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Oklahoma energy industry could be affected in surprising ways by Biden administration

Biden, Oklahoma Energy, President Biden, Methane

An exceptional story on how President Biden and his new administration may change Oklahoma Energy, by Jack Money – The Oklahoman.

Presidential administrations and Congresses throughout the past 40 years undoubtedly worked to nudge the nation’s energy and climate-related policies one way or another.

Debates about ways to support the energy industry both in Oklahoma and across the nation have been part of every presidential and congressional election since the 1980s, and subsequent governmental actions have prompted applause or angst as they have helped or hurt energy production along the way.

That’s no surprise. While the number of Oklahomans employed by oil and gas companies in the state is relatively small, the industry’s impact on the overall health of the state’s economy and the services provided by state and local governments is huge.

A report issued by the Oklahoma State Chamber in September 2016, for example, showed:

  • In 2015, the oil and gas industry employed 53,500 Oklahomans who earned $5.6 billion.
  • Another 95,000 Oklahomans earned $10 billion in self-employment income from oil and gas activity.
  • In total, their earnings represented 13.2% of total state earnings during the year.

Energy industry slowdowns, it observed, typically lead to losses of gross production, property, sales, and income tax revenues and an associated loss of discretionary spending.

In short, keeping the industry healthy has been paramount to both industry leaders and state government officials.

As the Biden administration prepares to take office this month, questions again are being asked about how federal energy policies might change and how that might impact Oklahoma’s energy industry. 

While the questions are nothing new, answers from at least two Oklahomans might surprise you.

Mike Cantrell, chairman of Postwood Energy LLC and co-chairman of the Oklahoma Energy Producers Alliance, has been an activist in Oklahoma’s oil and gas industry since leading a membership committee for the Oklahoma Independent Petroleum Association (OIPA) in the early 1980s.

Over the years, he represented the industry and its viewpoints on environmental, trade, and tax policies that all influenced the success of oil and gas operators in the state.

These days, Cantrell said he has re-assessed many positions he has taken over that time. The industry, for example, lobbied hard to keep foreign oil overseas, despite its role (through an agreement made by President Ronald Reagan with Saudi Arabia) to flood markets with cheap oil to bring the USSR to its economic knees.

He also lobbied hard on behalf of the industry to eliminate the windfall profit tax on oil and gas producers, something they were able to accomplish for owners of stripper wells in 1981 and for producers generally several years later.

“I have done my fair share of that, looking back and asking whether or not the positions I took were right,” Cantrell said. “The question is, should we have let the marketplace decide?”

His thoughts are similar to those of Jim Roth, an attorney who is the dean of Oklahoma City University’s School of Law and a past Oklahoma Corporation Commissioner.

Roth said past Congresses and administrations indeed have been able to influence rises and falls in domestic energy production through regulatory and tax-related policies.

“But there are market forces that are evolving, regardless who is in control,” Roth said.

A 40-year itch

Until a decade ago, the most common called-for remedy to support Oklahoma’s energy industry was the need to enact a tax on imported crude oil.

Tulsa consultant Wayne Swearingen argued for a $5 per barrel tax when he addressed the OIPA in 1982, arguing that could help the nation pay down its deficit. He also called for Congress to eliminate windfall taxes on profits obtained through the production of carbon-based energy products.

“That’s the least awful of all ways to tax the industry,” Swearingen said.

Calls for import taxes only grew louder as President Reagan entered his second term, with spot pricing for West Texas Intermediate crude at the Cushing terminal averaging $15.05 in 1986.

The International Association of Drilling Contractors called for the president to save the oil and gas drilling and exploration industry from “imminent collapse” by using his executive authority to impose import fees on both oil and gasoline.

“The collapse of oil prices in combination with punitive actions of the Congress and the federal government in the form of windfall profit taxes, natural gas price controls and the like, threatens to destroy the U.S. independent oil and gas industry and critical drilling and exploration efforts with it and threatens the security of the nation,” said association President Ned E. Simes. “President Reagan used this authority recently to limit the import of cedarwood shingles from Canada. Certainly, the survival of America’s energy industry is at least as strategic as that of the wood shingle industry.”

As the 1988 election between Vice President George H.W. Bush and Michael Dukakis approached, Oklahoma’s energy producers were hopeful Bush would support the industry. But by the time he sought a second term in 1992, markets remained in control.

The average price at Cushing for crude was $20.58 a barrel that year as the nation imported more than 2.2 billion barrels that year.

“There remains no commitment, or even recognition from this administration to address the urgent problems and inequities within the domestic oil and gas industry,” said F.W. “Pete” Brown, the OIPA’s president at the time. “President Bush has been criticized for not having an energy strategy. I believe he has an energy policy — cheap oil today, regardless of the cost tomorrow.”

Under President Bill Clinton’s two terms, crude prices generally climbed. But imports climbed as well, growing to more than 3.3 billion barrels in 2000.

And as President George W. Bush served the first year of his second term in 2005, crude’s price averaged $56.64 a barrel as imports reached a record level of nearly 3.7 billion barrels.

When President Barack Obama took office in 2009, the shale revolution was growing. As domestic production climbed, oil imports declined, with only about 2.5 billion barrels imported in 2019.

Crude oil production in the Lower 48, meanwhile, grew from an average of 5 million barrels per day in 2008 to a record rate of 12.25 million barrels daily in 2019.

During the first week of 2021, the U.S. didn’t import any oil from Saudi Arabia — something that hadn’t happened in nearly four decades.

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Natural gas’ growth

The big issue the nation faced in 1980 on natural gas was a lack of production that energy industry officials attributed to federal price controls.

That began to change after Congress approved a 1978 law that exempted natural gas recovered from depths of 15,000 feet or greater from those price constraints.

In the fields of western and northwestern Oklahoma, drilling rigs practically appeared overnight, capping pioneering efforts of Oklahoma oilman Robert A Hefner III and others to produce natural gas from wells drilled deep into the Anadarko Basin.

Before long, though, debate shifted to whether natural gas prices for all wells should be deregulated. Oklahoma’s energy industry was split. Operators like Hefner argued against it, while smaller producers with existing wells argued for the change.

Congress began a lengthy process to remove price controls on the fuel in the mid-1980s, ultimately accomplishing that in 1993.

Those changes had little impact on natural gas production from the Lower 48, however. While federal expectations for production from wells in 1985 was about 159.5 trillion cubic feet (Tcf), that forecast had been lowered to about 152.5 Tcf in 1993, when the fuel’s average price was just $2.04 per thousand cubic feet (Mcf).

Oklahoman native T. Boone Pickens advocated boosting ways the fuel could be used.

“In America today, I see us miles from where we should be in our approach to energy,” said Pickens, then the general partner of Dallas-based natural gas producer Mesa Limited Partnership and newly elected chairman of the Natural Gas Vehicle Coalition. “What’s wrong with converting to a domestic resource that is environmentally superior, creates jobs, reduces the trade deficit, is a domestic resource that is cheaper than the alternative and doesn’t require an army to guard it?”

Pickens sought congressional approval of an energy bill that would encourage fleet owners of 30 million vehicles to operate using compressed natural gas.

His call to mainstream the fuel’s use was joined by other Oklahomans like Aubrey McClendon, who had founded Chesapeake Energy with Tom Ward in 1989.

Under McClendon’s leadership, Chesapeake used horizontal drilling and hydraulic fracturing to get huge amounts of natural gas (and later oil) out of the ground.

By the mid-2000s, Chesapeake was the second-largest producer of natural gas in the U.S., with only Exxon producing more.

Annual production rates climbed, but as they reached record amounts between 2018 and last year, energy producers found themselves victimized by their own success.

Imports vs. exports

Growing production rates in the U.S. for oil and natural gas caused commodity prices to fall as supplies exceeded demand.

As that happened, producers across Oklahoma and the nation shifted their focus from limiting imports to allowing exports instead.

A 2014 study by ICF International and EnSys Energy estimated that Oklahoma could gain nearly 4,500 jobs and see more than a half-billion dollars injected into its economy by 2020 if the U.S. reversed a ban on oil exports that had been in place since 1975.

The study, commissioned by the American Petroleum Institute, indicated additional exports could help increase energy supplies, put downward pressure on gasoline prices at the pump and bring more jobs to the United States.

“When it comes to crude oil, the rewards of free trade are not limited to energy-producing states. Scarcity is giving way to abundance, and restrictions on exports only limit our potential as a global energy superpower.” – Kyle Isakower, American Petroleum Institute’s Vice President for regulatory and economic policy

“The U.S. is poised to become the world’s largest oil producer, and the study shows that access to foreign customers will create economic opportunities across the country,” said Kyle Isakower, the institute’s vice president for regulatory and economic policy. “When it comes to crude oil, the rewards of free trade are not limited to energy-producing states. Scarcity is giving way to abundance, and restrictions on exports only limit our potential as a global energy superpower.”

A $1.1 trillion spending bill approved by Congress at the end of 2015 lifted the federal ban against oil exports that had been in place, finally.

Since then, exports of both crude oil and liquified natural gas (LNG) climbed. In 2015, the U.S. was exporting about 4.75 million barrels of (refined) petroleum products daily. In 2019, that average had climbed to nearly 8.6 million barrels with much of it crude, while net imports had fallen to just a half-million barrels daily. The U.S. achieved a status of a net exporter of petroleum products in September the same year.

Meanwhile, downstream operators continued to build LNG export facilities that have been boosting the amount of product getting sent overseas and recently have had their export permits extended by federal authorities through 2050.

Renewables’ rise

Oil shocks in the 1970s, emerging environmental concerns, and technological advances prompted interest on both state and federal levels to create new ways to renewable energy development.

Several Congressional acts led to 1992’s passage of legislation that established a renewable energy production tax credit and other incentives and credits programs for renewable energy sources that have been expanded and extended various times, since.

Oklahoma also created a tax incentive program in 2005 to encourage the development of wind-powered energy facilities that ended up playing a significant role in building that industry across the state.

By the time talks surfaced initially about ending the incentives program in 2010 to plug a projected state budget deficit for Fiscal 2011, more than 900 megawatts of generating capacity had been built, so far.

The debate about needs for the tax break would continue another five years before Oklahoma’s Legislature decided to end the incentives. A five-year property tax exemption for new wind developments ended Jan. 1, 2017. The measure also ended a zero-emissions tax credit for wind projects, the effect at the start of this year.

But wind energy’s first decade of growth in Oklahoma was astounding. About $20 billion was spent across the state to establish and grow the wind industry between 2009 and the end of 2020, with a chunk of that spent to upgrade the state’s electrical transmission system to handle the additional power the projects provide.

At the end of 2020, the projects were generating about 40% of the electrical energy used by Oklahomans each year.

According to the Oklahoma Corporation Commission, renewable projects impacted Oklahoma in other ways over that time too, including generating an estimated $235 million in state and local tax revenue, more than $200 million land lease payments and creating more than 7,000 jobs.

Renewable energy companies also worked hard to support the communities where they operate, such as contributing money to local school systems and other organizations to help them improve the services they provide.

In recent years, regulated electric utilities also have deployed commercial-sized solar farms, capturing another plentiful renewable resource within the state, while private contractors have been working with homeowners to install home-sized systems for them.

The first commercial-scale wind, solar, and battery storage project is being built now in northern Oklahoma.

‘At the end of the day, markets drive outcome’

Cantrell agrees that the successes and failures of Oklahoma’s energy producers over the past decade were largely made by consumers’ choices.

“As a democracy, do we allow government participation in marketplace decisions? It is a complicated system because what we have is a mix where we have a free market where the government participates. So, you need to find a balance between doing what is best, and doing what you think is right.”

A problem, he observed, is that the nation’s climate continues to warm despite the fact the U.S. is among few nations in the world to actually have met emissions reductions set under the Paris climate accord.

That makes it hard, he continued, to justify telling Americans they need to do more to improve a climate that other countries are failing to protect.

“Are we willing to sacrifice economically to protect ourselves from carbon emissions? That’s a question for the public to decide, and it will eventually get what it wants.” – Mike Cantrell, Chairman for Postwood Energy, LLC

“Are we willing to sacrifice economically to protect ourselves from carbon emissions? That’s a question for the public to decide, and it will eventually get what it wants.”

Roth carried that idea further, also observing that past successes and failures of federal and state policies were decided by market forces.

President Jimmy Carter, he remembers, advocated rapidly deploying solar energy to help the nation wean itself off natural gas. But the manufacturing of solar panels was uneconomical until just five years ago.

“And who would have thought that President Barack Obama would have overseen America becoming the largest oil producer in the world? That happened in 2014. There were more oil and gas produced during his last term than there was during Trump’s term. Why? The market fell out. Similarly, President Trump’s promise to support coal couldn’t be fulfilled because the economics couldn’t support it.

“Policymakers can try to do some things that generally open or constrict traditional development, but when you look at how energy in Oklahoma has evolved over the past 40 years, at the end of the day, markets drive the outcome. Politicians can promise, but the markets deliver.”

As published on AZCentral.com

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