Vello Kuuskraa, president of Advanced Resources International and known for his work in energy economics and petroleum recovery technologies, commented at a recent energy conference in Fort Worth that he believes “unconventional gas is the future, both in the U.S. and overseas.”  Unconventional gas includes shale gas, tight gas and coal-bed methane.  Such deposits require measures such as horizontal drilling and hydraulic fracturing to enhance their recovery and make then economically feasible.

Kuuskraa expects his end-of-the-year calculations to show that the Barnett Shale has become the biggest gas-producing area in the U.S., outpacing the San Juan Basin in New Mexico and Colorado.  Further, Kuuskraa said that future unconventional gas recovery worldwide could significantly expand supplies helping make gas increasingly attractive as a fuel for transportation and electric power generation.

The survey found that most Americans continue to underestimate the amount of oil and gas that will be needed to meet future demand as predicted by governmental experts.  It was also noted that most respondents overestimate the role that renewable energy sources will play in the future demand, the amount of oil that is imported from the Middle East and the amount of oil and natural gas industry earnings. 

It is estimated by the Energy Information Administration that the US energy demand will increase 9% during the next 20 years.  The majority of respondents in the survey thought that demand would increase somewhere between 16% and 21%. 

Fossil fuels such as oil, gas, and coal are expected to make up approximately 85% of global energy demand – only 10% of respondents answered this question correctly.

The US Department of Energy estimates that 12% of oil consumed last year in the US was obtained from the Persian Gulf countries.  The majority of respondents in the survey thought that our dependence on fossil fuels from the Persian Gulf countries was over 30%.  Further, according to the DOE, Canada is the largest supplier of imported crude oil and more than 73% of oil and gas consumed in the US is actually produced in North America.

Finally, the oil and gas industry has paid over $242 billion in taxes in the past three years and earns just below $0.06 on every $1 of sales.  Most respondents believed that the industry contributed less than $100 billion or were not sure how much was contributed in taxes over the past three years and thought that the industry earned more than $0.20 per every $1 of sales.

In these tough economic times where many are struggling for cash, states are not an exception. In order to aid them in meeting budgetary goals, some states are proposing the idea of imposing new oil and gas levies.

Pennsylvania and California are proposing increased severance taxes on oil and natural gas production in their states (5% and 9.9% proposed severance tax, respectively). Arkansas passed, and now has in effect, a tax increase on oil and gas production. Companies in these states warn that the new tax levies could lead to lost jobs and higher energy prices as they decide to relocate their business elsewhere.

Some states, such as Colorado and Montana, have already attempted to pass legislation to increase these taxes, but the bills have died in their state legislature due to “vote no” campaigns funded by the industry.  Although there is obviously significant opposition to the higher taxes, some industry insiders point out that the higher taxes may not greatly impact a company’s drilling locations. For instance, Alaska (which has the highest severance tax rate at 25%) has not seen a reduction in drilling activity.

As companies make decisions on where to drill, they should keep an eye on the relevant state legislature as rising severance taxes may impact the economic viability of their projects.

The Gulf coast remains at the top of the nations list, but the largest increases from the assessment came from shale gas which is located in the Appalachian, Arkoma and Fort Worth basins, among others. The report states that shale gas is growing in importance since it accounts for 33 percent of the reserves.

Many experts agree that the report is good news for the industry and for potential users of natural gas, but that demand must increase for the potential reserves to become actual supply. Natural gas between $5 and $6 tends to be regarded as a break-even range for natural gas producers. Shale becomes uneconomical at a price of less than $5, while prices at more than $7 are preferred for growth. Natural gas was traded at $3.80 per million British thermal units at the time this report was published.

Honesty and Authenticity- communications with employees should show your understanding of the current events and seek input from talented people. Being honest about your concerns and opening communications will help employees see the reality and help them take ownership of the solutions.

Day-to-day Operational Presence- this is not to be confused with micromanagement. This process is more about understanding the impact of the current times at a lower level in order to dissect problems and continue high-level strategy. Top employees will respond to this involvement if it is seen as high-level investigation to make their processes easier and more efficient. These hard times require leadership focus in all facets of the organization.

Optimistic Realism- being either too optimistic or too pessimistic create doubt in employees. Focus on the solutions to the problems and do not dwell in the problems as they appear. Be realistic about performance measures and reward smart solutions and outcomes. Do not give employees a false sense of security or a false sense of insecurity due to business slow downs. You can lose talented employees if they feel uncertainty.

Smart People Decisions- leaders have to make tough personnel decisions in hard times. Be certain changes are made based upon performance and contribution to the company. Develop or better implement performance guidelines to grade your employee group. Hard times are not forgiving to decisions made based on loyalty or politics. Your company cannot afford to keep or hire a liability in this market. You may be able to replace low performers with talented individuals who are currently in an uncertain job or have been laid off due to the current economic climate.

Future Watch- build with the future in mind knowing that the economy will turn around at some point. Can you make key acquisitions now and exploit these when the economy recovers? Use this time to innovate processes, learn new techniques for operations, and look for gaps in your current processes. You can come out on the other side of this economic chasm in much stronger position operationally.

Being a strong leader includes being willing to change current practices. The skills Mark Cook focuses on could help you improve your company for the long term.

“We got a break here, a little bit of a breather (with current oil prices), but within 60 days we’ll be back up to $60 oil and by end of the year we’ll be on our way … at $75.”  Full article.

This prediction seems to presume either a declining supply, an increasing demand or both for oil in the very near future.  Just six months ago the fear (and focus of much of the political speak during the election campaigns) was that we had too much demand for the supply that could be produced causing prices to soar.  This sparked the debate about alternative sources of energy to decrease our dependence on foreign oil, and the complaints that the U.S. oil producers were making too much money in the process of trying to keep up with this demand. 

A factor that plays into Pickens’ scenario is the rig count in the U.S.  For several months, due to a decreasing demand and the resulting drop in oil prices, we have seen an increase in the number of rigs taken out of service because it is now economically unfeasible to produce the reserves.  OPEC is also reducing production in an attempt to moderate global oil prices. 

Eventually, this reduced supply will drop below the level necessary to sustain the market’s demand.  This could be amplified if demand for oil also begins to increase.  Once prices begin to rise, it may be too late for U.S. producers to react quickly since bringing rigs back online will be expensive and time consuming.  As a result, prices will rise quickly at a time when the economy may still be struggling.  If OPEC can ramp up production faster that our U.S. producers, we may end up purchasing even more foreign oil to relieve the burden of rising prices on the U.S. consumer.

Instead of trying to find ways to penalize our domestic oil producers, it might be wise to begin removing barriers to their ability to produce enough oil domestically so we can keep more of these dollars invested in our own economy.

In a recent opinion piece in the Fort Wort Star-Telegram,  Senator John Cornyn said that energy should continue to be a focus of the 111th Congress:

While lower gas prices should have given us the chance to catch our breath and redouble our efforts to develop a comprehensive energy plan, instead it signaled an ill-timed break in discussion on one of the most important issues of our day.

According to a recent American Petroleum Institute report, it’s estimated that the United States has undiscovered technically recoverable resources, including onshore and offshore reserves, totalling 116 billion barrels of oil and 650 trillion cubic feet of natural gas.

Accessing those reserves may not solve all of our energy needs, but as our demand for energy continues to grow, where will the supply we need come from?  And more importantly, how much will it cost us?

1. Plan for setbacks.  The poorest results in a development program are likely to occur in the initial wells.
2. Continuously invest in good science and R&D. Especially in a down market.
3. Don’t manage costs by cutting corners in your drilling budget. Accounting and cost considerations shouldn’t drive your drilling program.
4. Risk. Don’t spend capital, invest it.

Richard Moorman, who is the Manager of Strategic Analysis for the Economics, Planning, and Acquisitions Division of Southwestern Energy Company, closed the conference by saying, “Think long-term.  Don’t give up too early.”

Great advice in an uncertain market.

Where do you think we’ll be a year from now?  Post your prediction as a comment.