A View from the TRC | Russell T. Rudy Energy LLC
David J. Porter, Chairman of the Texas Railroad Commission (TRC) addressed the September meeting of the Houston Association of Professional Landmen yesterday. Porter talked about his background, events that led to the most recent boom/bust cycle, the factors that contribute to a successful oil and gas play, and positive developments. Finally, in response to a question from the audience he talked about “orphan wells”.
Porter is a Certified Public Accountant and has his own firm in Midland, TX. He was elected in 2010 to the Texas Railroad Commission for a 6 year term. His peers on the commission elected him as their chairman.
The balance of Porter’s remarks did not reveal anything new to serious observers of the Texas oil and gas industry. However, I was impressed by his candor and even-handed approach. The shale revolution helped the U. S. surpass Saudi Arabia and Russia in total oil and gas production. However, supply outstripped demand and prices collapsed. The oil and gas market is truly global. China, as the world’s largest net importer of crude oil, is a major player in determining global demand. The downturn in their economy has been a major factor in continued crude price weakness.
The oil and gas industry is burdened with an excessive amount of debt. Porter estimates that operators are faced with $500 billion in loans that have to be repaid during challenging times for the industry. However, he pointed out that to put this in perspective, the housing industry is trying to cope with $11 trillion in debt.
Obviously, Texas is not immune to the downturn in the energy industry. The TRC has seen a dramatic drop in the number of applications for drilling permits. Fortunately, over half of the current rig count is working in Texas and two thirds of the recent increase in activity has been in the Permian Basin of West Texas and Southeast New Mexico.
Porter contends that a successful oil and gas play requires 4 factors: geology, an enlightened regulatory environment, people, and infrastructure. Obviously, if the geology is not favorable there is no oil and gas to be developed.
A second major factor is a regulatory environment that is conducive to success while concurrently protecting the state’s resources, people and economy. Porter contends that the TRC is the most advanced oil and gas regulatory body in the nation and has been a factor in the industry’s success here. Rather than assume an adversarial position with the oil and gas community, it has encouraged responsible development. It has provided a stable, predictable regulatory process and has avoided overregulation. Whenever possible the TRC has tried to come up with free market solutions to issues.
People are a third critical success factor. Texas has been blessed with innovative, creative, and hard- working oil men who have taken financial risks which benefited all parties. The state is also fortunate to have a wealth of experienced workers and a populace that realizes the potential benefits of oil and gas production.
Finally, a successful oil play requires infrastructure. Given the state’s long history of oil and gas exploration and production, we are probably the best positioned state in the union in this regard. For example, Texas has 430,000 miles of pipelines to move hydrocarbons to markets, and this number is growing every day.
While these are tough times in the oil patch, there are reasons for optimism. CNG (compressed natural gas) and NGL’s (natural gas liquids such as propane) are becoming increasingly important as transportation fuels. Natural gas sales to Mexico continue to increase, and Texas has export facilities for both crude and LNG (liquefied natural gas).
In response to a question from the audience, Porter briefly discussed “orphan wells”. Typically, these wells were drilled 30-40 years ago and currently, no party has been identified as responsible for them. Dealing with these wells is prioritized by the TRC on the basis of the risk to public safety. Otherwise, they are not considered a short term problem. With typical candor, he indicated that while there is a procedure for “adopting” these “orphan wells”, he understands that it is cumbersome and seldom used.
While there was little new in Porter’s remarks, I found his straightforward and even-handed approach to the role of the TRC encouraging.
