Texas Oil and Gas Attorney Blog

The Energy Information Administration (EIA) recently predicted that natural gas heating for homes will cost 13% more this winter than last winter. The average price over the winter this year will be about $679 for a household, which is actually still lower than the previous five year average cost. The increase in demand this winter and resultant small increase in natural gas prices may help sustain natural gas production.

Another key component in sustaining natural gas production is innovation. Even with lower prices, innovation can continue to drive the natural gas boom in the United States. This was the topic for discussion at the Decision Strategies Oilfield Breakfast Forum, which occurred in October 2013 in Houston, Texas. Steven Mueller, president and CEO of Southwestern Energy, said the industry is still in its early stages of learning, specifically on unconventional plays. He noted that in these unconventional plays, the U.S. “has a national treasure with long-term, low-price implications.” He also noted that, while it is a learning process, gas projects are the largest they’ve been in a century and are more efficient than ever. Gas industry strategies themselves are helping push gas prices down, and also make the price of gas less volatile.

James W. Wicklund, managing director of energy research, at Credit Suisse LLC, said: “We are not only awash in gas; we are awash in cheap gas.” Another speaker at the Houston Forum, Matt Fox, an executive vice president at ConocoPhillips, discussed his company’s strategy for innovation, saying “(p)ick a core strategy, carry contingent elements for strategic flexibility, and monitor scenario signposts.” The CEO of Huisman Equipment, Joop Roodenburg, also highlighted the importance of collaboration to overcome a divergence in priorities among various players, like offshore drillers, drilling contractors, and suppliers. The divergence, in his mind, suppressed innovation.

A recent study by a reputable organization recently concluded that transporting oil by pipeline is safer than any other transportation method, to the extent that if opposition to pipelines causes oil to be transported by less safe methods, the risk of oil spills increases!

The study, entitled “Intermodal Safety in the Transport of Oil”, was conducted by theb Fraser Institute, based in Calgary, Canada. The authors were Diana Furchtgott-Roth from the Manhattan Institute and Kenneth P. Green, a senior director of the Fraser Institute.

There are about 825,000 kilometers of pipeline in Canada and 4.2 million kilometers in the United States. However, as the authors note, the rising production of oil and gas in North America is outpacing the capacity of the pipeline infrastructure, and so more oil is being shipped by rail and other non-pipeline methods. When transporting oil by road, the risk of a spill is almost 20 incidents per billion ton-miles. By rail, the risk is slightly more than two incidents per billion ton-miles. Contrast this with transport by pipeline, which has a risk of less than 0.6 incident per billion ton-miles.

The government shutdown is now old news. But it’s still interesting to consider how it may have effected the Texas and U.S. oil and gas industry.

There are plenty of agencies that effect the oil and gas industry, which is heavily regulated by the federal government. One agency that is actually quite useful is the Energy Information Administration, which does a great job of collecting data. Their website is informative and useful for the industry. Unfortunately, during the shutdown, the EIA furloughed its employees and stopped reporting data.

That temporary loss of the EIA may have been the only meaningful casualty of the shutdown, however. During the shutdown, the Bureau of Safety and Environmental Enforcement was tasked with providing any necessary storm updates for the Gulf of Mexico as it would impact the energy industry. This agency, part of the U.S. Department of the Interior, continued to issue drilling permits for offshore drilling and continued their inspection process for offshore oil and gas operations.

If you listen to the media and popular culture, carbon dioxide is a dangerous chemical compound that will poison the planet. But as we have seen with the rhetoric surrounding the hot topic issue of hydraulic fracturing for gas and oil wells in Texas and in the United States generally, this perception of carbon dioxide as a poisonous planet killer is way overblown.

There was a thought provoking article last year in the Wall Street Journal about this issue, written by physicist William Happer, currently a professor at Princeton University, and a former astronaut, U.S. Senator and geologist Harrison H. Schmitt, who is also a professor of engineering at the University of Wisconsin-Madison. These scientists wrote in defense of carbon dioxide, making the case that by historical standards the current carbon dioxide levels in the Earth’s atmosphere are actually quite low, and that higher carbon dioxide levels could actually make agriculture more productive. Crops like wheat, rice, soybeans, and cotton evolved during periods of much higher carbon dioxide levels, and as carbon dioxide levels rise these types of plants could become more efficient. Commercial greenhouses already create conditions of high carbon dioxide levels to grow plants inside, showing the practical value for food production.

These two scientists are not alone. A paper entitled “Science or Science Fiction? Professionals’ Discursive Construction of Climate Changes” discussed a survey of scientists that reflected broad skepticism that climate change is a man-made or even human-influenced phenomenon. The survey included 1,077 geoscientists and engineers and was published in November 2012 in the peer-reviewed journal Organizational Studies. Almost all of those surveyed, 99.4%, agreed that the climate is changing. However, only 36% believe that this climate change is not normal in nature and that humans are the only or primary cause of the change. The rest believe that either the climate change is a natural cycle and humans have little impact, noting that the climate has shifted greatly in the past–warming to get us out of the Ice Age for example–or that the changing climate is some combination of human impact and also a natural occurrence, with varying opinions about the seriousness of a changing climate to the planet. This survey and the article about it are particularly interesting because it reported the actual opinion of real scientists. These results are hard to dispute as biased.

This blog recently discussed the increase in U.S. (and Texas) oil and gas production, and that it has shown few signs of slowing down in the near future. In August 2013, the American Petroleum Institute’s monthly production statistics showed that U.S. oil production was at a 25 year high at nearly 7.6 million barrels a day. This is 20.3% higher than just one year earlier. Much of this remarkable increase is due to advances in technology that allow previously unattainable resources to be tapped–technology such as hydraulic fracturing and horizontal drilling.

API’s chief economist, John Felmy, said: “August 2013 saw a continuation of trends that have been building for quite some time. The incredible rise in American energy production, helped in part by softening demand, has allowed the U.S. to dramatically increase energy exports and reduce its energy imports.” Stocks of crude oil were also high, at 361.6 million barrels in August , which is the second highest level for the end of August in 23 years. Gasoline stocks rose 8.7% compared to August a year ago.

Helping At Home

One oil company active in Texas, Paradigm Oil and Gas Inc., is planning to identify oil wells that can be made more profitable by using advanced technology. Paradigm announced recently that it is ramping up for what it calls a “Production Blitz” in the face of continued conflict in the Middle East. In this “Production Blitz” scheme, Paradigm wants to increase production quickly in the face of growing demand due to instability in oil rich conflict zones. In light of the conflict in Syria, oil supply disruptions in Libya and continued instability in Egypt, Paradigm believes oil prices will remain at above $100 per barrel for the foreseeable future and plans to capitalize on these shortages from the Middle East by bringing more wells into production and shipping oil while the prices are high.

After spending July and August doing a comprehensive survey of its oil and gas wells and assets in Texas, Louisiana, and Oklahoma, the planned production blitz will mobilize personnel and available resources. The company has 23 leases with nearly 200 wells in these three states. Most wells are ready to be worked on, since they were previously acquired by Paradigm. Vincent Vellardita, the president and CEO of Paradigm, said, “We have set one goal for theses leases, get them online and producing!” Paradigm did not give an estimate of their oil reserves or specific production expectations, but in August a Paradigm supervisor described their production in the state of Oklahoma as “booming”.

The “blitz” will work by deploying quick response teams to cover multiple lease sites, commencing in September, 2013. Within ten days of announcing the plan, Paradigm committed to having three wells online in different leases already producing revenue for the company. Most of the leases only require small repairs and maintenance to things like pumps, production lines, etc, to be fully online and do not need significant maintenance to keep them producing. A few wells will require more extensive repairs.

This year there has been a nearly continuous stream of good news about shale development in Texas and its positive effect on the economy in our area. In March 2013, the University of Texas at San Antonio’s Center for Community Business and Research issued its annual report on the Eagle Ford shale and its impact in south Texas.

The report stated that the Eagle Ford has resulted in more than $61 billion added to the Texas economy in 2012, and supported 116,000 full time jobs in the oil and gas sector. This is an impressive jump from the previous year, when the previous report from the Center at UTSA found that the Eagle Ford had contributed $25 billion and supported 47,000 full time jobs in 2011. For long term growth, the researchers expect $89 billion in growth annually and 127,000 jobs added by 2022.

This year, UTSA’s report was based on information from 14 oil and gas producing counties as well as six counties that are used as staging areas for the oil and gas sector. In these areas, home sales and home values have risen sharply. The manager of a home development company south of San Antonio said that two-thirds of their business comes from people relocating to work in Eagle Ford shale jobs. Hotels have also seen a big boom in business all around the area, with four new hotels opening in just 18 months.

The Bipartisan Policy Center published a study in May 2013 about the U.S. gas market and its supplies, entitled “New Dynamics of the U.S. Natural Gas Market”. This interesting research was part of the New Dynamics of Natural Gas Supply and Demand project. This project looks at new gas supplies in the U.S. and methods to improve the economic and environmental impacts of the energy industry. This current work builds on past reports on shale gas and on ensuring the stability of natural gas markets.

Specifically, the study looked at the potential impact of increased use of natural gas, taking into account various assumptions about future natural gas supplies. It examined increasing demand for natural gas from sources like industry and power stations as they replace coal with gas. The report concentrated on two main issues: 1) the price impact when multiple demand drivers increase demand at the same time; and 2) how the impacts would vary with either high or low gas production output. Even when the demand for natural gas rises in several areas, the report found that natural gas prices were unlikely to rise significantly. In other words, even when the supply is low and the demand is high, the peak prices of gas that were seen in past years would not be reached again. Significant increases in gas exports from the U.S. are also not likely to increase prices.

The report determined that most of the growth in natural gas will be driven primarily by economic growth combined with the switch from coal to gas for power plants and industrial use. The report also stated that natural gas vehicles will likely continue to get more popular and may make great gains in the market by the year 2035. The report also concluded that the United States is in a favorable and unique position to take advantage of various factors, including the environmental, energy and economic security benefits that our country’s natural gas reserves allow. Natural gas can improve both the energy and environment sectors, while promoting a growing economy and more jobs.

Experts at the Bipartisan Policy Center held a conference in June 2013 and as part of that conference concluded that U.S. oil and gas exploration and production can reshape global energy geopolitics. The chairman of IHS Cambridge Research Associates, Daniel Yergin, said that “(a) better supplied world is a safer world, but it doesn’t mean there still aren’t above-ground and below-ground risks. It could help us play a leadership position in the world that wouldn’t have been possible a decade ago, however.” Government officials at the conference were likewise optimistic, asserting that more oil resources can help the economy and business interests and influence the world. A U.S. State Department special envoy, Carlos Pasqual, said, “(i)f we manage it with environmental responsibility, it will be historic.

In terms of the relationship between U.S. military action and oil supplies, Luis Giusti from the Center for Strategic and International Studies told the conference not to expect the U.S. to defend oil producing counties abroad. Mr. Giusti said this kind of military action would make the markets very volatile.

Mr. Yergin, Mr. Pasqual and Mr. Giusti all agreed that the increase in U.S. oil production gives our country more clout in dealing with other countries. An example that Mr. Pasqual gave is the government’s ability to persuade countries not to buy Iranian crude oil or to buy less of it. He noted, “Countries understand the need to restrain Iran’s nuclear ambitions. They’re likelier to do something about it if they’re confident they can buy the oil elsewhere.” He also stated that “(i)f we can help Asia diversify its gas supplies, its positive influence on global markets will be important.”

The Texas oil and gas industry has had a busy year. In June 2013 Kinder Morgan Energy Partners announced it was expanding its pipeline system into the Eagle Ford shale in Karnes County, Texas. This new pipeline project is the result of a long term contract with ConocoPhillips and will extend the already existing 178 mile pipeline another 31 miles from DeWitt County to ConocoPhillips distribution facility in Karnes County. Kinder Morgan also plans to build holding tanks and a truck unloading facility at ConocoPhillip’s site in Karnes County. The project began construction in July 2013 and the new section is expected to be operational by the third quarter of 2014, with a capacity of 300,000 b/d of crude and condensates.

This news follows on Kinder Morgan’s announcement in May 2013 that it was expanding another pipeline to its refinery in Brazoria County. The original pipeline, part of the same pipeline system described above, went into service in June 2012 and brings Eagle Ford oil to Houston. That pipeline expansion is expected to start service by the end of 2013 and will increase the capacity to 100,000 b/d. Kinder Morgan indicated that it plans, as part of this project announced in May, to add new pumps and a storage tank in Wharton County, Texas, and offloading capabilities for trucks in DeWitt County.

In July, Exco Resources Inc. announced it was buying undeveloped oil and gas assets in Eagle Ford and also in the Haynesville shale from Chesapeake Energy Corporation. The purchased assets are located in Zavala, Dimmit, La Salle, and Frio counties in Texas, as well as some in Louisiana. Exco paid Chesapeake a total of $1 billion for these oil and gas assets.