The State Of Energy
Oklahoma is a key energy player in today’s new reality.
In November 1973, President Richard Nixon declared energy independence as a national objective in the wake of the Arab oil embargo. Subsequently, that dependence has only increased under consecutive administrations. Lip service to the idea of energy independence coincided with the widely held belief that the United States simply didn’t have the attainable resources to wean itself from the dubious grip of OPEC.
But what if that weren’t the case? What if the U.S. actually sat on a century’s worth of energy resources, permitting independence from overseas oil and providing decades of time for the successful development of truly viable alternative energy sources?
Ask a few sources with expertise in the field and an understanding of the traditional energy sector and it seems that today that independence is within reach – and Oklahoma is a key player in this new reality.
“We are definitely experiencing an energy renaissance,” says C. Michael Ming, Oklahoma Secretary of Energy. “Just look at how much energy has been developed – it’s been an unprecedented amount of energy coming into the system. In 1970, we thought we were running out of resources. As it turns out, we have 10 times the resources we thought at the time.
“It’s been so engrained in the American public that oil and gas are limited resources and that we are running out of them,” Ming continues. “Even the president repeats that we have two percent of the world’s resources and consume 25 percent of the product. That is not an accurate statement. We actually have a lot more than that. It is a finite amount of oil and gas. But in terms of human consumption, it’s not so finite. The ability to develop new resources has opened up a whole new world.”
Private sector experts agree with Ming’s assessment.
Harold Hamm, CEO of Continental Resources and chairman of the Domestic Energy Producers Alliance (DEPA), also uses “renaissance” when evaluating the state of energy today.
“This renaissance has really been brought about by technology,” Hamm says. “Primarily it’s been precision horizontal drilling. This has let us access rocks we couldn’t access before…to free up what used to be immobile oil. That pool of immobile oil that can now be accessed is larger by about one-third than the entire pool that we have been drawing from for the past 130 years. I’d say that’s a renaissance.”
Count Mike Terry, president of Oklahoma Independent Petroleum Association (OIPA), among others observing this historic moment in energy.
“These drilling and well completion techniques have combined to unlock vast new quantities of oil and natural gas across the country and are also being used to breathe new life into mature oil and natural gas fields that were considered all but depleted 50 years ago,” Terry says.
Terry goes on to explain why this renaissance might be national – but Oklahoma is at the center of it. “The state’s growing areas of exploration, its historic oil and natural gas production and business-friendly laws and regulations have made Oklahoma one of the best places to do business for oil and natural gas producers. The Fraser Institute’s Global Petroleum Survey 2012 put the state at the top of its list of 150 other jurisdictions, from the Middle East to the U.S. Midwest, as the most attractive place in the world to invest in the oil and natural gas business.
“The increasing production has brought the United States markedly closer to independence from foreign energy sources, a milestone that could reconfigure American foreign policy, the economy and more,” Terry continues. “In 2011, the country imported just 45 percent of the liquid fuels it used, down from a record high of 60 percent in 2005. National oil production, which declined steadily to 4.95 million barrels a day in 2008 from 9.6 million in 1970, has risen over the last four years to nearly 5.7 million barrels a day. The Energy Department projects that daily output could reach nearly seven million barrels by 2020. Some experts think it could eventually hit 10 million barrels – which would put the United States in the same league as Saudi Arabia.”
“I’d characterize the state of the energy sector as really good,” Ming says. “The last 10 years or so have been amazing for Oklahoma.”
David Prentice agrees. The managing director of Red Fork Energy was well aware of Oklahoma’s vaunted reputation in the energy industry when the Australian opted to locate Red Fork’s main offices in Tulsa half a dozen years ago.
“There was a degree of serendipidy to locating in Oklahoma,” Prentice says. “I had relationships with people who were based in Oklahoma. I knew Oklahoma’s reputation for being a good place for the business. It’s a great place to be.”
Red Fork has experienced impressive growth subsequently, particularly the past two years, Prentice says. He credits Red Fork’s savvy expansion of its holdings in northern Oklahoma’s oil and liquids rich gas epicenter, the Mississippi Play. Prentice references the Mississippian as an example of the new vibrancy that technolgy has introduced into the field.
“The Mississippian is just the tip of the iceberg in terms of utiliizing these new technologies to get resources,” Prentice says. “It’s very exciting. There are a lot of opportunities.”
Economics And Entrepreneurialism
Ming cites the energy sector as a key to the health of the Oklahoma economy – an economy that is positively brisk compared to other, non-energy producing states.
“It’s been trending really well,” he says. “All-in, direct and indirect, energy is responsible for about one-third of the GDP of the state. From the governor’s perspective, we’ve been able to refill the rainy day fund with a balanced budget and the implementation of a tax cut. We have the fourth lowest unemployment in the nation behind the Dakotas and Nebraska. We’re now tied with Vermont. You are seeing in energy states how effective balancing budgets and cutting taxes can be.”
Hamm says that within the industry, leaders recognize that domestically produced power adds jobs. That’s illustrated nationwide, he points out.
“You see job growth and less unemployment in states like Texas, Oklahoma and the Dakotas,” Hamm says. “There are still not enough workers to fill the jobs in North Dakota. Now we’re seeing this take place in Pennsylvania and in Ohio with the Utica Shale. In Ohio, idle steel mills started up again when the Utica Shale was opened. States producing energy like Montana and North Dakota have a big surplus. The states that are in trouble aren’t producing, like Illinois and California.”
Energy is also intrinsically important to Oklahoma’s manufacturing sector. A significant portion of manufacturing operations produce infrastructure for energy exploration, extraction and transportation of energy products.
“There are regional differences,” Ming points out. “Oklahoma City is mostly dominated by operating companies plus a few midstream companies. Tulsa has a lot of operators, but other segments are very strong – services and technology.”
On a recent visit to Canada’s vaunted oil sands, Ming said it was impressive to see so many pieces of equipment manufactured in Tulsa, from base infrastructure to specialty products, such as controllers and valves.
“Our manufacturing makes oil and gas flow all over the world,” he says.
The state’s role in energy impacts the economy in other ways as well. Hamm says that Midwest energy prices are depressed because of the quantity. This is most obvious when it comes to natural gas.
“Natural gas today is at about $2.90 or $3 a gallon here, yet in some parts of the world like Japan, it’s $18 a gallon,” Hamm says. He adds that while oil is a global commodity, natural gas is a regional one – which today is benefitting consumers of the product but not necessarily the industry.
“Natural gas is still awfully cheap,” Hamm says. “For the cost of wells today, it is pretty depressed.”
Fortunately, Oklahoma’s oil and gas industry is also flexible and diverse. The recent glut in natural gas has prompted some in the industry to focus operations more on oil, which sells for considerably more than natural gas at today’s prices.
While many in Oklahoma are familiar with big-name oil and gas companies, others are unaware of the entrepreneurial spirit that still permeates the energy sector – arguably to a degree not seen outside of the tech sector in today’s less-than-entrepreneurial economic climate.
Greg Casillas realized as much when, three years after graduating from Oklahoma State University with a geology degree in 1983, he left Seigel Petroleum Company to launch his own oil and gas company, Casillas Petroleum Corporation.
“This is an industry where there’s a lot of opportunity,” Casillas says. “It’s a very difficult industry, very capital intensive. But there’s always a need for oil and gas.”
Opportunity knocked when a downturn in the industry forced the family-owned Seigel to begin downsizing its staff, and Casillas answered by taking a calculated risk: He resigned and took the knowledge and experience he’d gained and started his own company.
“(At Seigel) I had learned how to do the field work, the drilling and the in-house stuff like prospecting,” Casillas recalls. “In ’86 there was another energy bust. Oil was at $9 a barrel…I told my wife I wasn’t going to work for somebody else.”
Casillas’ risk has paid off in the years since. What started out as a one-man operation has now become a company with 14 full-time employees operating approximately 300 wells in Oklahoma, Texas, Louisiana and Kansas. But for Casillas, success isn’t always quantified by dollars and cents. Often, it comes down to the challenge.
“Trying to find oil and gas is not easy,” he says. “You’re trying to guess what Mother Nature has done in the past. Stress is definitely a part of the equation. You have to know when to take risks and you have to know when to cut your losses.”
It’s that challenge that keeps Casillas excited about the future of the oil and gas business in Oklahoma.
“It’s just a fun business,” he says. “If you’re not learning something new every day, you’re not paying attention.”
Rocky Road Ahead?
Given today’s energy renaissance, enthusiasm abounds among those in the industry. However, insiders also say that there are serious potential roadblocks ahead for Oklahoma’s – and the nation’s – oil and gas industries.
“The greatest threat to Oklahoma’s oil and natural gas renaissance is impending federal regulations that will limit the ability of independent oil and natural gas producer to explore for new reserves,” Terry says. “Our nation’s current political leadership has not hidden the fact that they want to end the use of crude oil and are attempting to do so by making drilling and producing oil and natural gas in the United States more time consuming and costly. President Obama has called for the repeal of tax provisions for oil and natural gas producers every year since he took office. When Congress failed to support his plan, the federal agencies the White House directs began an all-out assault on Oklahoma’s most vibrant industry.
“The EPA instituted new air quality regulations that require time-consuming and obtuse reporting requirements, and the environmental agency continues to threaten increased federal regulation on hydraulic fracturing,” Terry continues. “The U.S. Fish and Wildlife Service has cordoned off swaths of northwest Oklahoma and virtually all of southeast Oklahoma to protect the lesser prairie chicken and the American burying beetle, a bird that is so plentiful in Kansas that there is a hunting season and a bug that was deemed endangered in 1988 but has since been found in massive colonies across the southern plains states.”
Ming also points out that the EPA desperately wants to expand its regulatory regime to include hydraulic fracturing – and that Oklahoma has taken a very strong position against the scheme.
“Our actions demonstrate the case for state regulation,” Ming says. “Oklahoma is emerging as a leader in that area because we’re good at it.”
As an example Ming cites the call from critics for transparency in disclosing the makeup of fracking liquids. An Oklahoma City organization launched www.fracfocus.org, a website that provides just that information to the public. The market demanded it and, without federal involvement, the marketplace has provided it.
“There are a lot of wells there, it’s transparent and its all happened in the last 15 months,” Ming says. He adds that other state level regulation has reduced surface infrastructure for drilling and influenced numerous other extraction components.
Hamm also cites federal hostility toward the industry as a major threat.
“There have been a lot of executive orders out of D.C. to try to re-arrange all the seats on the deck, directives come out of eight or nine different agencies – the EPA is just one, permitting is down 40 percent from four years ago, and a lot of land has been taken off the table that should be leased,” Hamm says. “Hopefully we’ll see a lot of change. The administration has a policy of scarcity when it comes to domestic energy, over realizing the abundance that we have here in the United States.”
Ming says Gov. Mary Fallin’s OK First Energy Plan, established early in her administration, deftly combines traditional energy, renewable energy, energy efficiency and environmental and public welfare concerns in establishing a blueprint for the state’s energy future, Ming says.
“It makes traditional energy better instead of just politically eliminating it,” he says.