"Kee" Points with Jim Kee, Ph.D.

As promised, I wanted to give you the highlights of our seventh annual South Texas Money Management Energy Symposium. We started these symposiums because many of our clients have oil and gas interests and properties, so they have keen interests in energy markets.We aim for a diverse group of speakers who don’t necessarily share the same opinions. Here are the key takeaways that I wrote down:

Land disruption: Forrest Smith of the Caesar Kleberg Wildlife Research Institute discussed the key issues that land owners need to focus on when restoring their land after the drilling trucks leave. A layman like me assumed that if you just leave everything alone it all grows back to normal in a few years. Evidently that’s not the case! Storing and saving the original topsoil is crucial to getting things back to normal, as it contains the organic matter and nutrients necessary for restoring native plants. And you need the native plants if you want the native wildlife, like quail. A huge problem is the spread of exotic or imported grasses. These grasses start taking over immediately, and their proliferation greatly reduces the natural wildlife in the area. Land needs to be reseeded with native plant seeds from the area.

Eagle Ford Shale: Trevor Sloan and Manuj Nikhanj of ITG Investment Research (definitely members of the best & brightest club) returned with drilling facts from the U.S.’s major shale formations. About 25,000 wells have been drilled so far, and there is about 10 times that many to go across the 7 main shale plays. So there’s a lot to come. What are the prices below which it becomes economically infeasible to drill for oil and gas? While there is considerable variability of well efficiency (costs) between companies and within a company between regions, in general the number seems to be $60 per barrel for oil (oil is currently $92bbl for West Texas Intermediate; $108 for Brent crude, while for gas the number is $4.00 per million British thermal units (mmbtu) for a pure gas well, gas is currently $2.50 mmbtu). Those are neat numbers to throw around at parties.

Politics: Political Strategist Greg Valliere of the Potomac Research Group returned to talk about the elections and other things. He felt that the U.S. “fiscal cliff,” i.e. the number of taxes slated to rise at the beginning of 2013, is huge, citing Standard & Poor’s Mark Zandi that doing nothing would result in recession. Because of that, Valliere felt that by December 21 (the last day Congress meets in 2012), everything would get extended for another quarter. He felt that Obama would barely win the White House, but that this was hardly guaranteed. “The safest bet but hardly a sure bet.” According to Valliere, Obama’s advantage is due to (1) he has a ruthless and efficient campaign team, (2) the President controls events (more than an incumbent), and (3) demographics… Hispanic voters in particular, the fastest growing demographic, are increasingly Democrat. Other assertions were that Greece would probably leave the Euro, defense spending would not be cut, the threat of war with Iran has declined in recent weeks, and Ohio Senator Rob Portman would be Romney’s running mate.

Geopolitical: Peter Zeihan of STRATFOR (Stategic Forecasting) also returned with a provocative 45 minute trip around the world. Key takeaways were that the U.S. is destined to remain the world’s superpower for decades to come because of (1) plentiful interior navigatible waterways (by far the cheapest form of transport), (2) demographics, i.e. enough children (workers) coming down the pike, (3) coasts and ports all along the East and West. This makes the U.S. much easier to defend than either Russia or China geographies, and it makes it easier and cheaper to import and export. Demographically, Europe’s debt problem only gets worse because of zero population growth, meaning fewer workers and more retirees. The EU will probably break up. Coal could disappear from the U.S. energy mix altogether because of shale gas plays over the next 20 years. Zeihan had an interesting thesis as to why Mexico was growing (GDP) amidst the horrendous drug wars. His explanation was that the drug wars and Mexico’s high birth rate demographics tend to lower wages, which increases the inflow of foreign direct investment (because of cheap labor), which leads to GDP growth. Zeihan felt that, due to high transportation costs (mostly because of terrain and lack of navigable waterways), if China and European growth slows then Brazil falls off the economic map entirely. Finally, environmental groups formerly loved gas, now they hate it because it threatens solar and wind projects.

Our luncheon speaker was the Honorable John M. Deutch, former Director of the CIA, Undersecretary of Defense of Acquisition and Technology, Undersecretary in the Department of Energy, Halliburton board member, Professor Emeritus at MIT etc., etc. Deutch argued that shale gas was big, and it was good. It will lower our dependence on imported oil from volatile regions and is a much cleaner source of energy. But according to Deutch shale gas does have to pass muster with respect to a recent environmental impact study which mentions not just ground water contamination concerns but also those of methane venting (air concerns) and community land use concerns.

Skeptic  #1: Henry Groppe of Groppe, Long, & Littell advised caution in the face of exuberance over the shale gas plays. Groppe has over 60 years worth of consulting experience, and he pointed out that every effort of the National Energy Council (with which he was involved) to forecast energy was basically off the mark. As a founder of Mitchell Energy Group, Groppe echoed Rodney Mitchell from a former STMM Energy Symposium in arguing that well decline rates were likely to be far greater than those that today’s overly exuberant analysts are expecting. He asserted that gas prices were low because of “the warmest winter in 100 years,” and he expected supplies (inventory) to drop and prices to rise by October.

Skeptic #2:  was Arthur Berman, an independent geologist (associated editor of American Association of Petroleum Geologists and Director of the Association for the Study of Peak Oil). Berman argued that when there are no barriers to entry, capital rushes in and all lose, likening the shale fracking activity to being on a “drilling treadmill” requiring endless amounts of capital. None of the companies are really making money, argued Berman, so the “gas gold rush” is ending. “There is no revolution.

Amy Myers Jaffe, of Rice’s Baker Institute, clearly disagreed with the skeptics. Jaffe argued that shale gas is a game changer, particularly for oil producers in the Middle East-it lowers their influence in the world and gives the U.S. the upper hand over many oil producing countries, including Russia. Jaffe felt that a big threat to shale gas (in addition to an environmentalist assault) was lease litigation, particularly given the large sums of money involved. Jaffe also suggested that the Israelis aren’t as dependent as they used to be on other countries’ airspace in order to launch a strike against Iran.

Conclusion: The Honorable David Porter, Railroad Commissioner for the State of Texas, talked about the importance of keeping state regulation versus ceding power to the federal government. One of the more politically charged speakers, Porter stated his opinion quite frankly that in order to take advantage of shale gas and oil in Texas and the U.S., Obama would have to go and new regulatory climate would have to follow.

For additional information on this year’s Energy Symposium, including copies of the presentations from a number of our speakers, please click here.

Webcast: If you have not had the chance to watch our first quarter webcast, I encourage you to do so by clicking here. We are giving away one of the newest IPADS to a lucky viewer who watches before May 31.