Industry Trends

Quite a bit has happened since my last EMI column just a short few months ago. The citizens in Denton, Texas, voted to ban fracking while voters in one California city voted to go full speed ahead. The price of oil has dropped over 25 percent, causing pundits everywhere to give their opinions on what that will mean to the oil boom. And in one of the most frustrating things to come out of Washington in quite a while (and that’s saying a lot), the Senate in their infinite lack of wisdom voted not to approve the construction of the final segment of the Keystone XL pipeline.

So, as you can imagine, that give us quite a bit to talk about this time.

Let’s start with Denton. It’s my opinion that the people of Denton fell victim to a slew of untruths and misinformation that has been the norm in the fracking debate. And I have to say I am saddened to know that the good people of Denton may suffer financial hardship as they watch the rest of their state and nation prosper from the fracking boom that is financing new roads, better schools, social programs, and a better quality of life. The ground-rumbling they will hear won’t be earthquakes, but the stampede of lawyers running to the area to join in the plethora of lawsuits.

The part that’s even sadder is that the people of Denton probably thought that their vote would put an end to the issue when, in reality, they are now in for a messy and expensive legal battle that has already begun with a lawsuit against Denton by a group of royalty owners. This ban blocks citizens from selling their mineral rights, a violation of the Fifth and Fourteenth Amendments of the U.S. Constitution. And even if the ban withstands the current onslaught of legal attacks, it is not going to have the effect that most residents probably thought it would because existing wells will be grandfathered in, allowing fracking to continue within and around the community.

It all goes back to what I said in my last column: knowledge is power when it comes to the fracking debate, and unfortunately, most of the knowledge the voters absorbed came from the loudest speakers, that of the protesters. As I said last time, I think our industry missed a chance to explain fully what a “no” vote really meant. Hopefully we learned a lesson from that experience.

Oil drops

So, what about the price of oil, and what effect is it going have? It’s a very complicated question, since there are so many different things that it can affect. We’ve seen this type of fluctuation before, so I don’t think these recent drops in oil prices are reason for us to hit the panic button just yet. As a consumer, it’s always nice to see lower pump prices, but at what cost? 

There aren’t enough pages in this magazine to explain all the reasons why oil has slipped, who it will affect most, and the rationales of all the different players. But what I can tell you that as I write this, oil is hovering in the mid-70s. Considering it was in the high-90s when I wrote my last column, it’s a very significant change. 

So what’s going to happen in the short run, and what will happen in the long run if prices keep dropping? If oil stays between $75 and $80 a barrel for several months, I think we’ll start to see production cutbacks in regions where it costs more to get the oil out of the ground and transport it to market. Areas like the Bakken, Marcellus and Utica with probably be the first areas to see slowdown in production. But because of the smart infrastructure that is already in place, areas like the Permian and Eagle Ford will still be profitable, since the cost of extracting and transporting oil is much lower there, meaning producers can still make money in that price range.

If the early snowfalls and freezing temperatures in the northeast (think: Buffalo) and other areas (including the Farmer’s Almanac) are any indication, we could be in for another very cold extended winter. If that happens, I think we will see prices rise as the need for heating oil increases throughout the winter months. The downside of that is that when roads are icy and snow is deep, people don’t drive as much, so it’s a double-edged sword. But if prices rise back to the $80-$90 per barrel level, we probably will not see any noticeable slowdown in production.

If oil continues to drop below $70 or further, however, we could see 50 percent of all the rigs in this country lay down and production being curbed. That would not only be disastrous from an energy independence standpoint, but it would mean loss of jobs, economic failures, and potentially an end (at least temporarily) to the oil boom. But my opinion is that during this current pricing crisis, we will test $70 and rebound later in the winter above $82 and settle in somewhere in-between $85 and $90 a barrel. Let’s hope so.

And of course, there is another player in this equation: OPEC. The OPEC countries are at odds among themselves as to whether they should lower prices or limit production, all of which would affect pump prices. As I said earlier, the current glut of oil is making consumers happier at the pump, but remember that a big chunk of America’s economic recovery is tied to the oil and gas boom. Our country can’t afford to see the oil and gas boom start to bust.

the keystone debate

What most people don’t know (although I’m guessing that most of EMI’s readers are familiar with it) is that the Keystone XL pipeline has five segments, four of which are completed and have been operating successfully for quite a while now. The last section, and the one that has been making all the news, is the section that crosses from Canada into the U.S., thereby needing further government approval.

As a major study by Southern Methodist University pointed out when it was released in April, the pipeline capacity needed to support North America’s energy boom just doesn’t exist right now. 

The shale boom and the limited pipeline capacity have made oil shipments by rail from Alberta and the Bakken grow 25-fold since 2008. And according to the North Dakota State Pipeline Authority, about 75 percent of Bakken oil left North Dakota on trains in April 2013. 

These rail shipments will to continue to rise if Keystone XL is not built. But we all know too well that railroads are not the most efficient nor the safest means of transporting oil. As the SMU study pointed out, when a freight train hauling crude oil in tank cars jumps the rails, the damage can be devastating — as was the case with the tragic accident in Quebec in July 2013. By comparison, decades of use have proven that pipelines overall are overwhelmingly safe and reliable. Pipelines carry far more crude and have fewer leaks per mile. 

Even the U.S. State Department has said the pipeline is the better choice. Pipelines are underground and stay where you lay them. You can’t say that about trains barreling through the middle of cities, or trucks speeding 70 miles per hour down the road.

But, I’m sad to say, approval of Keystone XL is probably a moot point and will continue to be until this president is out of office. He has made it clear in ridiculous statement after ridiculous statement that he intends to kill the Keystone XL as long as he has the power to veto, and the Senate is clearly still taking its lead from him. 

So there you have it. It’s amazing how much can happen in three short months. Hopefully by my next column, we’ll have much happier things to talk about as we watch the oil and gas boom continue to be the foundation for a strong America.

Chris Faulkner is CEO of Dallas-based Breitling Energy Corporation (OTC:BECC), and is an outspoken advocate of fracking. His new book, “The Fracking Truth,” was released on June 30. 

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