny, it just keeps turning up in the public discourse. Last time I addressed this subject, it was over an effort by the U.S. shipping industry actually expand this pernicious and archaic protectionist law, an effort that thankfully failed thanks to some last minute interventions by a few members of the Texas congressional delegation.
That was back in May. Now, here we are four months later and the Jones Act has once again become the subject of national media coverage, this time mainly because President Trump keeps having to suspend it in order to help save lives after major hurricane events have devastated the U.S. and its territories. That sentence alone should make any observer wonder: After all,
Before we get into that, let’s review what the Jones Act actually does. Fellow Forbes contributor Ted Loch-Temziledes, in an excellent piece on the Act, sums it up thusly:
The act regulates all maritime commerce in U.S. waters and between U.S. ports. It requires that shipping of all goods transported between U.S. ports be carried out by ships under the U.S flag. The ships must be constructed in the United States, owned by U.S. citizens, and crewed by U.S. citizens and U.S. permanent residents. Furthermore, the steel used in any foreign repair work on a Jones Act vessel must be less than ten percent of the ship’s total weight. Waivers are only possible on a temporary basis, in cases involving national defense, or other emergencies, such as hurricanes.
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In news that is certain to upset adherents to the never-dying cult of Peak Oil, IHS Markit released a study on Sept. 25 indicating that, per their analysis of data from more than 440,000 oil wells in the Permian Basin, the basin still has somewhere between 60 and 70 billion barrels of producible oil to give up in coming years. That’s not exactly the “near-infinite resource” view of the Permian held by Allen Gilmer and his staff at DrillingInfo, but it certainly supports the notion that the basin will remain a very active area for oil and gas development for decades to come.
“The Permian Basin is America’s super basin in terms of its oil and gas production history, and for operators, it presents a significant variety of stacked targets that are profitable at today’s oil prices,” Prithiraj Chungkham, director of unconventional resources for IHS, said in the statement.
The IHS Markit study is the latest in a string of resource estimates in the past year that have produced a growing understanding of the true magnitude of the resource in place in the Permian. Last November, the U.S. Geological Survey (USGS) issued its own resource estimate that a single formation in the Permian, the Wolfcamp Shale, contains 20 billion barrels of technically recoverable oil, by far the largest such estimate ever issued for any single formation by the USGS. Most in the industry understand that this is actually a conservative resource estimate because USGS limits its resource assessments to reserves that are producible using current technology. Given that technology advances in the oil and gas industry every day, such estimates, while useful markers, are out of date before they are even released.
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Allen Gilmer, Co-Founder and Executive Chairman at DrillingInfo, Inc., is not a man who minces words, an attribute that has served him well during a long career in the oil and gas industry. When it comes to the Permian Basin and the amount of oil and gas resource contained in it, he becomes positively loquacious.
“We should view the Permian Basin as a permanent resource,” he says, “The Permian is best viewed as a near infinite resource – we will never produce the last drop of economic oil from the Basin.”
No one disputes that the resource in the Permian is huge, but ‘infinite’ is a big word. I asked him to expand on that concept. “That is the practical reality with the amount of resource that is in the ground,” he says, “The research we’ve done indicates that we have at least half a trillion barrels in the Permian at reasonable economics, and it could be as high as 2 trillion barrels. That is, as a practical matter, an infinite amount of resource, and it is something that has huge geopolitical consequence for the United States, in a very good way. It has a huge consequence in terms of GDP, and right now it is creating an American energy global ascendancy.”
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Last Friday, the American Statesman published a piece titled “About 100 Protesters Call For Austin To End Fossil Fuel Use For Power”. Being from Texas, I read the piece and viewed the video attached to the story with great interest. The City of Austin – Texas’s capital city – maintains its own power utility that is separate from the power grid that provides electricity to most of the rest of the state.
The protesters were on-hand to oppose a proposed plan that would increase the city’s use of renewable fuel to 65% by 2027. In a state rich in natural gas resources for power generation, this goal wasn’t aggressive enough for these 100 souls.
My first thought upon seeing the group of protesters was to wonder how many of them drove to the site of the protest in gasoline-powered cars, which make up about 99% of automobile fleet in Texas? I wondered further if any of them understand that many of the components in the cars they drive – even Teslas – are made from petroleum-derived products?
Many in the group were wearing sneakers. I can’t help wondering if they know that those shoes are in part made from petroleum products? Some carried backpacks – do they know that parts of many such items are to some extent made from petroleum products?
It was a prosperous-looking bunch, most of whom no doubt practice sound dental hygiene. I couldn’t help wondering if they know there’s a very good chance their toothpaste – and their toothbrush, for that matter – is largely derived from petroleum? I wonder if the women among the group realize that their makeup and lipsticks are most likely derived from petroleum as well?
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Every fad runs its cycle: The ’50s gave us the hula-hoop, the ’60s gave us tie-dyed t-shirts, the ’70s gave us leisure suits, the ’80s gave us Cabbage Patch Dolls, the ’90s gave us Pokemon, and the ’00s gifted us with The Atkins Diet (on which I once lost 36 pounds and then gained it all back in a single year). Fads come and fads go, but the thing that they all have in common is that, when we look back from the viewpoint of history, we wonder how they ever became so popular to begin with?
Thus begins the saga of “Fracking” and its application to the very safe, heavily-regulated industrial process of hydraulic fracturing by activist conflict groups, the news media and the entertainment industry that has run a similar course over the past ten years. Starting around early 2008, we began to see groups like the Natural Resources Defense Council (NRDC), the Sierra Club and other major environmentally-focused conflict groups using the term “Fracking” ubiquitously in their messaging campaigns to oppose the oil and gas industry the U.S.
The use of the term – which is adopted from the remake of the Battle Star Galactica series that aired during the early years of this century – quickly spread into the media, which is not surprising. After all, the term is stark, it is sexy, and it is adopted from a cuss word (In Battle Star Galactica, the term “Frakking” was used to describe the act of sexual intercourse) that had become well-known in pop culture. We first began seeing the term used in left-wing media outlets like ProPublica, but it quickly spread to the mainstream outlets, as journalists and editors began to see the use of the term attracted traffic to their websites.
Over the following few years, the use of the term expanded almost exponentially in the media and then into the entertainment industry, as the public became increasingly aware of the boom in shale oil and natural gas that “fracking” had made possible. (Nevermind, though, that “fracking” had to be wedded to horizontal drilling in order to achieve that feat – , and thus almost never appeared in headlines, articles or movies.)
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If you read the Dallas Morning News for information about the oil and gas industry, you’d be best advised to do more than just scan the headlines. Here are two examples of headlines that just don’t really match the content of the articles:
Trump Won’t Declare Dallas Firm’s Dakota Access Pipeline A Major Disaster – Well, no, that’s not at all an accurate description. The state of
Governor Burgum did ask the President to declare the site of the months-long protest/riot action against the Dakota Access Pipeline to be a “major disaster” in an effort to seek federal help in footing the $38 million bill for policing the often-violent protesters and cleaning up the epic mess they left behind when they finally cleared their illegal site. Given that it was the federal government, under Barack Obama, that allowed these rioters to illegally occupy the site for half a year, it would seem that the Governor had a valid complaint. President Trump disagreed, which is his right. Either way, it would have been nice for the headline writer to accurately portray the content of the article.
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