SHALE Policy Article May 2019 - The Industry’s True Existential Threat is in Local Communities, Not in Washington, DC

The Industry’s True Existential Threat is in Local Communities, Not in Washington, DC

The essence of your problem is not in Washington, D.C. or in the various state capitals: It is in the local communities in and around which you operate. The local communities are also where the potential solutions to your problem must originate.

That is the lesson America’s oil and gas industry should derive from the advancement of two very damaging pieces of legislation in the increasingly oil and gas-unfriendly state of Colorado, and the very oil and gas-friendly state of Texas. Whether it will or not is another question entirely.

Colorado SB 19-181, the 2,000 page document designed by the legislature’s Democrat majority that will essentially kill the oil and gas business in their state, passed both the Senate and the House with zero Republican votes after a withering political fight and was signed into law by Governor Jared Polis, a longtime opponent of oil and gas development. If fully implemented, the bill would:

  • Fundamentally change the mission of the Colorado Oil and Gas Conservation Commission (COGCC) from one of preventing waste and conserving the state’s mineral resources to one of environmental protection from a Sierra Club point of view;
  • Lower industry representation on the COGCC;
  • Give cities and counties the right to control surface and downhole operations within their boundaries, thus creating a patchwork of industry regulations that would become very costly and difficult to navigate; and
  • Place new restrictions on the permitting and construction of upstream and midstream infrastructure.

The bill does much more, but those are the high points. The obvious goal of the legislation is to make it far more difficult and costly for oil and gas producers to do business in Colorado than it is already is. The DJ Basin is already one of the less-competitive shale resources in the country — this new law would make it even less so.

Meanwhile, in Texas in early April, State Sen. Lois Kolkhorst, a Republican from Brenham in Central Texas, saw her Eminent Domain reform bill (SB 421) passed on the floor of the Senate by a vote of 28-3. The vote came after Kolkhorst incorrectly represented her bill as being a compromise bill that had been signed off on by all stakeholders, including the oil and gas industry trade associations that have been involved in negotiations surrounding it. The industry had not signaled its approval of the bill in its current form, given its concerns that its provisions could make it harder to get much-needed midstream infrastructure built in the state.

The industry lobby was caught off-guard by the vote, but no matter: That lopsided result in a chamber in which normally industry-friendly Republicans control a supermajority shows how many members of the Texas Senate have received significant complaints from constituents on this issue. Those members are anxious to pass legislation that would placate those constituents, a motivation behind most bills that ultimately end up being passed into law.

It is not as if the Texas industry hasn’t had ample warning: As Kolkhorst pointed out, this is the third consecutive biennial session in which she has introduced this kind of eminent domain-related bill.

The same dynamic of members responding to constituent complaints was at work with the Colorado legislation. Many want to attribute its passage to admittedly shifting voter demographics that have over the last decade helped to shift the state from a slightly “red” state to a pretty firmly “blue” one. But that analysis, while certainly relevant, is overly simplistic.

The reality is that there would have been no basis for such a bill were it not for years of failure to address the very real impacts from its operations in an industry-wide, organized and transparent fashion. Politicians, regardless of party affiliation, tend to be responsive to constituent complaints, and they are generally able to distinguish between artificial complaints from individuals who are just reciting talking points handed to them by activists and real complaints from those who truly believe they have been unfairly impacted by oil and gas operations in their communities.

One of the great strengths of the U.S. oil and gas business is that, unlike most other big producing countries, it is not a state-owned and run industry. Instead, the domestic industry is made up of thousands of highly-competitive individual companies, and that competitiveness works to encourage a high degree of efficiency and innovation.

However, that same structure, combined with the nation’s anti-trust laws, make it very difficult for the industry as a whole to come together to adopt strategic, industry-wide initiatives designed to address ongoing, chronic issues that give it black eyes from a public relations standpoint. Left unaddressed in any visible, comprehensive way, these issues tend to fester until they ultimately show up as the type of negative legislation the industry is facing this year in Colorado and Texas.

All of which is why the establishment of the Permian Strategic Partnership is such an encouraging development in the industry’s progress. Led by new CEO Tracee Bentley, the PSP’s mission is to develop and implement strategic, broad-based approaches to dealing with chronic, local impact issues that, if left unaddressed, can ultimately lead to the introduction of bills like Texas SB 421 and Colorado SB 19-181. That is exactly the approach that is needed — even if it comes fairly late in the game, as the shale boom in the Permian Basin began in earnest eight years ago.

Another weakness the U.S. industry has when compared state-run oil businesses is its comparative focus on short-term goals and planning at the expense of any real long-term planning. For far too long, the almost exclusive focus of domestic companies has been on meeting their quarterly and annual financial, cost and production goals designed to satisfy investors and Wall Street analysts. This hyper-focus on near-term results has had the negative consequence of leaving one of the nation’s key industries without anyone truly looking out for its long-term health.

Where is this industry going to be in 10, 15, or 20 years? What are its long-term goals for the future? Finding anyone in a position of leadership for America’s oil and gas business who can offer informed answers to those seemingly basic questions can be quite a challenge. I would certainly have a hard time doing it.

Much has been written and said in recent years about the generational change that is taking place in the oil and gas industry — the “Great Shift Change,” as some have called it. This generational shift is not isolated to the oil business; it is, in fact, taking place across our entire society.

The great Baby Boom generation, of which I am a part, is in the midst of retiring, growing old and ultimately dying away. Over the past 40 years, this generation has formed the heart and soul of the industry, and also its major base of support within society at-large.

Baby Boomers are inexorably being replaced, both within the industry and in society as a whole, by younger generations — so-called Generation X, Generation Y and the Millennial generation. As society is quickly learning, these younger workers and stakeholders hold entirely different sets of beliefs and priorities about energy, the environment and other societal matters than did their parents and grandparents.

For the nation’s oil and gas industry, that means that unless someone starts focusing on doing the things necessary to maintain its health over the long haul — by becoming more immediately responsive the priorities of these younger generations — we will be seeing more and more efforts like Colorado SB 19-181 arising in other oil and gas states around the country. If the industry wants to be able to retain its license to operate in the U.S. 20 years from now, the time to start planning to reach that goal is today.

That means that we need to start seeing strategic initiatives like the PSP forming in every major play area — and have them created during the first or second year of a boom, rather than the 8th year. By now, we all know what the major impacts in any shale boom will be: The strategic approaches required to address them will vary only slightly on a regional basis.

Bentley has a big job ahead in leading the development and implementation of such strategies, but she appears well-equipped to succeed in the role. Where the industry as a whole is concerned, the PSP represents a good start.

But a start is all it is. There are many other big play areas all across the country that are crying out for a similar long-sighted approach, and the industry ignores them at its own peril.

 

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].

 

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