Attendees to the October luncheon of the PBPA heard from four individuals who have strong interests in this energy-rich region.
When the Permian Basin Petroleum Association gathered for its monthly luncheon at the Petroleum Club of Midland on Sept. 19, the usual fare of steak-dinner-with-guest-speaker-on-the-side was supplanted with steak-dinner-with-four-guest-speakers-on-the-side, as attendees were treated to a quartet of brief but stimulating talks.
The first, and advertised, speaker was Jeff Tillery, Director of Research for Tudor, Pickering, Holt, and Co., who was on hand to talk about “The Permian Revival.” But late-invitees Jerry Patterson, Don Evans, and Greg Abbott also took the podium. Patterson is Texas Land Commissioner. He informed the group that he would soon vacate that role, as he is running for the position of Lieutenant Governor. Evans is a cabinet member. He is the United States’ Secretary of Commerce. Evans took to the dais to introduce his friend Greg Abbott, prior to Abbott’s talk. And Abbott, finally, is Texas’ Attorney General. He addressed the group to talk about the indispensability of the Permian Basin oil and gas industry, and to let attendees know he is running for governor and would like their support.
Important Piece of the Global Macro
Tillery, when he was introduced, opened with a “fun fact”: “Over the next 7-8 years,” he said, “Texas and New Mexico will become the 2nd largest OPEC nation.”
As surprising as that sounds, there are ample statistics, and surprising ones, to support it. As Tillery noted, it’s staggering how much the Permian is going to impact national and international energy supplies.
“We see that the Permian Basin today produces about a million-three barrels [1.3 million] a day, and given the resources at hand and the capital that we see available in the Basin, we think that can grow over the next 10 years or so to approach 3 million barrels [per day],” Tillery said, “So, even though it’s somewhat tongue-in-cheek [to call the Permian Basin the second-largest OPEC nation], it’s clear that the numbers are staggering. Between the Permian Basin and the Eagle Ford, this year [their production] will comprise about one-third of the global oil supply—making them a very important piece of the global oil macro.”
How New York Views the Permian
The Petroleum Club faces Wall Street, but the Wall Street that Tillery cited numerous times in his talk is the Lower Manhattan Wall Street, home of the New York Stock Exchange and the surrounding financial district.
“I spend most of my time dealing with institutional investors on Wall Street,” Tillery said, “and the Permian Basin is the hottest topic there among energy stocks over the last six months. And I suspect it will remain so over the next year. It’s because—and this is a little funny—but it [the Permian Basin] is considered a new basin, as far as Wall Street is concerned.” [This got a laugh.] “This shows you how smart Wall Street guys are, but what is so fascinating about it [the Permian Basin] to them is the sheer number of horizons that are available to be exploited out here. There are lots of levers to pull on value.”
As an example of that, he remarked on the current availability of capital and the potential that that promises. “With the industry adding 40 or 50 horizontal rigs each year over the next five or six years, the productivity of this area is going to grow significantly. So from a million-three barrels a day, over a ten-year period, we could see that figure approaching 2 ½ to 3 million barrels.”
Tillery said the region is “still in its infancy,” when viewed as a basin of such huge potential, but being in its infancy and being on a learning curve (as compared to other basins) is, in Tillery’s eyes, a good thing. “We’re moving up the learning curve on the horizontals side,” he said. “We just haven’t seen the drilling efficiencies and gains that have been achieved in other basins, but ultimately that’s an attractive thing here, because that’s all still to come.”
He concluded by saying that he and his associates see “explosive growth over the next 10 years, from a production standpoint… And there are a lot of levers on value that we see—which affect asset values for the private operators, and equity values for the public companies. It’s really an exciting place to be.”
Patterson on Progress
Jerry Patterson, a figure familiar to many in the PBPA ranks, made the long trip to Midland to have just a few minutes before the PBPA faithful.
“I have been associated with your business in some form or fashion for quite some time,” began Patterson, who was elected Land Commissioner in 2002. “I started out as a roustabout offshore on TransWorld [Drilling Co.] Rig #49, down in Morgan City, La. [He raises an open palm.] I still have all my fingers and toes! [laughter] There wasn’t much OSHA presence in 1968. Then I served in the Marine Corps where I consumed a lot of hydrocarbon products… in fighters which burned a lot of gas. And then in the oil tool business I was a salesman for some rubber-related products. Then I ran for the legislature and served six years in the legislature—in the state senate—where I authored the concealed handgun law.
Then I got this job. I ran successfully in 2002 for Land Commissioner and I ‘got in the oil business’ but it’s a little different than the way you’re in the business. You’re in the business in that you risk your capital and you want to make money. I’m in the business in that I manage, in some form or fashion, 13 million acres that are either in the PSF, or the Permanent University Fund, and we just collect a check. It’s really a good deal! You should try this business model [laughter] where everybody else spends their money and takes their risks, and you just collect a check and a bonus for production royalties. But what I’m saying is, I understand what you do and I understand what you seek. One of them is certainty, one of them is… fair regulatory environment—predictable regulatory environment. And you seek an opportunity to operate without continued interference from the government. Now we in Texas know that we’re pretty good at that. The folks in Austin generally—generally—are sympathetic to your business and generally do not interfere with it.”
“There are exceptions and we’ve been through about 2 ½ years of one of those exceptions, and that has to do with the Endangered Species Act,” Patterson said. “We’re fighting one battle and we’ve got another one on the horizon. Of course my most recent claim to fame in your business—your line of work—is that about a year and a half ago I was on Fox and Friends in the morning. You know, that national cable show. And I coined a phrase, talking about the Dunes Sagebrush Lizard, when I said that here in Texas we describe this conundrum with this so-called endangered species—the Dunes Sagebrush Lizard—we call this “reptile dysfunction.” [laughter] Now, I had a purpose behind that, and my purpose was to raise the profile of the issue. To make it not just a Permian Basin Texas/New Mexico issue, but to make it a national issue. When you’re talking about the Permian Basin, you’re talking about either the most prolific or the top two most prolific oil-producing regions, at a time last summer when we were in a “iffy” recovery. And I think in part because of all that attention that y’all brought and all the other folks that represent you—because of that, the lizard was not designated.
“Well, that’s the good news. The bad news is that now we’re back in court. We are in a constant fight. Now we have the Chicken. It’s like those dances from the Sixties. We’ve got ‘The Lizard.’ We’ve got ‘The Chicken.’ But it’s a continual fight against—well, whether it’s against the Endangered Species Act, with the U.S. Fish and Wildlife Service, or whether it’s EPA, whether it’s the Clean Water Act, whether it’s the National Environmental Policy Act. It’s always a threat to economic prosperity—to oil and gas production—and not just to oil and gas production but to other things as well—things like renewables. All the ‘green people,’ they won’t win [either], not when you’ve gotta have transmission lines and all these critters get in the way of the transmission lines. So that’s another thing you’ve got to worry about.
“But you’ve always got a fight,” he continued.
After noting that he is himself a Texas A&M grad, he turned to the topic of football as a metaphor for the current fights that PBPA finds itself in.
“I’m an Aggie, and we’ve got a pretty good quarterback,” Patterson said, alluding to A&M star Johnny Manziel. “If you were a coach of a football team that was hanging on one guy—i.e., your Heisman Trophy winner—for success, you would probably not want to injure that Heisman Trophy winner. Well, the problem is that there’s too many folks that don’t recognize that the Permian Basin is driving the economy in Texas, in large part, and that Texas is pulling the economy of the U.S. along in the right direction, in large part. If you start doing things that sound like they’re okay, and you don’t know what you’re talking about, you could be headed for trouble. For example, I hear all kinds of things out of Austin along the lines of, ‘Well, you know, they’re really making a lot of money out there. Exxon Mobile brings huge profits, so we’ll just do this and it won’t hurt much.’ But what they don’t understand is that some of those things that allegedly ‘don’t hurt much,’ when you start applying them to minimal production fields where you’re just barely getting 5 barrels per day, if we make that non-economic, that gets shut in and won’t ever be re-entered. That is not good for today, it’s not good for the next generation, or the generation after that, and on down the road.
Anyway… I love what I do, I’m in my third term now, but I will not be doing it anymore. I’m running for Lieutenant Governor in 2014, and I’d be happy to talk to you about that.”
Secretary Evans took the microphone to introduce Attorney General Greg Abbott. Evans had a statistic to add to Tillery’s, regarding the rising prominence of the Permian Basin and the shale revolution it has pioneered and fostered.
“One big thing that I’m excited about is that because of you and others in the industry, the United States of America is now once again the number one producer of oil and gas in the world,” he said. “We just passed Russia. Russia became the number one producer about 15 years ago and we’ve just taken that back. So congratulations to you! Let me tell you—from my perspective, Texas is kind of the envy of the country right now. America, I could tell you for sure, is the envy of the world. And the reason we’re the envy of the world is because we have this system that has created enormous wealth and enormous prosperity and improved dramatically the standard of living of all those that live in this great nation. How did we do that? We did it because we live in a country that’s based on freedoms—freedoms that are grounded in our Constitution. We have a country that created a free enterprise system that allows for competition. That allows for you to do what you do so well, which is to innovate and develop the technology and, yes, to create the wealth. I have just got to tell you that right now, I think that that free enterprise system that we all cherish, we all believe in, is under attack at some level in every branch of our federal government. The administration—the executive branch—as well as the legislative branch and the judicial branch. And when I think about that, I think, “Well, who’s going to continue to fight to protect our free enterprise system?” And I think quickly about the 50th attorney general of the state of Texas. Greg Abbott, more than anybody I know, with character, with integrity, with honor, with duty, with commitment to public service, has been a tireless defender of the free enterprise system. If you haven’t noticed that, then you haven’t been paying attention. I can tell you that when I was in government, I remember him coming with attorney generals from across this great country to Washington to talk about this free enterprise system. I had a chance to address that crowd. But this is a tireless leader and a tireless defender of the free enterprise system of this great country.”
Keep Drilling, Keep Hiring
Here Abbott took the microphone and finished the session with yet more words about the Permian Basin.
Speaking of the forces who have brought the Endangered Species allegations and the lawsuits that PBPA has fought, Abbott said he will oppose them if he wins the governorship.
“If they come to Texas and starting expanding the [list of] species they claim are endangered, whether it be the Sagebrush Lizard or Prairie Chicken, or whatever they come up with next, we will be prepared to file legal challenges to protect your ability to continue to produce energy,” Abbott said. “I want to emphasize something about some issues I will focus on as your next governor. I want to assure you that I will continue the policies that attract jobs, that promote opportunity, that reward ingenuity. Texas is different. Texas is better than states like California because we have a different way of governing. We believe in less government. We believe in low taxes. We believe in regulations that are smart, reasonable, and predictable, so that businesses understand how to make a profit. And we will continue the Right to Work laws that have helped Texas avoid some of the union abuses that you see in other places like Detroit, California, Chicago, etc. My focus also, though, will ensure that we are prepared to deal with some of the looming challenges that we see in the coming decade. Those include obvious issues like roads, water, and education. We understand the dire need for water resources in the Permian Basin as well as some of the other places across the state of Texas. We also understand the importance of ensuring we have an educated workforce to build the jobs that you need.
“But I want you to know that, in the bigger picture, I will be guided by the very principle that Don Evans emphasized. And that’s the principle that [ought be] elevated above all else in this country, and that’s the principle of freedom. For me it was best captured in a meeting that I had two days ago in Dallas, Texas. I had a meeting with a guy named Jay Adair. He’s the CEO of an international company called Copart. Last summer he relocated the headquarters of that company from California to Dallas, Texas. I was visiting of him about why he went through the process of moving his company—moving hundreds of employees and then going through the process of hiring many more here. He described the process and said that first and foremost it was an issue raised and pushed by his CFO, who had done the math and realized that the business would make far more money economically by going to another state. So they looked at other states and came down to three states: Texas, Tennessee, and Florida. They looked into the regulations and [had seen] the incredibly burdensome regulations out of California and knew they had to escape. And of course the unions in California are crushing jobs as opposed to promoting them. So I asked him, why was it that he moved? He ticked through these things about the taxes and the regulation, and about the unions.
“But the kicker is the way that he closed. He said, ‘I’ve got to tell you, all of those matter, and when you look at all of those, Texas came out on top.’ But what has meant most to him has been what he’s realized, after he and his family and his employees got to Texas. After living here a year, he said, ‘All those other issues matter and all of those other issues had an incredible impact on our bottom line.’ But after he got to Texas he found something here far more valuable than all those other things—something he had not seen in California or other parts of the country he had lived in. He saw in Texas a powerful sense of freedom. Individual freedom. Freedom to be an aggressive entrepreneur. Freedom to live the life that was intended to be guaranteed in the United States of America.
“And I want you to know that, as your governor, I will preserve, protect, and promote your freedom to pursue your entrepreneurial dreams. We want you to succeed because when you succeed, Texas succeeds. So all that we ask is that you keep drilling, you keep hiring, and that you keep Texas prosperous. God Bless.”