Energy companies respond to market forces while blaming others for downturn
A new study by the Wilderness Society reveals that the energy industry presents two opposing views of the downturn in natural gas development on public lands. While publicly blaming the Obama administration for the downturn, industry experts acknowledge to their investors and stockholders that market forces are responsible for the decline.
Through endless public hearings and meetings, the energy industry has pounded on one message: The Obama administration’s hostility toward fossil fuels and Interior Secretary Ken Salazar’s leasing polices are driving up the cost of development, making it “increasingly difficult for producers to supply the natural gas necessary to reduce greenhouse gasses and increase energy security.”
These charges were summarized in a paper by the Independent Petroleum Association of Mountain States last November. Obama administration policies “have severely impacted project environmental analyses, permitting, and lease issuance in some states,” the report charges. The result is “less American energy, less economic activity and fewer jobs for Intermountain West states.”
This argument ignores facts, according to the Wilderness Society. The downturn began in 2008, “well before the Obama administration took office and instituted reforms to protect wildlife and other public values.”
Reviewing mining annual reports and other industry sources, the Wilderness Society presents evidence that the industry fully recognizes that the decline in drilling is the result of market forces, not actual or impending regulation.
In other words, the society report concludes, “Market forces are doing their job.” As supply exceeds demand, “cutbacks in production are the simple, rational and predictable reaction of gas producers to low market forces.”
When speaking within the industry or to their stockholders, natural gas industry leaders seem to agree with this assessment.
According to Chris Ambusher, an analyst at Al Frank Asset Management, “There seems to be a new shale [gas] discovery every couple of months. It’s amazing how many drillable places there are in the U.S.”
President Art Gelber of Gelber and Associates, a Houston natural gas consulting firm, says, “The battle between pricing signals and the propensity to want to drill in a low-price environment will keep the exploitation of these shale gas reserves at a relative low rate. It’s only when prices are up that drillers will drill more aggressively.”
Fortune magazine quotes Richard Howard, manager of Prospector Capital Appreciation fund, as saying, “ultimately, the cutback ought to reduce production enough to hamper supply, which would boost prices.”
Even the major industry trade association agrees that low prices, not regulations, are driving the industry down.
Hazem Arafa of the American Petroleum Institute wrote last year, “The U.S. drilling downturn that began last quarter in connection with the current downturn in economic activity has continued in earnest in the second quarter of 2009 as companies proceed with caution in an uncertain year.”
Other industry leaders describe deliberately shutting-in producing wells, curtailing production from existing wells and reducing capital investments in the face of a declining market. The consistency of these statements supports the Wilderness Society’s position that prices, not policies, are responsible for the decline in drilling for natural gas.
Despite the evidence to the contrary, industry trade associations continue to blame the downturn on Obama administration policies and reform efforts by Secretary Salazar.
IPAMS still claims that, because of restrictions on drilling federal lands, “independent producers in the Intermountain West are hindered in their efforts to find and produce American natural gas and oil, create jobs, and provide economic stimulus to rural communities.”
President Jack Gerard of the American Petroleum Institute has made similar statements blaming government policies and regulations for the downturn.
However, the Wilderness Society study concludes that Obama administration efforts to protect air and water, recreational opportunities, wildlife habitat and unspoiled landscapes have had little effect on public-lands drilling.
While the industry readily admits this to its own insiders and investors, its associations continue to deny market forces and blame government efforts to find a balance between conservation and development.
It is time for the oil and gas associations to get on the same page as their managers and talk frankly with impacted communities about the true cause of the recent bust. That approach is far more likely to lead to long-term plans to manage the next energy expansion for the benefit of all parties.