The nature of bottlenecks is that the resolution of one generally results in others developing further downstream. We see this in automobile traffic, where the clearing up of an accident or the adding of new lanes of one stretch of freeway ends up creating another bottleneck down the road.
We usually see a similar dynamic at play in any oil boom — and by any measure, the ongoing boom in the Permian Basin has created more than its share of such traffic jams already. At the busiest play area on earth, a region the size of South Carolina with half of the nation’s active drilling rigs operating within its boundaries on any given day, the bottlenecks have arisen with great rapidity as the activity has ramped up. Rail bottlenecks, road bottlenecks, traffic bottlenecks, shortages of things like sand, qualified employees, disposal well capacity: Problems in all these areas and more have arisen over the last five years and have either been successfully dealt with or lingered, depending on the severity of the issue.
The lack of pre-existing refining capacity designed to process the grade of light, sweet crude being produced in the Permian region has presented another ongoing issue. Most capacity at the Gulf Coast refineries is designed to process heavier grades of crude due to the historic U.S. reliance on imports of crude from places like Venezuela, Mexico and Canada. That is just beginning to change as some refiners, like ExxonMobil (XOM), are working to accommodate more volumes of Permian crude in announced or ongoing expansion projects.
But the reality is that most additional barrels coming out of the region will have to be exported in order to find a refining home. Indeed, in a recent report, Bernadette Johnson, Vice President of Market Intelligence at Drillinginfo, said, “Every incremental barrel of production since the middle of 2016 has been exported. As U.S. crude oil production grows, all incremental barrels are (and will continue to be) exported.” As the U.S. moves more and more into its new reality of being a net exporter of crude oil and a major global exporter of liquefied natural gas (LNG), the rapid investment in and build-out of critical industry infrastructure becomes an increasingly-higher priority for the nation’s economy.
Tellingly, Johnson also noted that the build-out of port infrastructure necessary to accommodate the efficient export of the oil and gas tends to lag behind the ability of the industry to produce it. “If recent history has shown us anything, it’s that infrastructure doesn’t always come on-line as expected, and everyone, both the industry and investors alike, should expect some price volatility while the market balances itself,” she said.
There are many factors that lead to this dynamic in the business: The unprecedented magnitude of this particular oil boom in modern times has much to do with it. The fact that the play area is in a sparsely-populated, mainly-rural part of the world also plays a role. The nature of the oil being produced — the light, sweet variety — and the play area’s immense geographic sprawl also have been major factors in the creation of a variety of bottlenecks.
Over the last two years, the big bottleneck talk related to the Permian has centered on the need for a major expansion of pipeline takeaway capacity to move oil, natural gas and natural gas liquids (NGLs) out of the basin to major markets, refining, chemical and gas processing centers along the Texas and Louisiana Gulf Coast. But the eventual resolution of that particular bottleneck has begun, and will likely result in a surplus of pipeline capacity by 2021. Just counting the expansion and new-build projects already underway, the midstream segment of the industry will add up to 6 million barrels of oil equivalent of new takeaway capacity out of the Permian by the end of that year.
This new capacity is desperately needed, as the U.S. Energy Information Agency projects that Permian crude production will double over the next four years, from the current 4 million barrels per day (bpd) to as much as 8 million bpd. Given that virtually all Permian natural gas is associated with production from wells classified as oil wells, we can expect similar increases in natural gas and NGL production during that time frame.
The coming resolution of the transportation bottleneck will allow the production to flow freely downstream, likely creating the next — and hopefully last — Permian-related bottleneck, namely the Gulf Coast export capacity, or lack thereof. All of that additional oil has to go somewhere when it arrives at its coastal destination, and, as Johnson notes, pretty much all of the incremental barrels over and above current levels are going to have to find a refinery home overseas for the foreseeable future. Fortunately, a variety of port expansion projects and plans for building new loading terminals are either already underway or in the planning stages.
One of the most vital of those projects got underway on May 29, as Port of Corpus Christi officials held a ceremony to celebrate the groundbreaking of the effort by the U.S. Army Corps of Engineers (USACE) to deepen and widen its main channel. The ship channel depth will be increased from 47 feet to 54 feet, and its width will expand from 400 feet to 530 feet. The new dimensions are vital in that they will allow the Port to land and fully load the largest class of crude tankers, known as VLCCs.
Due to its close proximity to both the Eagle Ford Shale and Permian Basin regions, the Port of Corpus Christi quickly developed into the nation’s key oil export facility after the ban on crude exports was lifted in December 2015. Port officials embarked on an effort to convince Congress to allocate funds needed for the USACE to deepen and widen its main channel, which can land VLCCs but is not currently capable of fully loading them. Port leaders even made the decision to take on debt for the first time in the Port’s 100-plus year history to fund part of the project in an effort to speed the process along.
But Congress lingered over the decision until early 2018, when it allocated an initial $36 million to what is now estimated to be a $400 million project in the USACE budget. The rest of the needed funding remained outstanding, with little congressional momentum behind getting the issue resolved.
Simply put, the Port of Corpus Christi needed a congressional champion to get the funding of this time-critical project across the finish line. As luck would have it, that champion would arrive just in the nick of time.
Enter Michael Cloud
The last year and a half has been a whirlwind for Congressman Michael Cloud. It all started when his predecessor, fellow Republican Blake Farenthold, announced he would not run for re-election in 2018. Farenthold had represented Texas’ 27th Congressional District, a sprawling district that encompasses a swath of South Texas that runs from Lockhart in the north all the way down to Kingsville at its southern extent. In between those two endpoints, the district also includes Corpus Christi and Cloud’s hometown of Victoria.
“I remember sitting outside at a restaurant with my wife and kids, when we were first telling them that, ‘Hey, some people have asked Daddy to run for Congress, what do you think?’”
Congressman Cloud began when we met with him in early June. “And at the time, we thought it would be a couple of months, and a primary, and then we’d have a little bit of a break before the fall to November march of a campaign.”
But it was a little more complex than that. In fact, the soon-to-be Congressman quickly found himself caught up in a series of events and races that is likely unprecedented in Texas politics.
Cloud decided to run for the GOP nomination in the March 25, 2018 primary, a race in which he finished a close second to Bech Bruun. But neither man received the needed 50% of the vote, so a runoff was scheduled to take place on May 22.
But shortly after the primary, on April 6, Farenthold announced that he would resign his office immediately. As a result of that sudden change, Governor Greg Abbott announced on April 25 that a special election would be held on June 30 to determine his successor. Thus, Michael Cloud found himself involved in two races simultaneously: His runoff with Bruun to decide who the party’s nominee would be for the November general election and the special election to determine who would serve out the rest of Farenthold’s term.
You seriously could never make this stuff up.
Cloud was able to prevail over Bruun by a wide margin in the May 22 runoff election, which meant he now had to begin preparing for and planning his general election campaign while at the same time engaging in the special election contest. Cloud ended up winning that special election over three other opponents without a runoff, pulling in over 60% of the vote.
That victory meant that he was immediately off to Washington. As a result, “We didn’t have that normal November to January buildup time, that little chance to catch your breath, get staffed, doing all of those kinds of things. It definitely at times felt like the campaign would never end, and immediately you are going to Washington to serve while you’re building your staff.”
Anyone who has spent time working the halls of Congress knows that running a Congressional office is no simple thing. “It’s like starting a small business,” Cloud told us, “things like trying to figure out where the printer ink is, getting email accounts set up, all that kind of administrative stuff while you are also voting on issues every day and doing your best to have the information you need to get the votes right.
“I remember thinking that if we live through this, we will be stronger for it,” he says with a laugh, “It was a fun experience, but one I wouldn’t necessarily wish upon anyone. But we were able to get through it, and thankful that we’ve been able to have some success on issues as a part of it.”
Finding Ways to Make a Difference
He has had plenty of success working with his fellow House members during his short time in Congress thus far. A quick search revealed 87 different bills on which Cloud is a sponsor or co-sponsor. One of the Congressman’s early areas of focus is on administrative and governance matters, perhaps stemming from his time managing a non-profit.
“One of the big things we’ve focused on is the Cost Estimates Improvement Act,” he says. “I realize it sounds simplistic, almost, and a little wonky, but we’re trying to correct something that’s been happening for years in Congress.” The bill is an effort to improve the process of “scoring” legislation by the Congressional Budget Office (CBO). When a bill is introduced, it goes to the CBO to get a “score”, which is a process that is supposed to provide an accurate estimate of the bill’s cost or addition to the balance of the federal budget for the first five years it would be in effect.
But Cloud quickly understood the CBO methodology had a rather large hole in it. “In that process, we haven’t been including the cost of debt servicing. It would be like you going out and buying a car without ever asking what the interest payment per month is going to be.” This is a rather key aspect of the cost, given that Cloud estimates that the cost of interest can amount to as much as 20% of any given bill.
“So, the first bill we introduced was one that will require the counting of the cost of interest in the scoring process,” he continues. “There are a lot of things we face every day, but this is a pretty topline issue. When you look at $22 trillion in national debt, that’s just not a sustainable path.
“We’re at a point where in just a few years interest payments will surpass military spending,” he notes. “Think of all the work that could be done if we would just be a little more focused and strategic in our spending and not be spending it on interest, the big things that could be done if we get a little more fiscally conservative.” He pauses before continuing. “I have three small children and you want to leave them a better nation than the one we inherited.”
Another key area of focus for Cloud, during his multiple campaigns and since assuming office, is ensuring proper treatment of the nation’s veterans. At the time of our interview he and his staff were putting the final touches on a bill to be submitted later this year to address that critical issue.
Thanks to the simple fact of his District’s geographical location, border and border-security issues have also been high on his radar screen. “We are not a ‘border district,’” he says, “but we’re just a couple of hours away. There are several highways that come through our district from the border (U.S. Highway 77 and I-69), and they’ve become known as the ‘fatal funnel.’
The corridor that goes up through our district to Houston that carries much of the human slave trade, the cartel drug traffic – this goes through our district and affects the whole area, and indeed the nation.
“So, that’s something we have been really involved in, not just from a legislative standpoint. Recently, we sent a letter to the White House and Homeland Security detailing some things that could be done from an administrative standpoint to get emergency control of the situation. Ideally, Congress would be dealing with the situation, but that looks like a longer-term conversation. We have been dealing with that pretty much on a daily basis for the last seven months.”
Obviously, the situation at the Texas/Mexico border has been an ongoing, high-profile issue for years, and that profile was only elevated when the Democratic Party gained control of the House of Representatives in the 2018 general election. We asked Cloud if he believed Speaker Nancy Pelosi would eventually allow the House to even consider real border security legislation before the 2020 election comes around.
“That’s really become the ultimate question: Whether the debate would even be allowed,” he begins. “I think there’s a lot of room and bi-partisan support for a lot of the stuff on the table. I know the wall becomes a conversation piece, but as far as our Border Patrol agents, having enough of them and the tools they need, we were recently down in the Laredo sector in their command center and they have cameras that only cover 30% of the area they’re supposed to be covering – when they’re working at 100% capacity, which is only 70% of the time.”
Cloud told us that the surveillance cameras being used by the Border Patrol today were installed in the 1990s, during the Clinton administration. “So, you have the cartels flying drones with new cameras and our guys are sitting in a bunker using cameras from the 1990s. One of the amazing numbers that came out of our discussions from the latest trip down there was that it is estimated the cartels are making about 80 million a week in that particular sector, and our Border Patrol [for that same sector] is funded at $13 million for the year.”
Cloud does believe that there would be a great deal of bipartisan support for real border reforms if everyone really understood the truth about the situation. “It was interesting to take people down there, including a van full of media, and see their eyes opening when they sit down and really understand what is going on. When you’re standing on a beaten path on the border and the Border Patrol agents are telling you ‘Yeah, this is where about three to four weeks ago, tracer rounds were being fired in from Mexico over our heads, and there’s a trailer over there where we had to take a lady to the hospital when a .50 caliber round went through the wall of her trailer and hit her in the face,’ that’s the information that is just not getting out. I like to think that if everyone really understood what is going on there would be broad, bipartisan support for getting something done.
“So, what we’re looking at now as a team and a staff is what can we do to help bring the reality about the border situation to Washington, D.C.? We will be working on that very intentionally.”
Seizing The Day For The Port
The subject turned to the Port of Corpus Christi, and the key role Cloud played in convincing President Trump to advocate within the administration for funds to be included in the USACE budget. As budget negotiations were coming to a head last October, Cloud took quick advantage when he was presented with a rare opportunity to meet face-to-face with the President aboard Air Force One.
We asked the Congressman to describe how that opportunity came about.
“Sure,” he begins with a laugh. “It’s important first of all, and I mentioned this at the project groundbreaking, to recognize that this is something that people have been working on for nearly three decades. I had the privilege of getting the baton in a good position, so to speak, for when the opportunity came. But there were a lot of people working on this for a long time. So, it’s really been a team effort to see it come to this point.
“Upon getting elected, we felt we had a strong case for how this would impact our district. Everybody in Congress wants money for their district, so that’s the easy part of the sell.” But this particular project was not only important to District 27, it is a key component to the future of the domestic oil and gas industry, one that would have big impacts on both the Texas and national economies.
And, as Cloud noted, it even comes with global strategic implications. “What was important from a national perspective was the strong case for how this would impact the region and the country as a whole. It would reshape our place on the geopolitical sphere. It was really one of those projects where 30 to 50 years from now you can look back and think, we had a hand in shaping the world for the better.”
As budget negotiations wore on through the summer into fall, Cloud and his staff felt they were making strong progress. “We had been working to make the case with the administration, talking to folks at the OMB and others to get them informed on the project. We felt we were getting a favorable response, but it was coming down to close to the time when the President’s budget was being prepared, so it was time to talk with him and make sure he had the information.”
That was when the moment to seize the day presented itself at an unexpected time.
“I remember, I was walking through the Corpus Christi Aquarium with my family, and I get the call. It was funny to me that this was posed as a question: ‘The President’s going to be in Houston, would you be able to fly back to Washington with him and discuss this project?’” He laughs.
“And I’m like, well, let me check my calendar, I’ll see what I’m doing that night.” He laughs again. “Just kidding. As someone who was at the time just three to four months into the journey here in Congress, getting that call already, I figured that yeah, we will find a way to make that work.”
This was in October, and it had turned out that President Trump agreed to hold a rally in Houston in support of Senator Ted Cruz, who was in the midst of a tough re-election campaign against Democrat Beto O’Rourke. Cloud quickly agreed to fly up to Houston to link up with the President and his staff at that event and then flew back to Washington, D.C. with him on Air Force One.
On that flight, he was able to fill the President in on the details of the proposed project and why it was so vital to the nation’s future. The rest, as they say, is unfolding history.
“We knew we needed to make the case for expanding the Port to handle the VLCCs. What it would mean in the trade balance, what it would mean to economic development across the region and the nation, what it would mean from a national security standpoint.
“If you think back to 20-30 years ago, we thought our nation was forever going to be dependent on Middle Eastern energy. But now we are making the transition from an energy-dependent nation to an energy-dominant nation. It certainly strengthens our stance in the world when our allies can get their energy from us vs. countries who don’t have our best interests in mind.
“There’s also the fact that American companies are going to produce the energy more responsibly than we see from other parts of the world. To me, that’s a key factor as well in this discussion.
“So, the impact that this project has just goes on and on.”
That last point the Congressman made is really important, and it is one that does not get emphasized enough in our national news media, which likes to focus almost exclusively on negative stories about the oil and gas industry’s environmental impact. We asked Cloud to expand on it.
He was happy to oblige. “The thing we have to remember is that the world’s demand for energy is going up and that’s a good thing. That’s people coming out of poverty; it’s people finding mobility. So, the question becomes, how are we going to meet the demand for energy, and I would rather we meet that demand here rather than in other countries who aren’t going to do nearly as good a job of producing it responsibly.”
So, the key project to expand the Port’s main channel is underway and funded for its first phase. We asked Cloud to talk about the hard work that still remains to be done.
“Oh, there is definitely still more work to do,” he says with a chuckle. “We’ve gotten about $95 million or so funded already and need about $130 million to get the project fully funded. We are still in conversation with the White House and OMB – we were in a meeting with them just a few weeks ago, reminding them again of the importance of this project. We continue to get a favorable response, but certainly are not taking anything for granted.
“We want to make sure we run this thing across the finish line. Our goal is to get the remaining stages of the project fully funded before the stages currently being worked on are completed, in order to ensure there is no stoppage of work. It saves everybody money – the taxpayer included – if we can continue the work without any stoppage.”
Thus, the hard work of stewarding the remaining funding through the Byzantine federal budgeting process will remain one of Cloud’s top priorities for the foreseeable future.
Budget-minded Texans and all Americans should keep their fingers crossed for his success.
The Challenge of Staying connected With Family
Michael Cloud was born in Baton Rouge, Louisiana in 1975, and received his college degree in communications from Oral Roberts University in Oklahoma. We asked him to talk about what it was that brought him and his family to end up settling down in Victoria, Texas.
“I’m someone who got to Texas as quick as I could,” he says with a chuckle. “In fact, I came here straight out of college. I initially moved here to work at church, and loved what I was doing, to have a job where I was helping people every day. That was certainly meaningful – I appreciated who I was working with and what we were trying to accomplish every day.
“But when I began to look at what was happening in our country, I really felt that our nation needed help. That didn’t necessarily mean a political career at the time, but it did compel me to get involved, volunteering in my community, being involved in the process and trying to get others involved and educated on what was going on.”
Cloud wasn’t necessarily planning to run for office, but his efforts to get involved ultimately led him to volunteering to serve for several years as the county GOP Chairman. “People at the time liked to ask me what I was going to do, and I had been volunteering for about 20 hours a week in addition to my full-time job and I thought, well, maybe spend some time with my kids,” he laughs. “I didn’t have any next steps planned, but I felt that it was time to move on. As I was cleaning out my office, I found an article about how to plan for your next role in life, and after seven years in that post, it read like all the things we had already done.
“There was even one item in the article that hadn’t been done but that we were working to finish at that time. That was kind of a sign that, ok, it is time to hand this off to somebody else.”
Shortly thereafter, Cloud was approached by party leaders about running for Congress. “I thought that was kind of crazy at the time. I didn’t come from that background. I don’t have any family members who were elected to office or anything like that. But when my wife and I began to really pray about it, looking in our hearts for the nation and everything that’s going on, it just felt like something we were supposed to be involved with.
“I remember talking to my wife about it, and her saying ‘Oddly enough, I have a peace about it.’
The way she phrased that was kind of interesting, since it meant she was realizing that she would be alone much of the time with three small kids, that I would not be there as much because of the travel to D.C. It was a sobering decision because we were aware of what the costs would be, but really believed it was something we were supposed to do.”
When we asked Cloud to tell us about his wife and kids, his voice lit up.
“Oh, that’s my favorite topic, so I’m happy to. My wife is Rosel Cloud. She is an immigrant from Mexico. We met when she was 15 and I was 17, and had a long-distance relationship for seven years before we got married.
“I like to tell people that that was all before the Internet. It was definitely a different dynamic when you send a letter, and she might finally get it a month later. We would have to schedule phone calls, and we’d have to schedule the time in advance, and many times the call would just get cut off after we’d been talking for maybe 10 minutes. That was a whole different time.
“Rosel is a school teacher, and I honestly don’t know how she does everything that she does. People sometimes say that I have a hard job, and all I can think is how my wife’s job is infinitely harder. She’s just phenomenal to be able to be the support and strength she is for me and for the family and to play the leadership role she does in our community. I could ramble on and on about her and what she does.
“Now, of course, if my own daughter came to me at age 15 and said she’d found ‘the one,’ I’d tell her she was grounded,” he says with a laugh. “But after that long-distance relationship, we got married and now we have three kids: a 12-year-old son who is going on 13; our middle child, our daughter, just turned 10; and our other son, who is 9.”
How have the kids handled not having Dad around during the weekdays?
“They have all really handled this well. It is a challenging transition for any family, of course. It takes a while to figure out the new ebb and flow of being in Washington and coming home and making sure you stay connected with your kids, and also to let them be a part of it.
“I’m able to get home most weekends. Thankfully, we do have technology now, so that, for example, I can Facetime with the kids. For my oldest son’s birthday, he came and spent the week with me and just recently went to Congress with me. He sat in committee meetings, he went down on the floor and voted with me. My youngest son is also going to come and spend a week with me. Of course, when that happens, we stay over extra days to try to make sure they get some fun out of the trip as well.
“It is interesting to see that they understand what we are doing is important work. They understand we are weighing the costs against the work that is being done, and how it’s important for our nation. It’s interesting as a Dad to watch that understanding develop in a child.”
Recovering From Harvey
As one might expect, hurricane recovery has been a big undertaking in District 27 following the devastating passage Harvey in 2017. The region was very hard hit and Cloud has received a lot of praise for his efforts in this area since taking office. We asked him to talk about the issues that remain, how far the community has come since the storm, and the work that remains to be done.
“The best work that we all saw was in the immediate aftermath, with all the neighbors coming together, just the spirit of Texas, people being so proactive in helping one another. The pop-up shelters that came up, the distribution centers, neighbors, churches, community groups coming out together and all putting our hands in to deal with the situation. I still remember seeing the electric repair trucks coming in from literally all parts of the country – it was truly amazing watching everybody pulling together.”
He pauses before continuing. “But there is still a long-term recovery impact, rebuilding an infrastructure that took decades to build isn’t easy. And in many situations, it isn’t just the infrastructure, it’s the entire economy of an area that must be rebuilt. For example, you see people who have finally gotten the funding to rebuild their structure through the process only to find that their employees have moved on because they didn’t have housing. All those related elements and more go into what makes a community a community that must be rebuilt.”
As with securing the funding for the deepening and widening project at the Port of Corpus Christi, working all of this through the morass of the federal budgeting process is complex and time consuming. Just as the Port needed a champion, so did the people in District 27. “Getting the funding is certainly important, but rebuilding all of that just takes time. We have been working to make sure that the funding that is due to our district gets through to us – we actually hired a person to our team whose entire job is working on hurricane recovery.
“We’ve seen $96 million come to our area [in federal relief funds] that our office has been involved with. That involves either putting strong pressure from our office or just being there to oversee the process to make sure it all gets to the right place. At the same time, we have been working to reform the process to reduce waste, reduce fraud, streamline processes.
“We always looked at this as a two-track kind of thing – what do we do within the current system to make sure that people are cared for, and while we are doing that, let’s take notes about how to reform the system for the next big event.
“It’s part of who we are as an office, and something we are working towards every single day.”
In the corporate world of the 1990s, one of the favorite slogans was the advisory to “Work smarter, not harder.” As we have seen, whether the issue is veterans, or the border, or the CBO’s scoring process, or Hurricane recovery, or trying to steer their way through the frustrating and often-inexplicable federal budgeting process, Michael Cloud and his staff have modified that advisory to read “Work smarter AND harder.”
In his first year on the job for the people of the 27th District of Texas, that approach has produced some impressive results. The good news is, he’s just getting started.
About the author: David Blackmon is the Editor of SHALE Oil & Gas Business Magazine. He previously spent 37 years in the oil and natural gas industry in a variety of roles — the last 22 years engaging in public policy issues at the state and national levels. Contact David Blackmon at [email protected].