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The Importance of Texas' Oil and Natural Gas Surge

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"The Texas Miracle" is being built on oil and natural gas. Thanks to hydraulic fracturing ("fracking") coupled with horizontal drilling, Texas crude oil production has tripled since 2010, and gas output is up 15%. Every day, Texas now produces 3.6 million barrels (b/d) of crude oil and about 22 billion cubic feet (Bcf/day) of natural gas. Texas now accounts for nearly 40% of U.S. crude output, compared to less than 20% in mid-2009, and over 30% of our natural gas. Texas is the source of ~55% of the incremental U.S. oil production since 2008 that has transformed the international market. Texas's shale oil revolution has been launched by the Eagle Ford play in South Texas and the Permian Basin in West Texas, constituting more than two-thirds of U.S. shale output in April. Texas now yields more oil than Iran or Iraq and more natural gas than any nation except Russia and the U.S. as a whole. About half of all rigs actively exploring for or producing oil in the U.S. sit in Texas.

The importance of the Texan energy juggernaut can only increase. Texas has 11 billion barrels of proven oil reserves, 31% 0f the national total; and 90 Tcf of proven natural gas (a doubling since 2003), 26% of the national total. In contrast, California, our largest gas import market, has just 0.6% of the proven gas, and reserves continue to fall. And gasoline will easily remain the most important transport fuel for decades to come. Texas leads with 27 of the 142 U.S. refineries, holding 30% of all capacity. Texas is also the center of over $100 billion in new investment in the U.S. petrochemicals sector. The opportunity for CO2-EOR is staggering, with hundreds of billions of barrels available for tertiary crude operations. The Permian Basin has sourced over 80% of CO2-EOR production, and today's national total of 400,000 b/d could "plausibly" reach 3.7 million b/d by 2030. Often conveniently ignored and largely undervalued, CO2-EOR is a win-win-win strategy to extend oil production, grow the economy, and safely reduce emissions. The U.S. National Energy Technology Laboratory reports that next‑generation technologies will make the oil yielded from CO2-EOR 100%+ “carbon-free,” up from 75% today.

Texas' Rising Oil and Natural Gas Production 

Source: EIA

The importance of Texas' ability and willingness to produce and export more natural gas (and oil) can't be overstated. That's because over the past 15 years gas has accounted for more than 80% of new power generation capacity, a dominance that's sure to continue (see here). From 2005-2014, U.S. gas-based electricity increased 65% to 1,130 TWh, and gas has extended its share of electricity from 18% to 28%. The Southwest and Southeast regions in particular have a growing reliance on gas to reduce emissions. For example, while California imports over 90% of its gas (its primary source of electricity), mighty Texas is a net gas exporter at 2.7 Tcf a year going to other states (i.e., Texas exports more natural gas than any other state even produces!), nearly an eight-fold increase since 2002. Thus, without Texas, CERA's Michael Stoppard's 2008 false prediction that "the LNG armada has already set sail" for the U.S. might have become a reality. Texas has driven a national about-face, and the U.S. is now looking to export more natural gas (and oil), not needing to import it. Of the 11 states depicted below, Texas is the only one that hasn't surged its dependence on gas power, even though it's the one that has the resources to do so. Other low-producing, high-consuming states continue to depend on more gas while sucking in more gas from growing neighbors. For example, both California and Arizona have fast-growing populations, import over 90% of their gas, and will continue to lean upon natural gas to compensate for issues with other sources (see here and here). For vital 24/7 baseload power, California closed its 2,500 MW San Onofre Nuclear Generating Station in 2013, and Arizona's coal-based 2,250 MW Navajo Generating Station is entangled with EPA regulations.

In fact, per America 2050, the U.S. has 11 Mega-regions, six of which lie within the depicted 11 states. These booming areas of the Gulf Coast, Texas Triangle, Arizona Sun Corridor, Southern California, Northern California, and Florida will be adding tens of millions of people in the years ahead, and can't be afforded the luxury of not producing their own natural resources. Given tremendous opportunities for the Monterey shale and offshore, this is especially true for California, where the rising needs of 38.8 million people for outside energy can unfairly increase prices in other states. Texas' own population is expected to double by 2050, so other states must help out by producing what they can. And when played out in reality, Renewable Portfolio Standards (RPS) put the onus on more reliable natural gas, the source that ultimately gets dispatched more as the aptly suited backup for when "the wind isn't blowing" and "the sun isn't shining." Ask California: with an ambitious RPS at 33% by 2020, gas has extended its share of California's power generation to 60%, up from 47% in 2003, the first year of the state's RPS. Simply put, "the Texan way" is the far more sustainable way: "if you're going to use more oil and gas, you should first look to produce as much as possible in your own backyard." Some huge oil- and gas-based states have laws that actually block resource development! (see here and here). Wanna know what's really "unsustainable?" Just imagine if the neighbors they import from took the same approach.

Texas: THE Big Gas Producer in a Region Depending More and More on Gas

Source: EIA

Comparing the Texas and California electricity markets is another topic that requires serious discussion. Texas has its own power grid (ERCOT), while California imports 33% of its electricity, an over reliance that sparked a historic 2000-2001 electricity crisis when drought in the Northwest states cut the amount of hydro power available to California. Texas has cheaper rates, but California's bills are lower since mild weather and smaller homes with more people suppress the need for electricity. In fact, along with a higher GDP per capita, these naturally lower bills (from needing less) are why California can outbid other states for energy, especially higher cost renewable power. Texans use about 14,200 kWh per year, and residential bills average $135 a month; while Californians use 7,000 kWh, and residential bills average just $95. California's advantage, however, has much more to do with the unique characteristics that define "The Golden State" than the state's efficiency policies that some habitually tout (see here, here, herehere). The mantra therefore for other states to simply "follow the California model" to use less electricity isn't practical. According to the National Climatic Data Center, for instance, Texas has about 2,700 cooling degree days a year, against 990 for California and the U.S. average of 1,350. Just think about it: Houston averages 93-95 °F in June, July, and August, versus 77-80 °F in Los Angeles. The EIA's latest Residential Energy Consumption Survey clearly illustrates the point (see here and here):

  • Texas: 8.9 million households...99% have air conditioning...97% use it
  • California: 12.5 million households...63% have air conditioning...57% use it

Electricity Prices: Texas vs. California

Source: EIA

Despite being the oil and gas capital of the world, some Americans might be surprised to know that Texas is also easily the national leader in wind power. Wind is now nearly 15% of Texas' total generation capacity. Importantly, Texas has a very diversified electric power system, where gas is 47% of generation, coal is 34%, nuclear is 9%, and wind is 9%. This solidifies the essential "diversity in the system" that buffers supply problems and enables dispatching based on current economics. Texas has also had the greatest absolute decline in CO2 emissions over the past decade or so, slashing its carbon intensity by nearly 40%. Texas's 23 metric tons of CO2 emissions per capita is on par with the others in the region and less than half of Alaska's mark. California has lower emissions per capita, but, as mentioned, there is a unique faculty to need less electricity. New York's lower emissions, meanwhile, arise from the mammoth NYC mass transit system that constricts personal energy use, and more multi-family units offer efficiencies of scale for energy for heating and cooling.

Overall, California is becoming a less energy-intensive (i.e., fewer manufacturing jobs), more service-based economy, while New York is oriented toward high-value, low-energy-consuming activities such as financial markets. And in support of Texas, it's crucial to bear in mind that Texas produces 7 times more petroleum, our primary fuel, than California and New York produce combined, and 30 times more natural gas, our 2nd most important fuel whose use is rapidly rising. In other words, those who compare Texas CO2 emissions unfavorably with California and New York are only telling you a part of the story.

Wind Power Capacity: Texas vs. California

Sources: DOE, WINDExchange

If Texas were its own nation (I know, I know Texans, it already is!), the economy would rank as the 12th largest in the world, at about $1.6 trillion. Texas has been repeatedly cited as 1st in "best state for business" by Chief Executive Magazine. Texas has no state income tax, low corporate taxes, reduced costs, and a legal system that encourages free enterprise. In some recent years, Texas has accounted for 70% or more of all new jobs created in the country. Texas has one of the lowest unemployment rates at 4.2%, compared to 5.5% nationally. The Texas unemployment rate has been at or below the national rate for well over eight years. Texas' personal income was up 5.6% in 2014, 5th nationally. Since 2000, Texas has created 2.1 million jobs, that's more than double any other state. Led by oil and gas, in 2014, Texas was ranked the number one state by export revenues for the 13th year in a row. Gasoline, diesel, and other refined product exports have soared five-fold since 2009, hitting $65 billion last year. Petrochemical sales added some $13 billion, and propane and natural gas exports brought in another $10 billion. Fast-growing Mexico is Texas' top trading partner, taking 36% of Texas' $290 billion in 2014 exports and nearly 2 Bcf/day of gas.

A much larger U.S. crude export market is emerging, and already leading in exports of petroleum liquids, Texas will be the hub. Around 75% of the 4.2 million b/d of oil products that we export comes from Texas' PADD 3 region. To begin, the Obama administration is likely to allow swaps of crude oil to Mexico, fairly giving the country the same rights as Canada. For natural gas, as of April, Texas has 2 of the 6 approved LNG export terminals, with nearly 40% of the 10.6 Bcf/day in sendout capacity. For proposed LNG export, Texas holds 6 of the 18 projects, with half of the 22 Bcf/day in total capacity. Today, low oil and gas prices are hurting, but expectations are that the market could start to tighten by midyear. EOG Resources, the largest shale oil producer in the nation, expects a return to “double-digit” production growth if WTI, the U.S. crude benchmark, reaches $65 per barrel or above.

Texas' Rising Income and Leading Job Growth

Sources: BEA; BLS