Sunshine and Clouds

January is the time of year when we look back at our previous year of work and accomplishments, and get operations underway for the new year. For Five States, 2013 was productive. We stayed busy throughout, evaluating 115 individual submittals, representing $140.2 million. Of these, only five made it across the finish line by December 31, for a total of $36.7 million of new commitments. However, 14 of the year’s submittals are still “in progress”, awaiting additional data or negotiated terms, so perhaps one or two more could still be accepted. Although the “yield” may seem low, it is typical of previous years’ results. Our challenge for the current year is to continue to increase the number of proposals we receive for review, and to stay alert for projects that can substantially enhance partnership size, quality and financial returns.

By the beginning of spring we had allocated the last of Fund 1’s capital to projects and opened Fund 2 for subscriptions. Fund 2 was closed in late December with commitments of $112 million. During December we agreed to participate in construction of a liquids extraction plant in Kansas (“Haven”) together with the same partner who introduced us to the successful oil gathering and rail transportation project in North Dakota. Our initial allocation of Fund 2 capital is $15 million toward building the Haven plant.

Each year Exxon publishes its global long term energy forecast, updating previous forecasts with new data. For individuals and companies with long investment horizons, Exxon’s view of the future for the oil and gas industry is bright. Exxon expects world energy demand to grow 35% by 2040 as electricity and other energy requirements reach people in the developing world.

According to the forecast, fossil fuels will still supply most of the world’s demand in 2040, with oil and natural gas supplying 60% of total demand. Liquid fuels—gasoline, diesel, jet fuel, and fuel oils—will remain the primary transportation fuels because of their unique combination of affordability, availability, portability, and high energy density. Exxon also predicts that by 2040 the world will consume 40% more energy from natural gas than coal. Coal, currently the second most consumed fuel after oil, is expected to level off and fall to third place by 2025 as countries displace it with less carbon-intensive natural gas.

Optimistically, Exxon estimates that 65% of the world’s recoverable crude oil will still be in the ground in 2040. But because oil will be harder to develop and produce, it will be more expensive, even with continued technological advances in techniques of seismic exploration, horizontal drilling and multistage hydraulic fracturing.

For Five States, Exxon’s projections indicate that opportunities should exist for us to make viable investments into the foreseeable future. We plan to continue development of our business along three primary strategic paths: (1) providing collateralized loans to others for development drilling and lease enhancements, (2) acquiring, enhancing and managing producing properties, and (3) using our equity dollars for construction of midstream assets.

In the shorter term, several issues are clouding the future. Prejudice against the industry is pervasive and deep, and manifests itself through a myriad of adverse policies and activities, from the top down, through many governmental agencies. The results to the industry are delayed or denied operating permits, more intensive regulation, higher taxes, and lack of cooperative governmental support. These conspire to create bottlenecks in activities and uncertain energy policies for all.

A related concern, perhaps engendered by the one above, is the recent trend toward politicization of education about the energy industry, in which science takes a back seat to the politics de jour. A spate of recent industry-related issues are being decided not on the basis of validated facts and decades of experience, but by the pleadings of movie actors, country singers, local politicians or other such authorities.

Hydraulic fracturing may be a hot topic of debate, but few know what the term “fracking” actually means, according to a recent survey gathered by researchers at Oregon State, George Mason and Yale universities. Yet, despite the fact that since 1947 more than a million oil and natural gas wells in the United States have been hydraulically fractured with no reliably validated adverse consequences, industry opponents show up in large numbers to protest the practice wherever hearings are conducted. Largely based on public attitudes, several states have declared absolute moratoriums on fracking, thereby effectively shutting down all petroleum development in those states, and with it all industry-related employment and potential tax revenues.

Perhaps it is no wonder that critical tests of logic are absent from discussions of many substantive issues. Basic math and science courses have generally been given little emphasis in U.S education curricula. In fact, the National Commission and Mathematics and Science Teaching for the 21st Century reports that 25% of high school mathematics teachers and 20% of high school science teachers do not have the academic credentials or back ground necessary to teach these subjects. Until the level of science education is substantially elevated, we may continue to see decisions made by less than well-informed groups who deny scientific knowledge and methodology in forming their opinions, to the ultimate detriment of us all.

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