Y”ou’re going to see the development of these resources. The money is too big to even have the politics squash it.”
So says Arthur P. Hall, founding executive director of the Center for Applied Economics at the University of Kansas School of Business, of the quickly evolving energy plays across North America. Before joining the university, Hall was chief economist in the public affairs group for Wichita-based industrial conglomerate Koch Industries, and before that he served as senior economist for the Washington, D.C.-based Tax Foundation.
“People are newborn millionaires, and are just not going to accept that they can’t be,” he says. “You’re going to see the energy interests winning out. And operators like Shell are extremely good. They’re going to take good care” of the assets and the communities, he says.
If the unconventional plays play out, the U.S. and Canada are going to have a competitive advantage for 10 to 20 years, says Hall, who just co-authored a comprehensive report on his state’s oil and gas resources. He says unconventional plays such as those being explored in Kansas will help the U.S. become a low-cost energy source, and “will start to have an impact on manufacturing site location.” They’ll also help the Midwest in particular enjoy a regional advantage “until there’s enough infrastructure to balance things out,” i.e. pipelines.
The U.S. Energy Information Administration released a preview of its 2013 Energy Outlook projections in early December. It foresees a decline in energy imports reflecting increased domestic petroleum and natural gas production, increased use of biofuels, and demand reductions resulting from rising energy prices and the adoption of new efficiency standards for vehicles. The report calls for the net import share of total U.S. energy consumption to be a mere 9 percent in 2040, compared with 19 percent in 2011 (the share was 30 percent in 2005).
In addition to calling for higher domestic crude oil production (from 5.7 million bpd in 2011 to 7.5 million bpd in 2019), the EIA outlook calls for more offshore natural gas production after 2015, and says the United States will become a net exporter of LNG starting in 2016, and an overall net exporter of natural gas by 2020 — two years earlier than the EIA’s previous report had projected. Who will get it? Among other locations, the report expects net pipeline exports to Mexico to grow by 387 percent by 2040.
From the Plains to the Coast
Hall’s report, though nominally focused on Kansas, features deep data on where oil and gas industry activity continues to be strongest, and where state revenues from that activity are too. Lest the headlines distract, make no mistake: Texas, Pennsylvania and Oklahoma are the far-and-away leaders in holes drilled. But the study shows plenty of job-creating activity related to the Mississippian Lime play and coalbed methane in the eastern part of the Sunflower State.
“Kansas has been on a march for the last five years,” says Hall, in part because of new industry-friendly tax exemption and expensing rules, and in part because of plain old industry friendliness. “As the city administrator for Kiowa City, Kansas said in a Kansas-Oklahoma planning meeting: ‘There is merit in coming together. Oil companies are not the big bad wolf. They are businesses,’ ” reads the report. “Many businesses have learned as much as governments with regard to past oil boom experiences — and choose to take a proactive approach to the known infrastructure issues.”
“A lot of disruptions from booms come because locals don’t have enough money to respond,” Hall says. When they do, those communities have the opportunity to transform booms into long-term, sustainable ballast for regional economies.
“If the Marcellus is a 20- or 30-year thing,” says Hall, “it starts to look like the Gulf Coast. That’s where the work force is. That’s where you go.”
Some industry sources peg the Marcellus play as a 60-year thing. As for the Gulf, Louisiana just attracted the biggest foreign investment in its history and, as far as it knows, in U.S. history, from Sasol, whose plans for a combined gas-to-liquids and ethane cracker complex are founded in part on the E&P activity sweeping the region.
Hall says the entire Midwest will benefit because of the region’s lack of regulatory backlash. But things are happening fast, and even regulatory ogres could suddenly turn polite.
“One of the bigger plays is off the coast of California,” he notes, citing a potential resource with an estimated 15.4 billion barrels of oil in it — four times as promising as the booming Bakken formation in North Dakota. “You can imagine how fast these things turn. They’re going to hell in a handbasket, but they get a new governor, they need money, and all of a sudden everyone’s working on the Monterey Shale.”
The federal Bureau of Land Management on Dec. 12 auctioned off drilling rights to 15 parcels totaling nearly 18,000 acres in Monterey, Fresno and San Benito counties in California, after one of its biggest leases of 2011 was for 200 acres leased to Vintage Production California, a subsidiary of Occidental Petroleum.
Faster Permit Review on the Way
Steven Wells is chief of the BLM’s Fluid Minerals Division, which oversees from a mere 33 offices (mostly in the West) some 49,000 leases and a database of 90,000 wells across 245 million acres of leased federal and tribal land and 700 million acres of federal mineral estate. Domestic production from over 63,000 federal onshore oil and gas wells accounts for 11 percent of the nation’s natural gas supply and five percent of its oil. BLM oil and gas royalties exceed $2.5 billion annually, and help pay down the national debt as well as provide important revenues disbursed to the states. Allotted royalty revenues on Indian trust lands alone in 2008 totaled $1.8 million, and rose to $106.7 million in 2011.
As one might expect in the midst of a gold rush mentality, Wells and his colleagues are having trouble with turnover. The U.S. Government Accountability Office identified recruiting and training skilled workers as one of BLM’s highest priorities.
“We struggle mightily to recruit, retain and train skilled staff,” he says, noting 30 vacancies in a field office of 100 people in Vernal, Utah, as well as strains on petroleum engineering staff and oil and gas inspectors. “We only have about 50 petroleum engineers in our entire organization of 11,000 people. We run upwards of 20-percent vacancy in staffing areas such as petroleum technicians. We train them internally, with a two-year program to get certified. Then industry will hire them away. We can’t even begin to match private-sector salaries,” which can run anywhere from 25 percent to 50 percent higher. But the private and government sectors face one common talent challenge: the Baby Boom crunch.
“A lot of our specialists were hired in the late 1970s and early ’80s, and now they’re all retiring,” says Wells, though there is optimism behind a new effort to engage returning veterans.
Natural gas rig activity abounds for Encana in such locations as Alberta, B.C., and Wyoming.
Photo courtesy of Encana
The BLM’s biggest office for oil and gas is in Dickinson, N.D., where, says Wells, “we issue a lot of permits” for the Bakken play, so many that “strike teams” have been sent to Dickinson for three-week stints, and help processing and reviewing has come from BLM offices in Montana and New Mexico. BLM manages nearly 2 million subsurface acres of mineral estate in active areas of the Bakken play. Drilling applications in the Bakken have seen a 500-percent increase over the past five years, half of which has occurred on American Indian mineral estate. Since 2007, applications to drill on Fort Berthold reservation, in the heart of the Bakken play, have increased from 0 to 175.
BLM conducts quarterly competitive lease sales, from which one half of the revenue is returned to the state. BLM Montana/Dakotas has contributed more than $1.3 billion annually to North Dakota’s economy through BLM-administered oil and gas production.
Last May, BLM released proposed rules that would expand regulation of oil and gas development on federal and tribal lands that uses hydraulic fracturing or other well stimulation techniques. Getting less attention are proposed streamlining reforms to its permitting process.
Announced by Secretary of the Interior Ken Salazar last spring, new automated tracking systems at BLM could reduce the review period for drilling permits by two-thirds and expedite the sale and processing of federal oil and gas leases. Average review time across BLM offices could shrink to as few as 60 days, while increasing accessibility and transparency.
Since 2008, BLM has processed more than 15,000 applications for permits to drill (APDs). BLM expects to process 5,500 APDs in fiscal year 2012. In addition, industry currently holds thousands of onshore permits provided by the BLM that are not currently being used for production related purposes.
Asked if the new APD expediting rules are still on track to be implemented by 2013, Wells says, “We’re cautiously optimistic,” citing the ongoing fiscal discussions in Washington and continuing internal review. As for all those dormant leases, Wells notes it’s a political football, but also describes the strategic factors involved in the 10-year leases, as developers seek to lock up land in advance.
“On roughly half of our leases out there, there isn’t activity,” says Wells, noting the cat-and-mouse game as developers watch what their neighbors are doing as they conduct their geophysical due diligence. And the way regulations are structured, “if they drill in that 10th year, they earn another two years,” says Wells. He says Nevada, which was home to the third most acreage leased by BLM in 2011-2012, is also home to a number of leases “where they haven’t drilled in years.” Some evaluation is going on, but some companies, he says,” didn’t quite know where all their land was. Some had turnover in their land departments, or were busy in shale, couldn’t keep up, and sometimes miss their rental payments. Sometimes they can’t get rigs fast enough. Some have left Wyoming and Utah for North Dakota.”
Mutual Best Interest
Wells’ program generates $24 per $1 of federal appropriation. “But I remind people that it is not a free lunch. There are disturbances and impacts. You cannot have a well without disturbance, such as trucks and dust.”
He says industry operators by and large live in the communities too, “and know it’s in their best interest to take care. The American Petroleum Institute is very active in issuing guidance with sound practices.”
Those practices include working with local and state governments to find ways to funnel needed funds as quickly as possible toward necessary and strained infrastructure.
“In some communities, industry helps fund recreation centers, and some of the road maintenance,” observes Wells. “They try to mitigate where they can, and provide funding for studies and monitoring.” In the foothills of Pinedale, Wyo., for instance, industry has set up funds for environmental monitoring, which Wells says provides better data for state fish, game and wildlife personnel to use.
Yet communities such as Dickinson and Pinedale still struggle to keep up, even as they’re rolling in it. Wells, a Wyoming native, says oil and gas revenues when he was growing up meant even a high school tennis team had a travel bus. His niece there just graduated from a high school where everyone had a free laptop to use throughout their four years. But the community was still surprised as the industry kept showing up even as natural gas prices have slackened. “The school system is flush with money,” he says, “but also flush with kids.”
Like others in the business, Wells continues to be amazed at the technological innovation in the field, in a sector where not that long ago shale was the barrier, not the target. Companies that once opposed directional drilling because of the added cost now do it routinely, and incredibly efficiently, thereby meeting goals of both the regulators and the regulated.
“In Pinedale, there are something like 64 wells coming off one pad,” he says. “We try to reduce fragmentation and disturbance. If you can confine the footprint, that for us is the end game. It’s what we want as a land manager.
We know there’s disturbance,” he continues, “but part of me says, ‘Why not do it here in our backyard, rather than import from overseas?’ Industry is stepping up, and looking to show they’re a good neighbor. A lot of these companies take a lot of pride in what they’re doing.”