Taking Time for What Matters

 As I reflect upon the week passed, one filled with meetings with impressive political candidates and Texas Railroad Commissioner Christi Craddick, and on the eve of my first annual investor meeting, I wonder if I am spending my time in a manner my investors would appreciate. My emphatic response to my investors is: absolutely! It should be the same for those of you operating or drilling wells. Here’s the reason: we have regulators, legislators, and elected officials who care what you think and want to hear from you. They also need your support in their campaigns. The reality is that it takes a lot of money to get elected and re-elected. If you don’t campaign, you may be voted out of office. We have a recent example of this close to home. It also takes money to traverse our large state to see their stakeholders as the State of Texas does not fund much of our elected officials’ travel.

Last month, I wrote of New Mexico’s shift from enforcement to informing operating company leaders and holding them accountable. Ben Shepperd implored you to comment on a draft of statewide rules 9 and 46 regarding salt water disposal wells and injection wells. After meeting with Commissioner Christi Craddick this week for a couple of hours, following a recent trip to Midland by Commissioner David Porter, I am reminded how blessed we are to have Railroad Commissioners who actively seek our input and are doing everything they can to improve the efficiency and effectiveness of the Railroad Commission. I am impressed that both seek to understand, and they do not assume they know everything. Our Commissioners understand their duty to the public to ensure the safety of humans and our environment, balancing that against resource development and economic growth. They get that a longer cycle time on a permit means reduced economic activity. They comprehend the upstream and downstream effects of our investments in the oil patch. For example, the $40 million new hydraulic fracturing equipment spread that Cudd Energy Services is using on a Wolfberry completion has Detroit Diesel engines and Allison transmissions manufactured in Michigan. I’ll bet the politicians and citizens of Michigan have no idea how much the Texas oil business is doing to try to help Detroit emerge from bankruptcy. The natural gas supply surge has created an ethane glut which has enabled companies like Dow and Shell to expand production and exports of polyethylene (building block for plastics) made in the Gulf Coast, a move that improves employment and tax revenues while simultaneously reducing our country’s trade deficit. Dow Chemical reported a 33 percent year over year increase in plastics margins (EBITDA of $1 billion) this quarter, which is no surprise given we sold our ethane for 17 cents per gallon here in the Basin this summer.

The unconventional resource revolution in my humble opinion has healed the budget crisis our state faced two years ago. The funding crisis turned out not to be one after all, and it is a shame our legislature had to cut over $5 billion of funding to public schools and higher education due to substantially underestimating oil and gas severance and sales tax revenues over the biennium. I dare say the cuts were a big setback to public education in the state that ranks in 38^th in the nation in spending per student according to PolitiFact.com. Senator Wendy Davis would tell you our spending per student is 49^th in the country. Either way, you’d think the 11^th largest economy in the world, an economy endowed with substantial natural resources and entrepreneurial spirit, could do better for our children. It partially explains why so many of us are sending our children to private schools to be better prepared for life as self-supporting, fulfilled adults who will one day raise a family in Texas and sustain (we pray) what we’ve spent our lives building here.

Back to the subject, I was fortunate to participate in a meeting between Commissioner Christi Craddick and my Legacy colleagues (I am still a Legacy shareholder) on matters including injection well permit cycle times, inactive well compliance, and plugging operations. The granularity of the discussion and the fact that she took notes and had suggestions for specific action impressed all of us. The meeting occurred because of something that had transpired earlier, when I mentioned Commissioner Craddick’s visit to Midland to Kyle McGraw. Kyle responded he’d like to meet with her. The meeting was impromptu but rich, as not only did EVP and director Kyle McGraw attend, he produced Legacy’s COO, Paul Horne, and Ernie Hanson, production manager. It helps to involve the people that are doing the deals and managing the assets, or who have touch points with the TRC or NMOCD. It is an example of the dialogue our TRC Commissioners seek with our industry to improve compliance, reduce permitting cycle times, and keep the federal government out of Texas’ energy business.

I hope that all of you read draft Statewide Rules (SWR) 9, 36, and 46 and gave comments to the TRC if you produce, dispose, or inject water or H2S in Texas. This merits your attention, because it will, like SWR 13, change the way we do business and increase the cost of doing business in Texas. I also hope you are informed and engaged in the Allocation Well discussion going on in Austin (since we don’t have forced pooling like New Mexico and Oklahoma), particularly if you are drilling horizontal wells or have horizontal wells prospectively traversing your leasehold or producing properties. Angela Staples wrote a great tutorial on the subject in the July issue of PBOG (her “From the General Counsel” column) that I continue to reference.

We all owe a debt of gratitude to companies including (alphabetically) Apache, Concho, Fasken, Henry, Cudd, Oxy, Pioneer, Summit, and others that have funded our Issue Advocacy, our Economic Impact Study being conducted by Texas Tech University, and have loaned the PBPA employees who are experts in the legal or engineering fields, as examples, to help us inform regulators and legislators at the highest levels of the potential impact of their actions, rules, and legislation on our business, and help rewrite pending rules and legislation. Given the PBPA’s finite human and financial resources, we could not wage the battles that PBPA President Ben Shepperd is leading for us without their support and expertise. Please continue to be informed and get engaged, because the economic revival we are enjoying will end abruptly if ill-conceived or poorly-implemented legislation or regulation creeps its way into the Permian Basin.

Finally, while we’re still talking about the value of dialoguing, please come out to the Permian Basin Petroleum Association’s annual meeting on October 24^th at the Petroleum Club, preceded by the reception on October 23^rd at 6 p.m. at The Petroleum Museum. I cannot think of a better way to get informed by speakers, including Commissioner Craddick and Energy Secretary David Martin of New Mexico at breakfast, and Speaker of the House Joe Straus at lunch. These are the officials at the center of the action in Austin and Santa Fe. We also have, as a speaker on a panel, Concho’s CEO Tim Leach and Laredo’s CEO Randy Foutch, who are among the most active drillers and innovators in the Permian Basin, particularly in horizontal, unconventional resource development. There are panels on water, transportation, Endangered Species Act, and pipeline and processing infrastructure that are all critical issues for our industry. Questions will be encouraged. Finally, the PBPA Annual meeting is a great networking opportunity close to home. I look forward to seeing many of you there—renewing ties and getting informed.