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Why U.S. Oil Producers Might Not Mess Up A Good Thing In 2018

A good friend of mine who runs the government affairs shop at a large independent producer has a favorite saying: You can always count on the oil and gas industry to mess up a good thing. The last time he said that to me was about this time a year ago, when it was apparent that, after a terrible year during which the oil price for West Texas Intermediate (WTI) had sunk as low as $26/bbl, the price would top $50 by the end of the year in the wake of the agreement between OPEC, Russia and several other non-OPEC nations to curtail exports.

We were discussing the probability that, in response to that higher commodity price, the upstream segment of the industry would respond by activating a large number of idled drilling rigs early in 2017 and drill its way right back down to a lower price. Which, of course, is exactly what happened: The industry brought more than 200 additional rigs online during January and February, and another 100 or so during the next couple of months, and the market responded by trading for WTI at $43/bbl by the end of April, even as OPEC and Russia reported high levels of compliance with their lower production quotas.

Now here we are, coming toward the end of another year, and once again we have a situation in which crude prices are ramping up to an even higher level, thanks to steadily rising demand, anticipation that OPEC and Russia will renew their export agreement through 2018, and other favorable market signals. One of those other favorable signals is the fact that the rig count in the U.S. has fallen off by about 70 rigs in the last seven weeks, as shale producers have executed on more conservative drilling budgets during the second half of the year. As a result, the rate of increase in overall domestic oil production has basically leveled off at levels the market can absorb.

So will the U.S. industry mess up a good thing again in 2018? It might surprise my good friend that this time I don’t think it will, at least not to the extent that it did over the first half of 2017. This view could change by the end of December, but right now there are several factors that indicate that, while drilling will definitely pick up again after January 1, it will be a more muted response than we saw this year.

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Energy Week With David Blackmon and Ryan Ray Podcast – Episode 2

In Episode 2 of Energy Week, David Blackmon and Ryan Ray discuss current dynamics with the domestic rig counts and prices, and the implications they pose for the rest of this year and into 2018.  Other topics of discussion include:

  • Why electric vehicles still aren’t making a dent in U.S. demand for gasoline-powered cars;
  • The heinous abuse of the court system by a professional protester who caused a riot a year ago at the site of the Dakota Access Pipeline; and
  • Blackmon’s Forbes article advocating for an increase in the federal gasoline tax.

Listen Here


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STEER: A Business Model That Works

It was great to be able to write this issue’s cover feature on the South Texas Energy & Economic Roundtable (STEER) and its outstanding staff, including President and CEO Omar Garcia. Watching the organization have so much success has been very rewarding, since I played a minor role in its creation back in 2012; and writing the piece provided a chance to reflect on the STEER business model and why the oil and gas industry should try to replicate it in other parts of the country.

By late 2011, it had become obvious to everyone that the Eagle Ford Shale was a world-class resource that represented an unprecedented opportunity for economic development in South Texas. Shortly after a lunch during which I and a group of colleagues talked about how best to go about protecting this opportunity, I got on a conference call with the Haynesville Shale Operators’ Committee (HSOC). This coincidence of timing was what spurred my involvement in the germination of STEER.

HSOC was the brainchild of the Louisiana Oil & Gas Association (LOGA) and its President, Don Briggs. Created during the height of the development of the Haynesville Shale natural gas development, the organization served as an extremely effective voice for the industry in what was at the time the busiest shale development region of the country. The challenge the Haynesville Shale presented to LOGA was its concentration in the northwest corner of the state, hundreds of miles from the state capital of Baton Rouge, where LOGA’s offices were located.

Rather than have its staff constantly travel back and forth between Baton Rouge and Shreveport to help its members address community and regulatory issues, LOGA came up with the model of establishing a committee within its organizational structure that essentially functioned as a separate trade association. To become members of HSOC, companies paid separate dues, and the committee itself had its own separate staff.

To further distinguish HSOC as a separate entity, the HSOC staff seldom became engaged in the single most crucial role of any state trade association — lobbying the state’s legislature. Instead, HSOC focused on helping members with community and media relations, functions that have not traditionally been strong points for the industry’s legacy associations.

The model worked. HSOC was a tremendous asset for producers, the media and communities in the region, all of whom needed an honest-broker intermediary to help understand and communicate with one another.

Seeing no reason why this model wouldn’t work just as well in South Texas — where the sudden, massive growth in oil and gas activity was very predictably creating lots of friction and challenges in the local communities — I took the idea to Rob Looney, then-President of the Texas Oil & Gas Association (TXOGA), one of the industry’s largest trade associations, headquartered in Austin. My involvement ended there, since I had a conflicting role with one of the industry’s national trade associations at that time.

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STEER: A New Kind of Trade Association

A Sleeping Giant Beneath The Chalk

Nestled in a quiet area of suburban Dallas, just off the intersection of Texas State Highway 12 and Interstate 30, lies the neighborhood of Eagle Ford. At one time an incorporated city, Eagle Ford was annexed in the mid-1950s by the city of Dallas, whose city center skyscrapers can be seen just 6 miles away.

Originally settled by the family of Enoch Horton in 1844, the community soon became known as an important crossing of the West Fork of the Trinity River. The Horton family established a grist mill; and within a few years they donated land to establish the town’s first cemetery and for the right of way and depot for the Texas and Pacific Railway. As was the case for hundreds of communities in Texas’ early decades, the establishment of a rail depot led quickly to rapid population growth. By the 1870s, Eagle Ford had become a key shipping point for the cattle industry, and its population had grown to several thousand.

The death of the trail drives led to the collapse of the cattle business, and by the 1890s, Eagle Ford’s population hovered around 50 citizens, where it remained well into the mid-20th century. Memory of the community’s heyday was largely lost to history, where it remained until late 2008.

Not far from the location of the original Horton grist mill, a small cliff face reveals an out-cropping of the Austin Chalk formation, which had become famous during the 1970s and again in the 1990s for the production of prodigious amounts of crude oil. Indeed, the Chalk is experiencing a bit of a third revival today.

Immediately beneath the Chalk outcropping, another formation displays what seems to be a rocky, clay-like profile. This formation is actually a shale formation, one that happens to be the source rock for the Austin Chalk. It was the oil migrating up from the Eagle Ford that made the Chalk such a prodigious formation to begin with.

Like the Austin Chalk, the Eagle Ford Shale extends deep into South Texas and even under the Rio Grande into northern Mexico. Unlike the Chalk, however, this formation had received scant attention until October 2008, when Petrohawk (now a part of BHP Billiton) drilled what is credited as the first commercial horizontal well completed in the formation in La Salle County. The well, completed with a 3,200-foot horizontal lateral involving a 10-stage frac job, produced at an initial flow rate of about 7,600 MMBTU of natural gas per day, and the race was on.


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Capital Flow To The Permian Basin Hasn’t Dried Up; It Has Moved Downstream

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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The Wisdom And Foresight Of The Texas Rainy Day Fund

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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It’s Been A Tough Week For Peak Oil Theorists

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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Gilmer: We Should View The Permian Basin As A Permanent Resource

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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Do Fossil Fuel Protesters Know How Much Those Fuels Impact Their Lives?

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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