Oklahoma Lawmakers Meet With Oil and Gas Industry

By Janice Francis-Smith

The memory of the oil bust more than 20 years ago and the effect it had on the state budget still haunts legislators. A group of lawmakers and oil and gas industry leaders gathered Friday to investigate what can be done to protect the state budget from the violent market swings that plague Oklahoma’s pre-eminent industry.

The oil and gas industry is credited with pulling the state budget out of a record shortfall in 2002 to record surpluses in 2007. Though thrilled to see steady increases in state coffers, some lawmakers are aware that a sharp decline in oil and gas prices could leave Oklahoma without the means to pay its bills.

The state government seems to have little control over its economic fate at the moment, according to a study presented the group by R. Douglas Elmore, Ph.D., director of ConocoPhillips School of Geology and Dan Boyd, a petroleum geologist for the Oklahoma Geological Survey.

“The main driver in all of this is going to be price,” said Boyd. Price increases – not production increases – account for the recent gains the industry has seen in Oklahoma. Between 2005 and 2007, oil production decreased about 30 percent but the price of oil increased by more than 100 percent. In 2002, the oil and gas industry brought about $300 million to the state budget, but in 2006, the industry provided the state budget about $1 billion.

In 2002, when the state’s budget shortfall necessitated huge agency cutbacks, the price of natural gas had dipped below $3 per unit. Today, natural gas prices hover near $7 per unit. Higher prices justify energy companies’ investment in new wells and fund the development of technological advancements to get more gas out of non-conventional sources. The increased drilling activity has kept total natural gas production relatively steady for the last decade, even as traditional wells drilled years ago are producing less and less.

Building up the state’s oil and gas reserves likely won’t work to protect the state from a drastic drop in prices, as said Boyd. If prices bottom out, the state won’t be able to sell its reserves for any more than the market price. And with each passing year, the state is producing less oil as investment in exploration has slacked.

“Unless we do something, the end is in sight for oil,” said Boyd. Today, the average oil well in Oklahoma produces less than half a barrel per day, and a further decline is predicted to extend to 2040, he said.

Steven Agee, Ph.D., chairman of the Oklahoma Energy Resources Board, suggested what he called a radical idea that might help Oklahoma protect itself from market fluctuations.

“What if the state hedged its gas production?” Agee asked. The plan for the state government to buy huge natural gas reserves at a set price, providing certainty for public utilities and for budget planners, would include multiple contracts, he conceded. But such a plan may be problematic to implement and may violate constitutional limitations on state contracts, lawmakers said.

Legislators also discussed fuel diversity, particularly regarding electricity generation, as a means to mitigate the risk to the state’s budget.

“I do know diversity is next to godliness, and diversity is what we need,” said state Sen. David Myers, R-Ponca City, who invited coal producers to speak about how the latest clean-coal technology is making coal-fired electricity generation more attractive nationwide. Using more coal for electricity generation would make the state less reliant on natural gas – and thus less vulnerable to the fluctuations in the natural gas market.

But Tom Price, senior vice president for natural gas company Chesapeake, cautioned lawmakers to weigh all the factors involved when comparing coal to natural gas. Natural gas is produced within the state, and is more environmentally friendly, he said.

“If I was playing poker and I had four aces in my hand, I wouldn’t throw one back and draw because I needed more diversity in my hand,” said Price.

Originally published by Janice Francis-Smith.

(c) 2007 Journal Record – Oklahoma City. Provided by ProQuest Information and Learning. All rights Reserved.