The Saudis Gambled and Texas Won

OPINION COMMENTARY

Energy innovators across the U.S. will always beat those who bet against capitalism.
By GLENN HEGAR
Aug. 31, 2015 7:20 p.m. ET
In November 2014, the leaders of Saudi Arabia made one of the biggest bets in history. Their strategy was flawed, and they’ve already lost.

In an OPEC meeting that month, Saudi Arabia announced it would maintain high oil-production levels despite falling prices. The Saudis were betting that by keeping prices low they could protect their market share and kill America’s energy renaissance—a rebirth driven largely by Texas, which produces 37% of America’s oil and 28% of its marketed natural gas.

An oil well in Garden City, Texas. ENLARGE
An oil well in Garden City, Texas. PHOTO: GETTY IMAGES
The Saudi strategy seemed to make sense. The conventional wisdom was that energy producers working in “tight” shale formations would be squeezed by low prices, since their extraction methods—hydraulic fracturing and horizontal drilling—are more expensive than conventional drilling. So, surely, once that happened Texas would be in serious trouble.

Columnists at the New York Times and elsewhere said the “Texas miracle” was fading, or even dead . . . and some of them seemed happy about it.

But an interesting thing happened on the way to the collapse of the Texas economy—it didn’t collapse.

First, many people still don’t seem to realize how diversified the state economy has become. In 1981 oil and gas production and its support services accounted for nearly 20% of Texas’ gross state product. Today, after years of incredible growth in the industry, it contributes less than 14%.

Dallas and Austin are booming today, but not because of oil and gas. Even in the 1990s when oil spent much of the decade at less than $30 a barrel, the state economy grew steadily.

And despite the slump in energy prices, oil and gas production in Texas and the U.S. has continued to rise. In fiscal 2015 oil prices were lower than my office had predicted, but revenues from Texas’ oil-production tax came in higher than expected, at nearly $2.9 billion.

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Texas Comptroller Glenn Hegar on how the Lone Star state’s economy has thrived in the Obama era. Photo credit: Getty Images.
What the Saudis and the naysayers closer to home seem to have forgotten is that the free market is the greatest incubator of technological innovation. Energy producers in this country have gauged the challenges of lower prices, are working to tackle them, and it’s paying off.

The technology behind shale production is advancing rapidly, and its costs are falling. Today the industry can tap multiple separate oil pools from a single vertical hole, drilling horizontally through miles of rock with computer-guided, steerable drill bits. Some of these “octopus” wells can feature as many as 18 horizontal shafts.

Articles about falling rig counts don’t take this into account. We’re seeing additional innovations such as the use of recycled “fracking” water, carbon dioxide and other substances to break formations, reducing the use of precious fresh water in drilling.

An extended period of below-$40 prices—if that’s what’s ahead—will have an effect on the industry and many families will have to endure consolidation and layoffs. Weaker and overleveraged players will go out of business. The oil industry as we knew it before prices dropped may never be the same.

But if history is any guide, oil and gas prices won’t remain low forever. And the technology, the talent and the infrastructure associated with America’s energy renaissance aren’t going away. They’re new facts in the global landscape. When prices rise, American capital will flow back to the oil patch and production will ramp up again.

OPEC’s gamble to kill American innovation was a short-term strategy without an endgame, and no appreciation of how the strategy would spur greater efficiencies and innovation in the U.S. Call this a gentle reminder: It is never wise to bet against capitalism, especially in Texas.

Mr. Hegar is the Texas comptroller of public accounts.

Oil-by-rail feeding East Coast Refineries Displacing Imported Crude

Oil-by-rail feeding PADD 1

Published: Sept. 19, 2013 at 7:27 AM

WASHINGTON, Sept. 19 (UPI) –WASHINGTON, Sept. 19 (UPI) — The increase in the amount of oil reaching refineries on the eastern U.S. coast is likely coming from rail deliveries, the U.S. energy department said.

Most of the crude oil reaching refineries in the Petroleum Administration for Defense District 1, which represents the East Coast market, is typically imported.

The Energy Information Administration, the Energy Department’s analytical division, said crude oil volumes at PADD 1 refineries increased steadily during spring and summer 2013. At the same time, there’s been a decline in net crude oil imports because of higher domestic production.

EIA said there’s a growing supply of crude oil delivered to PADD 1 that can’t be accounted for by production, imports or other forms of transport.

“Crude oil delivered via rail to East Coast refineries is likely contributing to the increase in unaccounted-for crude oil supply above historical levels,” the administration said in a report published Wednesday.

EIA in its short-term market report, published last week, said U.S. crude oil production in August averaged 7.6 million barrels per day, the highest monthly level since 1989.

The Association of American Railroads said last week petroleum and petroleum products were totaled 11,950 carloads, representing approximately 8.3 million barrels, for the week ending Sept. 7. That’s a 4.8 percent increase from the same time last year.

© 2013 United Press International, Inc. All Rights Reserved.

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Is Keystone Doomed To Be a Historical Footnote?

Is Keystone Doomed To Be a Historical Footnote?

By Ben Winkley Wall Street Journal

WHO NEEDS KEYSTONE, ANYWAY?

As 2013 rolls on from summer into fall there is still no end in sight to one of the great energy impasses of the year—will the Keystone XL pipeline ever be approved, or is it fated to become a historical footnote?

The pipe, in case you have forgotten, is planned to allow 830,000 barrels a day of heavy crude to move from Canada’s oil sands development all the way to refineries on America’s Gulf Coast.

Keystone needs approval from the State Department because it crosses the Canadian-U.S. border. The debate on whether it is a good idea or not has seemingly been endless and a decision may not now be made until 2014.

U.S. refiners increasingly doubt that Keystone will ever be built, The Wall Street Journal’s Ben Lefebvre reports. Only now, thanks to the expansion of other pipelines, the record amount of oil being produced in the U.S. and the rapid expansion of crude-by-rail, they don’t particularly care.

Which is all well and good for American refiners—and probably for these seven adorable species threatened by Keystone—but potentially ruinous for Canadian drillers.

Extracting Canada’s huge deposits of oil sands in the next few years might not be economically viable without Keystone XL. Oil-sands production capacity is predicted to more than double by 2030, to more than 5 million barrels a day—if Keystone doesn’t happen, output could exceed shipping capacity as soon as 2016.

This will mean that Canadian heavy crude will continue to trade at a steep discount to other grades of oil for the next few years, which could weigh on the economics of developing the oil sands.

So Canada hopes to build some pipes of its own—one all the way from Alberta to the Atlantic coast, and one to the Pacific. The former faces the challenge of scale; the latter of local opposition.

If Canada gets one or both of these off the ground, however, it could mean that Keystone turns out to be a lot of fuss over nothing. A lifeline could be thrown its way, though. The U.S. Federal Railroad Administration has begun an investigation into the business of moving hazardous materials—read: crude oil—on the tracks in light of the fatal accident in Quebec earlier in the year.

Any new safety measures or restrictions (say, on moving crude through residential areas) could increase the cost of moving oil-by-rail, and make that pipeline look a more attractive option once more.

INDIA BETWEEN A ROCK AND A HARD PLACE

India is considering a plan to reduce its ballooning current-account deficit that includes holding its oil imports from Iran steady, potentially putting the country in jeopardy of losing an exemption from U.S. sanctions against countries that do business with Iran.

The subcontinent is stuck between a rock and a hard place. Its currency, the rupee, has recently hit record lows against the U.S. dollar, making crude-oil imports much more expensive.

India imports more than three-quarters of the crude oil it requires, and the depreciating local currency would make those imports more expensive in rupee terms and add to the costs of government fuel subsidies.

India is turning to the Middle East, looking for deals. Oil exporters are eager to boost supplies to India to compensate for shrinking U.S. demand.

India and Iraq are working toward a 10-year oil-supply deal and the former may offer a stake in state-run India Oil Corp.’s planned refinery in the east of the country, the Journal’s Saurabh Chaturvedi and Biman Mukherji report.

Dealing with Iran will prove more contentious. India buys oil from the Islamic Republic by depositing rupees into a bank account, and then Iran imports Indian goods, potentially including food, drugs, consumer products and auto parts, debiting rupee amounts from the same account.

A bizarre ongoing dispute over an Indian oil tanker that was detained by Iran’s navy threatens to stall negotiations, but India may feel its need for fuel is greater than America’s need to squeeze Iran.

More U.S. oil is moving via truck, barge and train than at any point since 1981

COMMODITIES Updated August 26, 2013, 12:07 a.m. ET

Pipeline-Capacity Squeeze Reroutes Crude Oil

More U.S. oil is moving via truck, barge and train than at any point since 1981

By RUSSELL GOLD CONNECT

More crude oil is moving around the U.S. on trucks, barges and trains than at any point since the government began keeping records in 1981, as the energy industry devises ways to get around a pipeline-capacity shortage to take petroleum from new wells to refineries.

Getty Images

Oil container cars sit at a train depot outside Williston, N.D.

The improvised approach is creating opportunities for transportation companies even as it strains roads and regulators. And it is a precursor to what may be a larger change: the construction of more than $40 billion in oil pipelines now under way or planned for the next few years, according to energy adviser Wood Mackenzie.

“We are in effect re-plumbing the country,” says Curt Anastasio, chief executive of NuStar Energy LP, a pipeline company in San Antonio. Oil is “flowing in different directions and from new places.”

U.S. oil production has reached its highest level in two decades, while imports have fallen dramatically. A system built to import oil and deliver it to coastal refineries has become ill-equipped to handle rising production in Texas, North Dakota and Canada’s Alberta province.

“All of the pipes are pointed in the wrong direction,” says Harold York, an oil researcher at Wood Mackenzie. “We are turning the last 70 years of oil-industry history in North America on its head, and we are turning it on its head in the next 10 to 15 years.”

With oil prices persistently above $100 a barrel, companies drilling new wells don’t want to forgo revenue while they wait years for new pipelines. That leaves them with trucks, trains and barges to move an increasing amount of crude.

Oil delivered to refineries by trucks grew 38% from 2011 to 2012, according to the U.S. Energy Information Administration, while crude on barges grew 53% and rail deliveries quadrupled. Although alternatives are growing rapidly, pipelines and oceangoing tankers remain the primary method for delivering crude to refineries.

In the Eagle Ford, a large four-year-old South Texas oil field, production has grown to more than 500,000 barrels a day, from less than 1,000 in 2009, according to state statistics. Getting that torrent out of the sparsely populated region has required modifications to the oil-delivery system.

For example, last year NuStar reversed a 16-inch pipeline built to carry crude imported from Africa and Europe northward from the Port of Corpus Christi. Now, the pipeline flows south, taking delivery from hundreds of trucks that fill up at individual wells. Some of the 175,000 barrels a day moving through the pipe is loaded onto barges at Corpus Christi and towed toward refineries near Houston.

Earlier this year, Phillips 66 began putting some of this crude on ships for a 2,200-mile journey around Florida to its refinery in Linden, N.J.

The heavy trucks moving Eagle Ford crude are causing headaches for residents and local officials, ripping up roads and causing traffic tie-ups.

“These are rural roads built for 10 cars an hour, and now it’s 100 vehicles an hour, and 75 of them are 80,000-pound trucks,” says Tom Voelkel, president of Dupre Logistics LLC. The Lafayette, La., company started hauling crude in Eagle Ford in November 2011 and has more than 100 drivers full time in the region.

The Texas Legislature appropriated $450 million this year to repair and improve roads in oil-producing counties. “It doesn’t even begin to reach where it needs to reach,” says Daryl Fowler, the chief elected county official in Cuero, Texas, about a hundred miles southeast of San Antonio.

“We’ve seen a fourfold increase in congestion around here,” he says. “The roads are crumbling.”

In July, the Texas transportation department decided to convert 83 miles of state road in six oil-boom counties from pavement to gravel, to reduce repair costs and slow traffic.

Trucks filled with Eagle Ford crude are also heading 100 miles west to a barge canal. The first barge of crude departed in September 2011, heading south toward the Gulf of Mexico and refineries near Houston. Now the canal moves 1.6 million barrels a month, says Jennifer Stastny, executive director of the Port of Victoria.

“It’s like putting your 5-year-old to bed one night and he wakes up the next morning as a 16-year-old, with the appetite and demands of a 16-year-old,” she says.

In North Dakota, trains move 69% of the state’s 800,000 barrels a day of crude, according to state figures. Energy companies say they value rail’s ability to deliver crude to the highest-paying markets.

But the deadly runaway crude train crash in Canada’s Quebec province in July, which incinerated a small town and killed at least 47 people, highlighted the risks of the mile-long crude trains crisscrossing the country. The U.S. government is imposing new regulations on oil shipments by rail.

Some state regulators wonder if their local efforts leave them prepared for a train accident, in part because federal railroad rules pre-empt state and local control over trains.

In Washington state, “we can’t say [to train operators] you have to have oil-spill contingency plans in order to operate,” says Curt Hart, a spokesman for the state’s Department of Ecology. “We do that for oil tankers, barges, large commercial vessels and refineries.”

Home to five refineries, the state levies a per-barrel tax on crude delivered by tankers and barges, which pays for spill-response officials and inspectors. The tax doesn’t apply to rail shipments.

The American Association of Railroads says it is prepared for growing crude shipments because it has long carried hazardous cargoes. In 2008, major U.S. railroads carried 9,500 carloads of crude, the association says, and are on pace this year to carry 389,000.

Most industry analysts believe that while crude on trains will last, truck and barge traffic will decline once new pipelines come into service.

Environmental groups have criticized some pipeline projects, including the Keystone XL, meant to move Canadian oil to Gulf Coast refineries. The federal government is still studying the Keystone pipeline and has yet to issue needed permits.

Steve Kean, president and chief operating officer of Kinder Morgan Inc., one of several interrelated companies that own or operate 82,000 miles of North American pipeline, says government agencies thoroughly vet new projects.

Falling imports, infrastructure investments and increased manufacturing are just some of the benefits of newly abundant energy supplies, he says. “This has got to be one of the best things that has happened in our economy in the past 10 years. It is better than the iPad.”

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