SHALE Wesbite Featured Nov Dec 2018 Keffer

A Future of Opportunity and Challenge

As 2018 draws to a close, let’s do a quick review: the U.S. is now the number-one producer of both oil and natural gas in the world, moving ahead of Saudi Arabia and Russia; Texas is the number-one producer of both oil and natural gas in the U.S. (in fact, Texas, were we our own country, would now be the number-three producer in the world); and the Permian Basin is the number-one producing oil field in the state (second in the world only to the monster Ghawar oil field in Saudi Arabia — and in such an impressive position even after having produced over 30 billion barrels since 1923). Both the U.S. and Texas are meeting and exceeding peak oil-production rates that haven’t been seen since the 1970s.

Even though the U.S. has been producing oil since 1859, and Texas has been producing at significant rates since the Spindletop discovery in 1901, in a most counterintuitive way, we have discovered more reserves yet to be produced than we have ever known in the history of the oil industry. Stated another way, the U.S. has produced well over 200 billion barrels of oil since 1859, and yet, we have identified even more oil reserves available for production than we have ever known to exist.

How is that logically possible? How can we have produced so much of a finite resource over such a long period of time — and still have an ever-increasing amount in reserves? The more we produce, the more we have. It is because the dynamic variable in this equation is human ingenuity. The amount of crude oil in the U.S. hasn’t changed; but our ability to find and produce crude oil and natural gas is always changing and improving in technology and efficiency. Why has human ingenuity in the oil and gas industry thrived in the U.S.? It continues to blossom here because we are the only nation in the world that recognizes the private ownership of minerals in a significant way, and our free-market system encourages and rewards private innovation.

How does it look for 2019 and beyond? The Energy Information Administration (EIA) forecasts that U.S. crude oil production will continue to grow, as will natural gas production. That development, quite simply, has far-reaching ramifications beyond setting records. It is undeniable that U.S. foreign policy has been heavily influenced over the past 50 years by the expectation of our need for crude oil and natural gas, given the once-held belief that domestic production had peaked and was on a decline curve.

With current and anticipated domestic production rates, not only will the U.S. no longer have to make geopolitical decisions based on oil and gas needs, we are now in a position to use our domestic production as an affirmative foreign-policy tool — like replacing Russia as the only available source of oil and gas to Eastern Europe and persuading China to engage in fairer trade practices by providing them with much needed and desired oil and natural gas to replace their coal-fired power plants.

Because the longstanding ban on exporting crude oil was lifted during the Obama administration in 2015, export volumes have substantially increased, bringing a whole new level of industrial activity to the Houston Ship Channel and the Port of Corpus Christi. In addition to crude oil exports, there’s a brand new market for liquefied natural gas (LNG), sparking an impressive rush to build LNG export facilities along the Gulf Coast. The U.S. is awash with natural gas production from gas fields and gas wells, as well as from the associated gas that is unavoidably and invariably produced from oil wells. The excess supply of domestic natural gas production has kept market prices depressed, but global demand could both help countries thirsty for natural gas and bring market prices to a healthier level. It is a development that vividly illustrates the irony and unpredictability of the marketplace; As recently as 2003, the Texas legislature was exploring the need for permitting LNG facilities along the Gulf Coast — for importing natural gas.

Most of that natural gas that is being exported to foreign markets from the Gulf Coast is coming from the Eagle Ford area of South Texas. However, much of the natural gas being produced along with the record levels of crude oil in the Permian Basin, unfortunately, is being stranded because of a shortage in pipeline capacity As a result, the gas is being flared or vented into the atmosphere to the benefit of no one. That is one of the challenges to be addressed in the coming year. In order to build more pipelines, though, more pipeline easements will need to be acquired. Will that exercise go smoothly, or will there be more resistance, both from landowners not wanting to give up their land willingly and environmental activists looking for their next Keystone XL or Dakota Access protest opportunity?

Will there be a continued push to retire coal-fired power plants? Will nuclear power plants also continue to close because of their inability to compete with the low market rates for natural gas and the heavily-subsidized market prices for wind and solar energy? Will even natural gas power plants eventually find it difficult to operate at a profit because of the subsidized rates for wind and solar energy? What would happen if ERCOT (the operator of the electricity grid in Texas) could no longer look to coal plants, natural gas plants, or nuclear plants as reliable electricity providers for those (frequent) times when the wind isn’t blowing and the sun isn’t shining to provide the electricity that Texans expect and need every minute of every day?

I wonder if utility providers ever think about how subsidized rates for wind and solar energy are slowly pricing every other energy source out of the market and could lead to the “Wal-Mart” effect in the electricity market. By the way, the effect that Wal-Mart has had on putting locally-owned businesses in towns across Texas out of business is further worsened when, in some cases, Wal-Mart then closes its stores in those same towns, leaving local residents with no place to shop. Similarly, subsidized wind and solar rates will push reliable energy sources out of business, which could lead to brown-outs and black-outs because there will no longer be a reliable energy source sufficient to back up the inherently intermittent nature of the wind and the sun.

The coming year presents great potential and opportunity for Texas and the U.S. The challenges, however, are significant and many. As with all matters subject to our system of self-government, we are the masters of our own destiny.

About the author: Bill Keffer is a contributing columnist to SHALE Oil & Gas Business Magazine. He teaches at the Texas Tech University School of Law and continues to consult. He also served in the Texas Legislature from 2003 to 2007.

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