The Energizing Business of Oil and Gas Production

By Sara Pentz

The truth about the oil and gas business is that prices fluctuate because of the process of supply and demand. That is the way the free enterprise market works. That process has been over regulated for years with government curbing the progress of oil companies to expand drilling and refining.

But weather plays its own deadly game on the industry when it interferes with production. Oil prices have dropped about 15% from their peak on the day after Katrina while natural gas prices with different supply and demand dynamics are still close to historic highs.

Joe Sims, President of the US Oil and Gas Association, Alabama/Mississippi Division, based in Jackson, believes there are a number of significant opportunities for the Mississippi oil and gas industry as well as for companies from out-of-state who are active in the state. “With commodity prices being high, new ideas will come to the forefront and old ideas will make economic sense. Mississippi has a diverse geological setting and with the increased critical need for all fuels, unconventional and conventional, I think capital will be spent exploring and developing our natural resources.”

Sims points out that U. S. natural gas prices are a result of 1) the damage to onshore processing plants and shut-in production in the gulf and south Louisiana, and 2) an already tight market. In addition, there is pressure on refined products because of the hurricane and the damage done to gulf coast refineries.

“Supply was diminished because the refineries were shut down during the hurricane activity and 25 % of our country’s comes from gulf,” explains Jackson oil investor Wirt Yerger, III, of Crown Communications, LLC. “Central Mississippi was not hurt as badly as those who were drilling in the Gulf of Mexico because we are primarily a land based drilling area.”

Some analysts predict a continuing positive outlook for oil and gas companies in the fourth quarter of this year and first quarter 2006. Expect increased spending to develop the natural-gas industry, both domestically and internationally, by these large companies. And there is a general Wall Street ‘buy’ sign on the large oil companies as their stock continues to increase in value.

Still there are many who believe profits recently announced by the big oil companies should be penalized. But, according to others, that would prove fatal in the long run.

In a recent Townhall.com opinion article Ross Mackenzie writes: “Federal policy has assisted in multiple ways the developing crises in refined petroleum and natural gas. Regarding natural gas, easy-to-reach gas is tapping out, while federal policy long has discouraged - and still does - incentives for accessing the hard-to-reach. Regarding refining capacity, federal policy has hugely contributed - through environmental demands and requirements for boutique fuels - to a plunge from 324 refineries in 1981 (daily processing 18.6 million barrels of crude), to 149 in 2004 (daily processing 16.8 million barrels), and all while domestic demand for refined petroleum goes up.”

W.D. (Billy) Mounger, of Jackson–based Delta Royalty Company, Inc., has been in the oil business for a half century. “Years ago every oil company had offices here––Chevron, Shell, City Service. All of that is gone now. They’ve all moved to New Orleans or Houston. We have just a handful of independents left––the ones who had the wherewithal and the brilliance to survive. But they’ve had to pay the price to stay here.”

Ralph Hines, of Ridgeland–based Moon–Hines Tigrett Operation Company, says the hurricanes had no impact on his exploration business in the Alabama and Mississippi areas. “Gas prices have gone down some. Permits to drill are being issued routinely. Our business is okay even though we don’t have the margin of profit of the big oil companies. We’re continuing to do well in natural gas, a very valuable commodity right now. We see a pretty long period of increased activity for our business.”

Jackson’s Victor Smith, of Victor P. Smith Companies, puts together prospects that he thinks have a good chance of increasing commercial oil production. His company is hoping to have six new prospects in 2006. “In the past month, we have been delayed in some of our work in South Louisiana because some of the courthouses were not open and we weren't able to perform our land work,” he says of the effects of the hurricanes on his business. “We had minimal problems because of the hurricanes––but we are having some trouble with a well now that was interrupted by Katrina.”

Smith’s company is still on track regardless of those disruptions. “I believe our prospects for the future will be extremely good over the next three or four years. However, there will be some problems such as the availability of drilling equipment and the high cost of leases, and the possibility that Congress might come up with a windfall tax.”

Spooner Petroleum Company is an independent oil and gas producer formed in 1976. The company is involved in both exploration and production of oil and gas with land based operations located in North Louisiana, South Central Mississippi and Alabama.

Michael Spooner was fortunate that his company did not suffer damage to any of the facilities from either Hurricane Katrina or Rita, although he did experience a production shut-in due to the loss of electrical power. In addition, some of his field personnel could not get gasoline to fuel their trucks and therefore could not get to the production sites. They were also affected personally by the storms damage.

“We were able to restore most of the production within a few days,” Spooner explains. “Our most significant storm related problem involved a drilling rig at a well in Jones County Mississippi. We were forced to lower the derrick prior to the storm passing. The lowering of the mast proved to be a wise move because the eye of Katrina passed directly over the drill site. The cost to us as a result of the lost time was in excess of $100,000.”

For the Spooner Petroleum Company the future of the oil and gas business still looks good. “All oil and gas exploration and production companies,” explains Spooner, “are working diligently to supply our nation and the world with oil and gas. The world demand is continuing to increase and supply is tight. Oil companies, in particular independent companies (private not public), return their profits to exploration.”

While some government officials and consumers may bemoan these profits, it is essential for oil companies to make them in order to pay for the cost of permits, processing the regulations, drilling and building refineries.

“The notion that oil companies have some how manipulated the market to receive the current high prices is simply not true,” says Spooner. “The prices are controlled by supply and demand as determined by the world market.” In fact, the world market has changed considerably in the past years. China, India and other countries are consuming much more fuel and that demand has forced up prices.

Congressman Ron Paul of Texas is an advocate for liberty in politics. Writing in his weekly column recently he spoke to the issue of a free market for gasoline. “Many Americans understandably are upset with the sharp spike in gas prices since Hurricane Katrina hit the gulf coast in August, and are concerned by reports of oil company profits. But we must understand that high oil prices are not the result of an unregulated free market. On the contrary, the oil industry is among the most regulated and most subsidized of U.S. industries. Perhaps we need to ask ourselves whether too much government involvement in the oil markets, rather than too little regulation, has kept the supply of refined gasoline artificially low.”

Paul adds: “Most Americans agree that the American economy should not be dependent upon Middle East oil. He sites economist George Reisman, author of CAPITALISM: A Treatise on Economics––which has been called a magnum opus on the nature of capitalism and the clearest and most comprehensive defense of capitalist economic system available.

Reisman explains that our own domestic regulations make us slaves to OPEC: “Today, it is possible once again to bring about a dramatic fall in the price of oil – indeed, one even larger than occurred in the 1980s. And it could begin right away. All that is necessary is to abolish the U.S. government’s restrictions on domestic energy production inspired by the environmentalist movement.”

Paul writes: “Reisman also explains how abolishing restrictions on coal production, natural gas production, and nuclear power would further reduce the OPEC stranglehold. By increasing the supply of these other energy sources, demand for oil would decrease and prices would drop.”

Michael Spooner agrees with many economists and industry experts who say that the biggest threat to the oil and gas industry is negative legislation. “Currently there is much talk in Washington about punishing the oil companies by taxing away a portion of their profits,” he says. “That would be a tremendous mistake for the energy security of this country. Such a tax will do nothing to lower the price of oil, to build a new refinery or to lower the price of gasoline. In fact history has shown us that just the opposite will occur.”

As Spooner points out, the Carter Administration enacted such legislation in the late 70s with the Windfall Profits Tax. “That tax is partially to blame for the current energy situation in this country. Instead of punitive action with no benefit, Congress should enact legislation for incentives to the industry and to use sound scientific judgment concerning environmental regulation.”

Late last week Hillary Clinton and a few other officials in Washington joined forces to call for laws that would require oil companies to reinvest their profits in increasing refinery capacity in the United States. Clinton proposed to hit oil companies with $20 billion in new fees that would be used to fund research on clean energy. This, of course, according to many in the oil industry, will only drive up costs for oil producers that they would inevitably pass along to consumers.

But the feeling in Washington is that legislation must be enacted. In a New York Times article (October 28, 2005) written by Jad Mouawad and Simon Romero, the authors claim: “Today, Republicans and Democrats alike, aware of the politically sensitive issue of high energy prices, are putting increasing pressure on the oil and gas industry to return some of its profits. The ideas include forcing the industry to invest in more refining capacity, to increase inventories to cushion energy shocks, or to provide money directly to the government program that helps low-income people pay heating bills.”

This is exactly what Spooner is talking about. People in government are unwilling to let business operate on the principle of supply and demand. These tax proposals will only do damage to the industry and cause further shortages. Further, it is not consistent with the principles of economic freedom to use force against an industry for arbitrary political motives.

OAGA spokesman Joe Sims agrees. “New taxes on the industry would hurt new investment in the nation. The cost to find and produce oil and natural gas is significantly higher and we, as a policy matter, should be encouraging capital expenditures. Industry investments are capital intensive and have risks just like other business investments and we compete internationally with other countries for this investment.”

Some experts speaking to the oil profits say the big problem is the regulatory and permitting processes that makes it hard to do almost anything new and significant in refineries, including building new ones.

Spooner, Yerger, Hines, Mounger, Smith, and other investors in the business, like to hear about higher profits. “It makes more sense for us to drill for oil when prices are higher. We might take more risks and complete wells that we might not have completed,” adds Yerger. “When profits are lower we might need to plug and abandon our untapped wells.” And that is not good for any business––even those only allied with the oil companies––as well as the cities and towns in which these oil companies do business.

Of course, the business of drilling for oil is very risky. Yerger continues: “You may be successful on one out of eight holes and some investors may loose big time. Something like eight out of 10 holes are dry. If the price is high enough and you can find a good field–hopefully good geology with seismic research–then you can be successful and make good money.”

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