Kenneth Hill | Victory Energy Corporation
As executives in the oil and gas business, we work very hard to keep an eye on the fundamentals of our business when evaluating risk and opportunity. We build strategies that are catered to our available capital, our expertise and the playing field that we see in front of us. When I was originally asked to write this article I planned to focus on all of these things, however after reading several “top 10” lists from some of the biggest research houses, consulting companies, accounting firms and our government, it occurred to me that few of them addressed what I believe is one of the biggest risks and opportunities for our industry; people and the power they have in directing our future. With that in mind, here is my list of the top three important issues in our industry and how we need to take action to impact these issues.
We need to ensure that the general public and our employees understand the economic and quality of life benefits created by the oil and gas industry is critical to our future.
I recall back in the early 90’s when a group of researchers went to a New York elementary school and asked the kids questions about common things such as “where does milk come from?” The interviewers were astounded when the kids answered that “milk comes from the grocery store.” That’s how I feel when speaking with people about our industry. The oil and gas industry suffers from the public’s lack of an accurate understanding of the true source and ubiquitous benefits of the products we deliver to market. As an industry, we need to change perception by providing crisp and concise information about what a critical “cash cow” our industry is for our economy.
According to the American Petroleum Institute, America’s oil and natural gas industry directly and indirectly supports 9.2 million American jobs—and the opportunities keep on coming. Twenty percent, or one out of every five new private jobs created in the U.S. between 2003 and 2011 was supported by oil and gas, paying an average wage that is over $12,000 more than the national average.
The shale gas boom has already cut household energy bills by an estimated $1,000 a year and spurred a wave of new industrial investment, reversing a 30-year period of declining manufacturing jobs.
At least five new U.S. steel plants plan to use gas instead of coal to purify iron ore, according to Bloomberg News. The natural gas boom in America will also lead to a significant reduction in greenhouse gases. Natural gas-fired power plants produce around half as much carbon emissions as coal-fired plants and just 1 percent as much sulfur oxide.
When comparing energy from oil to other energy sources, there is no equal. Today, oil meets 36 percent of the U.S. energy demand, with 70 percent directed to fuels used in transportation. Petroleum is the main mover of our nation’s commerce and its use for transportation (vehicles, airplanes, ships etc.) has made our world truly more connected. When discussing solar, nuclear and wind alternatives, remember, few of these investments address transportation on the highways, in the air or by sea.
|Oil isn’t just what fuels your car or other means of transportation — it’s all over, pervading every part of our life. When it comes to products, you’d probably be hard-pressed to find something that doesn’t contain oil. Approximately 11 percent of U.S. oil goes into the making of common every-day products such as plastics, rubber, aspirin, bandages, cosmetics, clothing, diapers, personal lubricants, shampoo, lipstick and items made out of synthetic materials. When oil prices go up, so does the prices of these common products. It’s not likely that alternative sources of energy such as nuclear, wind and solar can ever contribute to the molecular structure of these products the way our own oil does.|
According to the International Energy Agency, the U.S. could reach energy independence by 2035. New technologies are driving this move toward energy self-sufficiency, but like many new technologies, the companies deploying the technologies have to control the risk and maximize the benefit of innovation.
The U.S. Energy Information Administration has forecast that the nation could become a net exporter of liquefied natural gas as early as 2016. Much of the recent growth in our industry has come from the deployment of new technologies to recover hydrocarbons from rocks that most people 20 years ago would have thought impossible. This includes people in our own industry. As usual, this sudden growth scares some people, so they begin looking for reasons to slow it down. Many of my neighbors, most of the media and what sometimes seems like all of the government, have spent a considerable amount of time talking about the dangers of drilling with these “new” technologies into these “new” sources of oil and gas. We all know that most of these new technologies are really just modifications of older methods of recovery that continually improve through quality engineering, innovative deployment and industry experts thinking differently than we once did.
Remember, when we say “new,” to many it translates as “we are still learning” and therefore we will make mistakes. To some extent the learning part is true, however new methods don’t usually translate into disasters unless our people and our control processes break down. Right now I’m thinking about how a budget acts as a control point for our government.
Almost without exception, the examples that our detractors select to prove their case are the direct result of human error, a breakdown in our processes or because they are exploiting the fact that most people don’t fully understand our business and the products that we create. Our biggest opportunity is in front of us and we will be allowed to conquer it if we manage our people and our processes well.
Independent oil and gas companies will transform the U.S. energy industry with their innovation and efficiencies.
The general public is familiar with fully integrated companies, many of which are household names. Most people at my church and in my community seem to think our entire sector is comprised of “big oil” companies. When they read about politicians or media targeting the oil and gas industry, they think of big companies, with record profits, being subsidized by tax payers. This is a mischaracterization of the industry and we need to take a stronger stand on the reality and the importance of the various sectors of our industry.
According to the Independent Petroleum Producers of America (IPAA), independent producers drill 95 percent of the oil and natural gas wells in America, producing 54 percent of U.S. liquids. As a comparative, the 2011 Exxon Mobil annual report shows that only 49.3 percent of company revenue from upstream, downstream and chemicals occurred in the U.S. Furthermore, according to the IPAA, independent producers reinvest 150 percent of their cash flow back into new American production. How many other industries or alternative energy companies can say that?
In addition to their current production, independent oil companies are positioned for growth in 2013. While increased jobs are a major driver for economic growth, the lack of skilled workers is a deterrent for big oil companies. A lack of skilled workers is an issue causing one of the major obstacles to growth according to research by the Economist Intelligence Unit. Due to the lack of skilled labor, wages and the cost of contractors are expected to increase in 2013, driving up the operating costs and driving down profit. If large companies are forced to reduce spending, business could suffer. Many independent oil and gas companies are privately held small organizations with less than 20 employees and therefore immune to the obstacles of big companies. Because of their high operating efficiencies, independent oil and gas companies are poised for profits.
And unlike major oil and gas companies who fund a significant portion of their drilling activities with the sale of stock, most independent operators rely on direct investment. In return, these independents provide investors with cash flow and tax advantages through direct participation in oil and gas programs. The next year will provide a window of opportunity for small energy investors and provide key opportunities for investment.
Energy policy and tax policy need to support this investment and production paradigm that is so essential to our country’s energy independence and economic recovery.
How can it be that even with all of these jobs, products, benefits and quality of life improvements that our industry has helped to create, that so many people still think of what we do as nothing more than creating a propellant for their vehicle? We cannot allow our industry to be victimized or vilified by false representations driven by political agendas.
If you are involved with oil and gas exploration, finance and investing, compliance and regulation or you are a family member of someone who is, then start telling someone you know about all of the great things our industry does for them. It’s imperative that “the people” in our industry work aggressively to educate the public about the role we play in creating jobs and stimulating our economy. Illumination leads to enlightenment which quells fears, inspires advocacy and fosters greater innovation.