Oklahoma meeting probes state's energy policy options

The needs of a producing state with potential fading for oil but rising for natural gas create a mosaic of energy-policy challenges discussed in a Dec. 1 conference in Oklahoma City. Most speakers at the annual conference, hosted by the International Society of the Energy Advocates and Sarkeys Energy Center of the University of Oklahoma, stressed the need for a national energy policy.


Bob Tippee
Editor, Oil & Gas Journal

The needs of a producing state with potential fading for oil but rising for natural gas create a mosaic of energy-policy challenges discussed in a Dec. 1 conference in Oklahoma City.

Speakers at the conference addressed policy issues from the perspective of a state hoping to boost interstate sales of gas-fired electricity and prolong the life of a mature oil resource, 70% of the production from which comes from wells yielding 10 b/d or less.

Most speakers at the annual conference, hosted by the International Society of the Energy Advocates and Sarkeys Energy Center of the University of Oklahoma, stressed the need for a national energy policy.

"Our infrastructure in this country is shot,� declared Denise Bode, former head of the Independent Petroleum Association of America who now is vice-chairman of the Oklahoma Corporation Commission. She cited physical constraints in pipelines, refineries, nuclear power, and electricity generation and transmission.

�We can no longer just bide our time.�

Mark Monroe, president of Louis Dreyfus Natural Gas Corp., said a national energy policy should emphasize energy supply and include measures such as opening land for exploration, encouraging construction of a gas pipeline from Alaska to the Lower 48, easing restrictions on drilling, and providing tax incentives for activities essential to supply. But he wasn�t encouraging about prospects for such a package.

�Only an energy crisis will spur significant new policy,� Monroe said.

Robert L. Parker, chairman of Parker Drilling Co. of Tulsa, put Oklahoma�s concerns in the context of a global market, in which participants �aren�t really concerned about Oklahoma City or Tulsa or Oklahoma� and in which conditions are shaped by geopolitical events such as the elusive search for peace in the Middle East.

�The Arabs have the oil,� he said. �And we have Israel.�

He said in the US, the �big problem� is meeting rapidly growing demand for electricity at a time when renewable energy is �misrepresented as a solution� and gas deliverability, along with the industry�s credibility, is in doubt.

�We told them we had lots of gas�cheap, clean, abundant,� Parker said. �We don�t.�

Gas prices exceeding $4/Mcf revive demand for coal in power generation and are doing so now, he noted, a point underscored by other speakers who cited recent announcements of plans for coal-fired generating plants.

International
Worldwide, major companies aren�t drilling as actively as current prices and cash flows imply they should be, Parker said. He partly blamed the imposition of sanctions on companies based in the US, a practice that drew a sharp rebuke from another conference speaker.

�The [sanctions] policy on Iran is just simply crazy,� said R. Dobie Langenkamp, acting director of the National Energy-Environmental Law and Policy Institute in Tulsa, who voiced concern about the ability of US companies to compete internationally.

Throughout the world, relatively slow drilling reflects a spending lag that Marianne Kah, chief economist of Conoco Inc., attributed to company ownership.

�Our shareholders don�t want us to grow,� she said, noting that for 20 years oil companies have underperformed other industrial companies in return on investment.

The record makes shareholders wary of the investments needed to expand industry operating capacities.

OPEC, which Kah described as more �shell-shocked� than oil companies by the price collapse of 1998, is similarly reluctant to expand capacity. She said the trend, for as long as it lasts, will keep a floor under the price of crude oil.

State concerns
Tom Price, senior vice-president of Chesapeake Energy Corp., brought Kah�s concerns about spending to the state level.

Current drilling activity in Oklahoma, he said, is only 9% higher than the recent 10 year average despite oil and gas up proportionally much more.

�The crisis in the oil and gas business,� he said, �is a crisis in return on capital.�

While Oklahoma joined other oil states in providing tax incentives for oil production during the 1998-98 price slump, it should do more, said a former official of the Texas Railroad Commission.

With temporary easing of its 7% gross production tax, said David Garlick, now an Austin consultant, the state �did everything it could possibly do� to keep the state�s more than 66,000 marginal wells on production while prices were low.

But a comparison of the dollar value of the measure with total values of tax measures taken by Louisiana, New Mexico, and Texas shows, �Your legislature has been frugal,� Garlick told his Oklahoma audience.

Because Oklahoma�s standard of living follows the fortunes of the oil and gas industry, he said, the legislature should focus on jobs and economic outcomes, not on tax revenues.

He recommended a sliding-scale system of adjustments to the production tax that would reward output above target levels determined by 10-year production histories.

And he said responsibility for action beneficial to energy supply remains with state governments because of what he sees as limited prospects for a national energy policy.

�I don�t think we�ll ever have one that is comprehensive and wise,� Garlick said.

Marginal wells
Oklahoma�s tiered tax relief for marginal wells, although not active with oil prices at current levels, expires in 2001, pointed out Liz Fajen, executive director of the state�s Marginal Well Commission.

One of two major issues facing the small producers the commission represents, Fajen said, is extension of the tax relief so operators will be assured of its availability in a future price slump. The commission also hopes to make certification of marginal wells easier than it has been.

The other major issue facing small Oklahoma producers, Fajen said, is �encroachment��the spread of residential and other land development outward from towns and cities to once-remote well locations.

In some Oklahoma instances, homeowners� groups have physically blocked access to well locations, and operators have no statutory recourse.

Questions also loom for the planned development of an electricity-generating industry in Oklahoma based on the state�s rich gas resource.

As the state government addresses restructuring of the power industry, said Ray Reza Mize, president of the generating firm Energetix, it must repair bottlenecks in the transmission system.

In its current state, Mize said, the system can�t handle the 10,500 Mw of new electrical power represented by generation facilities planned or under construction.

And from the audience, Charles J. Mankin, director of the Oklahoma Geological Survey recently named director of the Sarkeys Energy Center, asked where in Oklahoma there were new gas supplies sufficient to fuel all the planned generating capacity. He received no answer.

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