A Project of Texans for Natural Gas

Frack Feed

Energy innovators across the U.S. will always beat those who bet against capitalism.
By GLENN HEGAR

In November 2014, the leaders of Saudi Arabia made one of the biggest bets in history. Their strategy was flawed, and they’ve already lost.

In an OPEC meeting that month, Saudi Arabia announced it would maintain high oil-production levels despite falling prices. The Saudis were betting that by keeping prices low they could protect their market share and kill America’s energy renaissance—a rebirth driven largely by Texas, which produces 37% of America’s oil and 28% of its marketed natural gas.

The Saudi strategy seemed to make sense. The conventional wisdom was that energy producers working in “tight” shale formations would be squeezed by low prices, since their extraction methods—hydraulic fracturing and horizontal drilling—are more expensive than conventional drilling. So, surely, once that happened Texas would be in serious trouble.

Columnists at the New York Times and elsewhere said the “Texas miracle” was fading, or even dead . . . and some of them seemed happy about it.
But an interesting thing happened on the way to the collapse of the Texas economy—it didn’t collapse.

First, many people still don’t seem to realize how diversified the state economy has become. In 1981 oil and gas production and its support services accounted for nearly 20% of Texas’ gross state product. Today, after years of incredible growth in the industry, it contributes less than 14%.

Dallas and Austin are booming today, but not because of oil and gas. Even in the 1990s when oil spent much of the decade at less than $30 a barrel, the state economy grew steadily.

And despite the slump in energy prices, oil and gas production in Texas and the U.S. has continued to rise. In fiscal 2015 oil prices were lower than my office had predicted, but revenues from Texas’ oil-production tax came in higher than expected, at nearly $2.9 billion.

What the Saudis and the naysayers closer to home seem to have forgotten is that the free market is the greatest incubator of technological innovation. Energy producers in this country have gauged the challenges of lower prices, are working to tackle them, and it’s paying off.

The technology behind shale production is advancing rapidly, and its costs are falling. Today the industry can tap multiple separate oil pools from a single vertical hole, drilling horizontally through miles of rock with computer-guided, steerable drill bits. Some of these “octopus” wells can feature as many as 18 horizontal shafts.

Articles about falling rig counts don’t take this into account. We’re seeing additional innovations such as the use of recycled “fracking” water, carbon dioxide and other substances to break formations, reducing the use of precious fresh water in drilling.

To continue reading, click here: http://www.wsj.com/articles/the-saudis-gambled-and-texas-won-1441063219