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J. C. Whorton and John C. Whorton,

Energy and the American West

From Remote Outposts to
the Global Spotlight,
Volume 40, Number 1

Copyright 2015

J. C. Whorton and John C. Whorton*

Im a great believer in geography being destiny.

Abraham Verghese

A s the economics and global politics of oil and gas are changing at a rapidly
increasing rate, the energy future belongs to whoever can fulfill the needs of a
dynamically changing society. It seems today that the hydrocarbon juggernauts of
the Organization of the Petroleum Exporting Countries (OPEC), Russia, and the

*J. C. Whorton serves as a Managing Director of StratCom Advisors, LLC, and as the Chairman
of Empire Petroleum Corporation (OTC: EMPR). His experience and leadership positions with six
Fortune 500 companies have provided him the opportunity to work with many of the worlds leading
energy firms at the executive and board level. The author has extensive upstream E&P operational
experience and was a member of the National Energy Consulting Practices at PA Consulting,
PricewaterhouseCoopers, Andersen, and Caminus (now SunGard) where he was recognized as an
international Subject Matter Expert on strategy and risk management. He is a registered Commodity
Trading Advisor with the National Futures Association and has held all major trading and principal
licenses with the Securities and Exchange Commission and Commodities Futures Trading
Commission. Mr. Whorton managed institutional energy trading desks at Prudential Securities
and Morgan Stanley. He has provided strategic insight and market commentary for such business and
financial news and wire services as Dow Jones, Wall Street Journal, New York Times, Bloomberg,
and McGraw-Hill. He coauthored Power Play Whos in Control of the Energy Revolution?
(PennWell, 1998) and has contributed to over 40 publications in addition to being a frequent speaker
on energy and financial topics. The author holds a M.A. in public administration from Oklahoma
City University and a B.A. in political science from the University of Oklahoma.
John Whorton serves as the Managing Director of Stratcom Advisors, LLC, an energy consulting
firm specializing in A&D Due Diligence advisory services. Since assuming a leadership role in

The Journal of Energy and Development, Vol. 40, Nos. 1 and 2

Copyright 2015 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.

North Sea are losing their iron grip on control of the market, and the United States
may be in pole position to once again reclaim its role as the global energy leader.
There is little question that the influence of geography on societies and cultures
has had a tremendous effect on the course of history. Geographic, climatic, and
environmental characteristics have favored certain regions and countries over
others and determined the fate of many societies. In the recent book, The Accidental
Superpower, Peter Zeihan states that the success or failure of nations may rest on the
very ground beneath their feet and stresses the forces that really shape the world
events are topography, soil quality, and access to water.1 Accordingly, we must add
natural resources to that list.
Territorial and nationalistic disputes over boundaries, natural resources, and
access to water fill history books as well as todays news stories as aggressive
political, military, and covert actions attempt to gain and secure strategic objectives.
A case in point, the ongoing territorial dispute between Russia and the Ukraine for
the Crimean Peninsula, serves as the perfect example. The combination of massive
offshore natural gas fields and abundant seaports with quick access to major trade
routes fed by adequate infrastructure to the mainland makes Crimea a valuable
component for either side.
As for the United States, it is truly blessed with numerous geographic attributes
such as abundant fertile cropland, tremendous natural resources, variable and di-
verse climates, 12 major rivers providing commercial navigability, and protective
moats the size of two oceans to give it advantages that few other nations possess.
Among the countrys natural resources, it has large reserves of recoverable oil,
natural gas, and coal, and the American West is truly the nations energy treasure
chest. Today, the West is playing a major role not only in shaping the countrys

2011, he has transformed the firms business model from a traditional land/lease brokerage firm into
an industry leader in energy due diligence practices. The author is widely recognized for his
extensive experience in managing due diligence engagements for merger, acquisition, and
divestiture projects totaling several billion dollars. He also has deep experience in originating and
managing large oil and gas exploration and exploitation projects throughout the Midcontinent
and Rocky Mountain regions. Mr. Whortons experience and expertise in complex title examination
and due diligence led him to develop TractMaster Energy Management System, a methodology
designed to more efficiently manage the workflow from the field to the land department.
TractMaster is a MS Excel-based ownership reporting technique, which is customized to
a companys specific land, title, and division order needs, and facilitates the due diligence processes
in merger, acquisition, and divestiture transactions. The author holds a B.S. from Oklahoma State
University and a Certificate of Petroleum Land Management from the University of Houston.
Acknowledgements: A special acknowledgement to StratCom Advisors team members, Amanda
Wynn Bidgood, Chance Snook, and Kerry Joannides. As principal members of the StratCom
Management Team, they bolster our support in advocating energys critical mission in the coming
decades as the United States strives for energy independence while practicing and promoting
responsible resource development. We are extremely grateful for their unwavering support and
invaluable input in assisting us address the many challenges and issues that this paper presented.

energy future, but the global energy landscape as well. Much of the future of the
U.S. drive for energy independence and its future role as an energy exporter will
depend upon the present and future energy development efforts and the resulting
policies occurring in the West. In other words, the West really does matter, and its
role in resource development will be in the global spotlight for decades to come.
As the early American colonies began to grow at a rapid rate, expansion was
forced in the only direction availableWest. It was not until explorers began to
probe the vast territories beyond the Mississippi River that the American West was
defined. In the 21st century, the West is no longer a mere outpost for future
growth. It is growth, and a lot of itin every way. Railways, the former main
artery for survival and growth, now are augmented by interstate highways and an
impressive number of regional and international airports. Its cities, once remote
outposts for trade, now are sprawling metropolises and stand-alone key economic
centers of commerce. This rapidly accelerated growth also has created the very
common side effect of acute growing pains. The West is no longer considered just
a fly-over region of vast empty spaces that trekkers endured as they traveled to
their final destinations.
To better understand many of the modern days contentious energy issues, we
need only to imagine what the early explorers and settlers found in the West. Upon
their arrival, there were only natural landscapes with uncluttered vistas. Now, few
of those natural landscapes still exist in a form that would be recognizable to those
first gazing upon them. Several things account for such change. The most obvious
one is the increased number of people. The second is the astounding array of
resources that are required to support growing populations and their associated
accoutrements: buildings of every variety, description, and purpose; parks;
transportation venues; reservoirs; energy infrastructure; and so on. Since most
urban areas grow outward and gradually, much of the construction goes unnoticed.
What is becoming more and more noticeable, and annoying to most, are the
landscapes of power, the utility poles and wires, transformer stations, drilling
rigs, production equipment, and numerous other eye sores required to fuel this
rapid growth and the associated modernization it commands. All of these factors
have created landscapes of power in such numbers and variety that their famil-
iarity often times camouflages their origins. We started making landscapes of
power as soon as we started burning wood to warm ourselves. The resulting global
imprint was as small as the population. Thousands of years later, when we began
wresting coal from the earth, our ability to create landscapes of power grew in variety
and intensity. Later, with oil and natural gas, we added to the mix of these land-
scapes: wells, pipelines, tankers, refineries, uncounted drilling rigs, and, always,
more roads. In other venues we turned canyons into lakes, open spaces into power
lines and generating stations, quiet shores into harbors. We then connected all of it
with a million miles of transmission lines, railroads, and pipelines. What we have
now produced is a complex, interdependent networka mega landscape of power.

In his book, Saving the West from the Landscapes of Power, Mike Pasqualetti
writes that:

We have lost count of the landscapes of power, dulling ourselves to our responsibility in their
creation. The reality that we reshape the landscape for energy is nothing new. It is just nothing
that many people think about much anymore. After all, out of sight, out of mind. While the
Intermountain West has many landscapes of power, they have been relatively dwarfed
compared to the enormous size of the region.

Unfortunately, that is all beginning to change.

Just as plants and animals need energy to grow and be functional, so do modern
societies. Energy allows human beings seemingly unlimited potential to create
technological advancements never before imagined. Today, nothing is impossible,
just mathematically improbablefor a while at least. Deirdre McCloskey, the
economic historian and philosopher, calls this the Great Enrichment. In the case of
the United States, there has been a roughly 9,000-percent increase in the value
of goods and services available to the average American since 1800, almost all of
which are made with, made of, or powered or propelled by fossil fuels, the very
things that are creating landscapes of power and the impassioned controversies
surrounding them, the very things that the West is so blessed to possess in
abundance, and the very things that are changing the balance of geopolitical and
economic power.
Thus, as the West and its inhabitants strive to better understand and manage their
role as the custodians of the nations energy treasure chest and as the apparent new
unofficial regulator for global crude-oil-market supplies and pricing benchmarks, one
needs to fully understand the range of perspectives and fundamental issues that they
face. These issues are growing in importance daily as reflected in local and national
discussions, news, and at the polls. Decisions made going forward will dictate policy
for decades to come as the West manages growth for today and tomorrow, while
preserving its natural resources and majestic beauty; recognizing and reacting to the
significance and magnitude of fossil fuels in global societies present and future de-
velopment; and how we accept the Wests new role as guardian of U.S. energy se-
curity and re-establishing our role as the global swing producer for crude oil supplies.

Growth and Energy

The future was predictable; but hardly anyone predicted it.

Alan Kay, Apple Fellow

The history of an era often can be defined by a particular commodity that most
influenced the economic and political decisions of that time. For instance, the 18th
century belonged to sugar, the 19th century to cotton, and the 20th and the be-
ginning of the 21st century certainly belong to oil.

The necessity for a growing United States to focus its interest in western ex-
pansion was accelerated significantly with the discovery of gold in the western
frontier, which began in the mid-1800s and thus began the mythical California
Dream metaphor. Gold strikes, or more often, simply stories told or written about
them, created a general euphoric feeling of a free for all in income mobility, in
which any single individual, regardless of religion or nationality, might become
abundantly wealthy almost instantly. The discovery of crude oil in the mid-1800s
exacerbated the universal perception that the American West was a place of new
beginnings where great wealth would reward hard work with opportunity and good
fortune. This indelible perception soon began to stimulate an immigration that led to
the exploration and permanent settlement of many new regions that continue to
define a significant part of numerous areas that remain and thrive along the western
frontier. An example is Wyoming, a state that is still fueled by the minerals and
energy industries. Accounting for as much as 50 percent of all tax revenue in the state,
natural resources and agriculture remain the lifeblood of Wyomings economy.
As the Wests history has proven, natural resource wealth is built on big bets
that affect all of those aroundboom towns can quickly become ghost towns.
Most of these benefits of this new Black Gold Rush have been very noticeable
economic stimuli felt appreciatively in every level of local, state, and national
coffers. The unforeseen consequences have created tsunami shockwaves in elec-
tions across the nation as well as geopolitically.
When one looks to the future growth of the energy industry in the West, we
must ask: can environmentalists and those wishing to use private and public lands
for private enterprise find ways to work together; how will the West continue to
evolve in its new found role as the global swing producer for the worlds thirst
for crude oil supplies; and as such, how will the western states energy economies
manage present and future oil and natural gas boom/bust cycles?
In the book, No Ordinary Disruption, the McKinsey Global Institute authors
introduce the four global trend-breaking forces: (1) the age of urbanization, (2)
accelerating technological change, (3) challenges of an aging world, and (4)
greater global connections.3 These trends form a unified and cohesive dynamic
that is now playing a part in almost every industry around the globe, not the least of
which is energy. Urban growth has spurred aggressive competition for land and
water, both of which are necessary in relatively high quantities to meet global
energy demands. Accelerating technological changes have introduced un-
conventional methods of oil and gas extraction, such as fracking and horizontal
drilling, that have been instrumental in thrusting the west into the forefront of oil
and gas production. The challenges of greater global connections have forced the
industry to dynamically adapt to greater demand, greater supply chain complexity
and disruptions, and more competition and pricing volatility.
Regarding aging challenges, few other industries face the myriad of challenges
presented by an aging work force than those of the energy sector. In fact, the

downturn of the mid-1980s that resulted in the ultimate bust saw hundreds of
thousands of energy professionals leave the industry, never to return, and few
college entrants saw the logic of pursuing a career with little or no job demand
waiting for them upon graduation. This mass exodus created a generational skip
that is still being noticeably witnessed today. As the baby boomers in management
positions are retiring, a huge vacuum will be felt unless companies have already
implemented active transition teams instituting knowledge transference programs.
An important question has arisen from these new dynamics: can municipalities
and rural communities co-exist and resolve urban sprawl and its associated
problems, such as noise abatement, traffic and pollution control, split estate le-
galities between surface and mineral estate rights, and, finally, can and will all
denizens of the West be able to manage, leverage, and share the regions most
precious and sparse water?
The dogma of the American West, with the individual set free in wide open
spaces with few rules and little government interference, inspired millions to mi-
grate here. But the reality is that, with each generation, we settle for substantially
less wilderness, less freedom, and far less space. Recreational spaces are becoming
as crowded as the cities that the people left to get away from everyone else.
As in the Wests beginning in the 1800s, agriculture and natural resource ex-
traction industries continue to contribute greatly to public and private bottom
lines. Public lands, just as in earlier days, are now the key to survival of many
adjoining communities as well as the long-term economic well-being of the entire
region. Public lands are required to be open and available not only to its traditional
beneficiariesnatural resource extraction (oil and gas exploration and mining)
and agriculture (timber harvesting, grazing, and farming)but to water develop-
ment, recreation, hunting and fishing, skiing, and general tourism as well.4 Over time,
the U.S. Bureau of Land Management (BLM) and natural resource enterprises have
successfully found ways to work within the regulatory framework while achieving
common goals. These challenges are becoming more difficult as decisions are now
scrutinized much more closely by many stakeholders than in the past. And, of utmost
importance to allurban centers, recreation, agriculture, natural resource extraction,
and development, to name a fewis that access to adequate water sources is critical.
Unfortunately, we have paid far too little attention to resultant population growth and
now deal with the unplanned consequences of water shortages. Droughts, fires, and
floods are naturally recurring events in this very fragile region; everyone who lives or
operates in the West must contend with them in one way or another. The western
writer, Edward Abbey, once said, there is no lack of water here [West] unless you
try and establish a city where no city should be. In other words, we probably have
not learned that much since the dust bowl era of the 1930s.
Energy boom times have fueled and been fueled by dramatic population
growth. They have generated tremendous economic opportunities for Westerners
and have paid for improvements in infrastructure and services in remote rural

Western towns. Boom times also have confronted communities with pollution,
traffic congestion, crime, and noise, and have acutely taxed the civic resources of
small Western towns, not to mention the nerves and patience of many of the locals
and old-timers. While nature is often indifferent to weather and rainfall, it is also
indifferent to user-friendly access when it distributed fossil fuel resources across
the West. Remote locations have posed a major burden for energy development
and help explain some of the most troubling impacts of energy production on
Western communities as local agencies are tasked with maintaining aging and
inferior infrastructures.
Market forces, international events, government policies, scientific discover-
ies, shifting social values, and technological advances have all had a say in picking
a particular regions energy resource du jour. For Western energy towns, decisions
on nearby Native American reservations or distant cities such as Washington,
D.C., or Riyadh, Saudi Arabia, can have swift and sometimes devastating effects
on a community and/or region.

Fossil Fuels and the Environment

There is great danger in short memories.
Source unknown

Over the past several decades, much serious effort around the globe has been
focused on reducing the planets carbon footprint. One encouraging environmental
trend has resulted in the carbon dioxide emissions per unit of energy produced
being diminished significantly, thanks largely to the switch from high-carbon coal
to lower-carbon natural gas in electricity generation. This has contributed im-
mensely to the shale gas boom creating more competitive natural gas prices than
coal. Interestingly, over this period, the overall volume of fossil-fuel consumption
has increased dramatically. There is now a realistic assessment suggesting that, for
many more decades to come, we will continue to rely overwhelmingly on the
fossil fuels that, thus far, have contributed so dramatically to the worlds pros-
perity and progress.
In 2013, about 87 percent of the energy that the world consumed came from
fossil fuels, a figure surprisingly unchanged from 10 years before. On a global
level, renewable energy sources such as wind and solar have contributed hardly at
all to the drop in carbon emissions, and their modest growth has merely made up
for a decline in the fortunes of zero-carbon nuclear energy. An argument for giving
up fossil fuels is that new rivals will shortly price them out of the market. But this
is not happening. The great hope has long been nuclear energy but, even if there
is a rush to build new nuclear power stations over the next few years, most will
simply replace old ones due to close. The worlds nuclear output is down from

6 percent of world energy consumption in 2003 to 4 percent today (2015). It is

forecast to inch back up to just 6.7 percent by 2035, according to the U.S. Energy
Information Administration.
Nuclears disconcerting problem is cost. In meeting the safety concerns of
environmentalists, politicians, and regulators, there are added requirements for
extra concrete, steel and pipework, and even more for extra lawyers, paperwork,
and time. The effect has been to turn nuclear plants into huge and lengthy regu-
latory and construction boondoggles in the United States with little incentive for
competition or experimentation to drive down costs. As a result, nuclear energy is
now able to compete with fossil fuels only when it is subsidized.
As for renewable energy, hydroelectric is unquestionably the largest and
cheapest supplier, but it has the least capacity for expansion. Technologies that tap
the energy of waves and tides remain unaffordable and impractical and most
experts think that the cost impediments will not change rapidly. Geothermal is
a minor player for now. As for bioenergy sources, such as ethanol made from corn
or sugar cane or diesel made from palm oil, they are proving to prompt ecological
disasters. Their production encourages deforestation, commodity volatility,
supply-chain disruptions, food-price hikes and shortages, and per-unit of energy
produced they create even more carbon dioxide than coal.
Wind power, for all the public money spent on its expansion, has inched up to
a mere 1 percent of world energy consumption in 2013. Solar, for all the hype, has
not even managed that. If we round to the nearest whole number, it accounts for
0 percent of the world energy consumption.
Both wind and solar are extremely reliant upon subsidies, which have enabled
them to achieve their current levels of economic viability. The costs of renewable
energy are coming down, especially in the case of solar. But even if solar panels
were free, the power they produce would still struggle to compete with fossil
fuelsexcept in some very sunny locationsbecause of capital equipment required
to concentrate and deliver the energy. This is to say nothing of the great expanses of
land on which solar facilities must be built and the cost of retaining sufficient
conventional generator capacity to guarantee supply on dark and cloudy days.
The two fundamental problems that renewables face are that they take up too
much space and produce too little energy. To run the U.S. economy entirely on
wind would require a wind farm the size of Texas, California, and New Mexico
combined, while to power it on wood would require a forest covering two-thirds of
the United States, heavily and continually harvested.5
Electricity produced by fossil fuels has a major advantage over wind and solar
power in that it can be generated on demand and utilized at any time. Even in the
most wind-swept regions, the wind does not always blow and the sun may not
shine through cloudy days. Until utilities can find a way of storing large quantities
of electricity, alternative energy sources, such as wind and solar power, will al-
ways have to be supplemented by other electricity-generating facilities.

Different fuels have different levels of energy content. The higher the energy
content, the higher the quality of the fuel, which is inversely proportional to its
chemical complexity. High quality fuels are gases while low quality fuels are
solids, with liquids in between. The fuel that has the highest energy content is
hydrogen, which is also the simplest chemical component in existence. Gasoline,
which is derived from refining crude oil, contains much more energy than coal
(twice the lower grade bituminous) or wood (three times).
Energy density drives the planets energy use. The density of energy is salient
because future energy sources need to be cheap and scalable. The denser the
energy source, the cheaper and more scalable it becomes. Manhattan Institute
senior fellow Robert Bryce looks at this idea in his City Journal article entitled
Get Dense, in which he argues that it is time to stop wasting land and resources
in the name of environmentalism.6 Fossil fuels lead the way as the densest form of
energy and they are among the most efficient.
There is always the argument that fossil fuels are finite. The buffalo of the
American West were infinite, in the sense that they could breed, yet they came
close to extinction. It is an ironic truth that no nonrenewable resource has ever run
dry, while renewable resourceswhales, cod, forests, passenger pigeonshave
frequently done so.
The miniscule amount of energy that human beings managed to extract from
wind, water, and wood before the Industrial Revolution placed a great limit on
development and progress. The incessant toil of farm laborers generated so little
surplus energy in the form of food for men and draft animals that the accumulation
of capital, such as machinery, was painfully slow. Even as late as the 18th century,
this energy-deprived economy was sufficient to enrich daily life for only a fraction
of the population.
Certain laws of physics state that the more energy you have, the more intricate,
powerful, and complex you eventually make a system. Just as human bodies need
energy to be ordered and functional, so do societies. In that sense, fossil fuels were
a unique advance because they allowed human beings to create extraordinary pat-
terns of order and complexity through machines and buildings with which to im-
prove their lives. Today, there should be little question as to the enormous benefits
that modern industrialized societies have realized through fossil-fuel power.
Still, more than a billion people on the planet have yet to get access to elec-
tricity and to experience the leap in living standards that abundant and affordable
energy brings. Energy demand is expected to increase over the next 25 years and
more base-load power supply will be needed to fill this demand. ExxonMobil, for
example, believes global energy demand will rise by 35 percent by the year 2040.7
The International Energy Agency believes consumption will rise by 37 percent in
the same time frame.
Today, we often overlook the many ways in which fossil fuels have contributed
to preserving the planet. As the American author and fossil-fuels advocate Alex

Epstein points out in a bravely unfashionable book, The Moral Case for Fossil
Fuels, the use of coal halted and then reversed the deforestation of Europe and
North America.8 The turn to oil eliminated the need to continuously harvest the
worlds whales and seals for their blubber. Fertilizer manufactured with natural
gas halved the amount of land needed to produce a given amount of food, thus
feeding a growing population while sparing land for wild nature and recreation.
To thoughtlessly throw away these immense economic, environmental, and
moral benefits, you would have to have a very good reason, or a large number of
them. The one most often invoked today is that we are wrecking the planets
climate. Climate change is a topic where everyone has an opinion and a plethora of
facts supporting their case and refuting the opposing sides argument. It will be
very interesting to see the conclusive source that finally reveals the irrefutable
evidence, for or against adverse global climate change, which will be unconditionally
accepted by both sides. Until that time, the embittered debate will rage on.
From a prudent global stewardship perspective, there should be little dis-
agreement that we should encourage the continued switch from coal to natural gas
used in the generation of electricity, provide meaningful incentives for increased
energy efficiency, guide responsible cost-effective nuclear power back on track,
and keep developing solar power and electricity storage. These measures all make
sense. Continuing on a course of subsidized ventures to build low-density, low-
output, capital-intensive land-consuming renewable projects probably does not.
For fossil fuels, there are three principal categories of energy, each with a
different purpose: oil and its refined products are used mainly for transport; natural
gas is used for heating, electricity generation, and petrochemicals; and coal is used
mostly for electricity generation.
The argument that fossil fuels will soon run out is moot, at least for a while. The
collapse of the price of oil in the latter half of 2014 and into 2015 is the result of
abundancean inevitable consequence of the high oil prices of recent years, which
stimulated innovation in hydraulic fracturing, horizontal drilling, seismology, and
information technology. The United Statesthe country with the oldest and most
developed hydrocarbon fieldshas found itself once again, surprisingly, at the top of
the energy-producing nations, rivaling Saudi Arabia in oil and Russia in natural gas.
If the life of fossil-fuel use extends beyond the next half century, then they
more than likely will continue to be the major global power source for some time
to come. The question will then become, once all known fossil-fuel reserves have
been fully utilized, will renewables then have their turn to power the planet?
In a post-fossil-fuel world powered by renewables, the West will be very well
positioned. The features of the landscape shape the regions resources in sun and
wind. Western states are blessed with a combination of mountain-enhanced winds
and empty obstacle-free prairie space. In several states, low pressure systems
routinely roll over the Front Range where they are shaped by valleys and ridges
before gusting down through the eastern plains.

The Wests mountain ranges also explain the many hours of sunshine. When air
moves in from the Pacific and Gulf of Mexico, the Sierra Nevada and Rocky
Mountains force it to drop much of its moisture. By the time the air reaches the
other side of either of these ranges, little moisture remains; as a result, pre-
cipitation and sun-blocking clouds are minimal. The sun has always been espe-
cially generous in its attentions to the West.9

Western EnergyThe Shale Genie is Out of the Bottle

Energy forecasting is easy. Its getting it right thats difficult.
Graham Stein, 1996

McKinsey & Company has cited shale energy as one of the emerging game
changers of the 21st century, for good reasonthe shale genie is now out of the
bottle. Even if the current low price environment drives out some high-cost oil
producers, in the North Sea, Canada, Russia, Iran, and offshore, as well as in the
United States, shale drillers can step back in whenever the price rebounds and
favors their economic parameters. U.S. shale oil production is one of the biggest
conundrums for OPEC. In spite of a sharply reduced rig count from last year,
production has yet to fall significantly in 2015. Ryan Lance, CEO of ConocoPhillips,
recently stated that the U.S. shale industry has already reduced costs by 30 percent
and expects to improve efficiency by up to 20 percent over the next five years. The
new reality is that unconventional resource plays, such as shale production and the
new and evolving technologies used to produce them including horizontal drilling
and hydraulic fracturing, are here to stay. Not only are they here to stay, but the
new and emerging order that they have created will place unprecedented pressure
on all producing countries and global supply/demand forecasts and market vola-
tility. Market share will be critically important for both producing and consuming
nations struggling to maintain a critical equilibrium for their budgets, many of
which are strained at best.
In an industry dominated by major oil companies and national oil companies
(NOCs), the United States is unique for its fragmentation. According to consulting
firm Rystad Energy, it takes 77 companies to generate 75 percent of U.S. output of
crude oil and related liquids, the most among the worlds 20 largest producers. Only
Canada and the United Kingdom are similarly fragmented. By contrast, the compa-
rable figure in Russia is four, three in China, and one in Brazil. In Saudi Arabia, Iran,
Mexico, and Kuwait, one state-controlled company accounts for nearly 100 percent of
total output, all of which must account to the dictates of a national policy.10 Thus, in
the United States there is no Minister of Shale to dictate policy, quotas, and price.
Even without a Minister of Shale, the shale producers are currently experi-
encing their own version of Moores law, which suggests that, with exponential

growth, it is unlikely to continue indefinitely. In the case of shale, a rapid fall in the
cost and time it takes to drill a well, along with a rapid rise in the volume of
hydrocarbons they are able to extract, creates pricing pressures that may be un-
sustainable. Additionally, the shale revolution has yet to go global. When it does,
oil and gas found in tight rock formations will supply the world with ample
supplies of hydrocarbons for decades, if not centuries, to come, thus making re-
newable and alternative energy sources even less competitive.
The United States was once, by far, the worlds largest oil producer and ex-
porter and its swing producer. The Texas Railroad Commission determined al-
lowable levels of production for Texas, the Saudi Arabia of the day. But by 1970,
United States oil output had reached its high point of 9.6 million barrels per day
and began to decline. The United States began to import more and more oil. By
2008, its own oil production was down almost 50 percent from its height. Oil
prices reached $147 a barrel, and fears that the worlds oil output had peaked and
that we were beginning to run out of oil had become pervasive.
Quietly, though, an unconventional oil and gas revolution was beginning to
pick up speed in the United States. It yoked together two technologies: hydraulic
fracturing and horizontal drilling. The impact was measured first in the rapidly
growing production of shale gas, which now makes up about half of total U.S. gas.
This shale gale catapulted the United States ahead of Russia to become the worlds
number one gas producer.
Then around 2010, the same technologies started to be seriously applied to the
search for oil. The results were phenomenal. By the end of 2014, oil production in
the United States was 80 percent higher than it had been in 2008. The increase of
4.1 million barrels per day was greater than the output of every single OPEC country
with the exception of Saudi Arabia.
As of 2015, U.S. output is almost back to where it was in 1970. On top of that
was a million-barrel-a-day gain since 2008 from the Canadian oil sands. The
chimera of energy independence was beginning to look more tangible, at least
for North America. Now the United States has surpassed Saudi Arabia and Russia as
the largest oil producer in the world.
For decades, Saudi Arabia, backed by the Arabian Gulf emirates, was described
as the swing producer. With its immense production capacity, it could raise or
lower its output to help the global market adjust to shortages or surpluses. But with
the current price decline, the decision to leave oil prices to the market by Saudi
Arabia and the Emirates signaled passing the responsibility as de facto swing
producer to a country that hardly expected itthe United States
As a result of the Saudi decision, U.S. tight oil from shale formations has
become the de facto swing producer in the global market. Low prices are driving
out high-cost producers, a text book case of markets at work. Low prices are culling
the herd. This allows the system as a whole to operate more efficiently by high-
grading and developing the highest potential prospects first.

After its peak in the early 1970s, U.S. oil output experienced three decades of
decline and energy grew to account for half of the nations trade deficit in goods. As
recently as five years ago, there was little evidence that this trend could be reversed.
In 2015, the picture is changing rapidly, driven by technological advances in
horizontal drilling and hydraulic fracturing. This process has unlocked large de-
posits of both natural gas and oil trapped in shaleresources once considered too
difficult or costly to extract. From 2007 to 2012, North American shale gas pro-
duction grew by more than 50 percent annually, lowering the price by two-thirds.
Today, output of so-called light tight oil is growing even faster.
If the United States fully comprehends this exceptional opportunity, shale
energy could revitalize the oil and gas industry, have significant downstream benefits
for energy-intensive manufacturing, and send tsunamic effects across the global
economy. It is a given that it has a positive impact to annual gross domestic product
(GDP) and permanent jobs growth. Many shale-producing regions, such as the
Williston and Permian Basins, have proved that it is an important source of high-
wage employment for workers without college degrees, generating economic ac-
tivity in remote parts of the country that have seen little investment in recent decades.
Until the 2014-2015 price decline, the impact already was being felt in the
energy sector and far beyond. The increased hydrocarbon production boosted
annual GDP within the energy sector itself. It also drove growth in manufacturing
industries that rely heavily on natural gas as a fuel or feedstock. These include
petrochemicals, fertilizer, and synthetic resins; iron and steel; and glass, paper and
pulp, and plastics packaging. Increased drilling activity and production require
support from other industries, such as professional services, construction, trans-
port, and trade. Real estate values in active basins have appreciated significantly
and as a result the loss of shale revenue to a producing region would have effects
on the areas economy reaching far beyond just the energy industry.
Building the required infrastructure to support the shale boom also provides
short-term stimulus to local and regional economies. The estimated investment
required to complete the necessary pipelines, rail networks, and drilling and
gathering infrastructure could easily run into the trillions of dollars. This will
generate significant temporary jobs during the build-out, mainly in the construc-
tion sector. Historically, these investment booms have been financed by private
capital and not through public funding.
Beyond the increase in output and jobs, the implications are significant. The
surge in shale gas production has driven down the price of U.S. natural gas from
nearly $13 per million British thermal units (MMBtu) in 2008 to approximately $3
per MMBtu in 2015sharply lower than prices elsewhere around the world and a
level at which some wells are being shut-in as producers cannot recoup their in-
vestment and operate profitably. Combining potential LNG exports with reduced
demand for imports of crude oil, the United States now has the potential to reduce
or eliminate net energy imports in the very near future and become a net energy

exporter. One might ask, would it not be better for the United States to sell the
Chinese crude oil and natural gas than have them buy U.S. government debt?

Why the West Really Matters

Lord, give me one more oil boom and I promise not to piss it away this time.
1980s bumper sticker

From a national security perspective, the following nations are all considered
failed or fragile states: Syria, Yemen, Iraq, Iran, Libya, Afghanistan, Pakistan,
Nigeria, and Egypt. Several of the many countries on high-alert risk indexes are oil
producers such as Russia and Venezuela.11 Could this be the beginning of a new
Era of Failed States? What if ISIS disrupts or changes the global supply picture?
What would happen to global prices and supply if production from fragile ex-
porters is no longer available? What would happen if major oil-trading routes such
as the Strait of Hormuz, the Gulf of Aden, or the Suez Canal were to be closed for
an extended period? What if there was another oil embargo such as the one in
19731974? In the event of an extended shortage or stoppage of crude oil imports,
what happens? How long will the U.S. Strategic Petroleum Reserve (SPR) replace
lost imports? The current inventory displayed on the SPRs website as of July
2015, was a little short of 700 million barrels. This equates to about 37 days of oil
at the 2013 daily U.S. consumption levels of 18.49 million barrels per day or 70
days at the 2013 daily U.S. import levels of 9.859 million barrels per day.12 Should
any of the above events occur, what would happen next for the U.S. economy and
security? Can we continue to expect crude oil or refined products from old trading
partners or will they need the crude for their own internal consumption? How will
our closest allies function with the lost lifeblood of crude oil? Who would they
turn to for supply? What will be the national security implications?
Oil in the North Sea is running out. Production has been declining since 1999
and, while experts estimate that it has billions of barrels of oil remaining, pro-
ducing them into the future is going to become even more costly. The International
Monetary Fund (IMF) estimates that U.K. producers have the highest operating
costs in the world at around $40 a barrel and by comparison operating costs in
Saudi Arabia and Kuwait are around $5 a barrel.
Also, many countries, such as Russia, have old producing fields, old equip-
ment, old technology, and limited financial resources for upgrading or expansion.
For these countries, immediate survival is extremely difficult, not to mention
meeting future domestic needs as well as competing for global market share.
Meanwhile, the ultimate price war casualty will not be the U.S. shale oil
producer but rather those oil-producing countries such as Venezuela, Iran, and
Russia (figure 1).

Figure 1

Source: Deutsche Bank and International Monetary Fund from the T. Bowler article, Falling Oil
Prices: Who are the Winners and Losers? BBC News, January 19, 2015.

Wait, what if the United States became self-sufficient and no longer had to rely
of foreign sources of crude from unstable regions and governments? Maybe the
American West does matter.
The recent oil boom should serve as an excellent example of how private en-
terprise and the market system can and does work for the benefit of the total U.S.
economy. It created a surge in employment, business investment, property values,
tax revenue, and ultimately, the GDP. The benefits of the boom were so blatantly
obvious that most objective people would question debilitating punitive regulations
and measures that would diminish the many positive effects that already have ac-
crued for communities and states. We should have self-sufficiency in natural gas for
many decades to come. We enjoy a two or threefold competitive price advantage
over Europe and Asia resulting in a revival of in-sourced manufacturing with natural
gas and liquids as fuel and feedstock. The boom served to greatly diminish the
importance of the Arabian/Persian Gulf and reliance on OPEC member states, as
well as spotlighting the Russian energy challenges with its European consumers.
The inherent market competition of the American West, led mainly by in-
dependent oil and gas operators of all size from mid-cap to large-cap companies,
has resulted in an efficiency among operators that is the new standard of the world
and still improving. Some of the largest western energy producers possess market

caps that rival those of the national oil companies, but with employee bases, one of
the largest of any corporations expenses, that pale in comparison. Figure 2 il-
lustrates the total market caps of two NOCs and two non-nationalized majors,
while figure 3 shows the same companies, broken down to market cap per em-
ployee. The comparison efficiency of the NOCs is seemingly not even on the same
playing field as that of the non-nationalized majors.
For most of modern history, the vital sources of energy in the Middle East lay
far away from major centers of economic production in Western Europe and North
America. Now, thanks to an abundance of shale formations and hydraulic frac-
turing, North America has much of the energy it needs at home. The United States
has less need to police sea lanes in the Arabian/Persian Gulf, a task that historically
mostly ensured the safe passage of oil from the Middle East to North Americas
and Europes industrialized centers. Oil has always been one of greatest reasons
why the United States needed to be involved with the outside world. Some might
argue that as the world becomes more volatile, there may be fewer compelling
reasons for the United States to pay with human sacrifice and financial resources

Figure 2
(in billions of U.S. dollars)

Data compiled by authors using The Companies: FactSet and Wall Street Journal for February
17, 2015. Market capitalizations are for stocks listed on the New York Stock Exchange (NYSE) as of
February 17, 2015 and, when dollar conversion was necessary, the exchange rate for that same day
was used. Shell profit is attributable to shareholders from continuing operations.

Figure 3
(in millions of U.S. dollars)

Data compiled by authors using The Companies: FactSet and Wall Street Journal for February
17, 2015. Market capitalizations are for stocks listed on the New York Stock Exchange (NYSE) as of
February 17, 2015 and, when dollar conversion was necessary, the exchange rate for that same day
was used. Shell profit is attributable to shareholders from continuing operations.

to stabilize it for the benefit of others, especially if energy projections hold true
and U.S. energy independence is achieved within the next five years (2015-2020).
Today, the West is the focus of the global energy spotlight for a very obvious
reason; it has upset the status quo of OPEC, Russia, Venezuela, and other major
oil-producing countries.
Horizontal drilling and hydraulic fracturingbusiness innovations utilized primarily
on private landhave pushed U.S. oil output to its highest level since the 1980s, setting
up a contest between Saudi Arabia and the United States, two of the worlds largest oil
producers. The reality is much more complex, affecting the future of OPEC and, perhaps,
fundamentally changing the global market for oil and how it is produced and priced.
Saudi Arabia is hoping that lower oil prices will stimulate economic growth
and demand for oil. In the meantime, with their large holdings of foreign exchange
reserves, Saudi Arabia and the Gulf nations can afford to wait.
That is not true for many of the other oil exporters. Venezuela is highly vul-
nerable to turmoil and even financial collapse. Russia is coping not only with
lower prices for oil, which provides over 40 percent of government revenues, but
with Ukraine-related sanctions and seems headed into a deep recession.

When it comes to energy investment concerns, the United States has a signif-
icant competitive advantage over the rest of the world and here are some of the
reasons why: robust, liquid capital markets available for energy investment; an
abundance of proven and probable reserves; privately owned mineral rights as
well as accessible public lands; large, safe, modern, efficient domestic drilling
fleet and service industry; skilled workforce with experience and expertise; sup-
porting road, utility, and other infrastructures; well-established, predictable, and
stable regulatory and legal system; existing gathering, processing, pipeline, re-
fining, and storage capabilities; a liquid financial and physical energy pricing
market where producers and end-users can hedge present and future pricing ex-
posure and volatility; and the Producer-Marketer-End-User value chain is one of
the most vigorous, liquid, and transparent market models in the world.
By contrast, here is a review of Europes energy realities and challenges:13
Europe has the worlds most expensive electricity; security of supply is de-
teriorating; emissions are increasing; industrial competitiveness is weakening;
unemployment is persistently high, especially among youth; fuel poverty is a real
issue for low-income households; the EU Commission insists on using less and
greener energy; risk of power shortages in case of an economic rebound; and
policy assumes high oil and gas prices to justify costly renewables.
What might the United States be facing if the unconventional revolution had
not happened? (1) The United States would be importing 14 to 16 billion cubic feet
per day of natural gas at a cost of approximately $70 billion a year and resulting
in utility bills that would be two to three times higher. (2) The United States
would import more than 10.5 million barrels of oil equivalent per day at a cost of
approximately $127 billion a year and gasoline would cost approximately $5 a
gallon. (3) Some 2.1 million additional Americans would not have jobs and the
unemployment rate could exceed 8 percent. (4) The average annual household
disposable income would be $1,200 less. (5) There could be a loss of $2.4 trillion
in oil and gas investment through 2025. (6) The U.S. manufacturing renaissance
(+ 3.9 percent to 2025) could be very limited or none at all. (7) U.S. GDP over the
period of 2010 to 2020 could lose approximately $3.3 trillion. (8) A 12-percent
drop in 2012 U.S. greenhouse gas emissions would not have occurred. (9) The
United States would be in an extended period of low or no economic growth.
Not only does the U.S. West matter in energy, it matters possibly more than ever before.

The best way to predict the future is to invent it.
Alan Kay, Apple Fellow

The American West is geographically blessed because the region is so rich in

natural resources, especially fossil fuels. The region is also very rich in natural

beauty, with some very unique and majestic landscape splendor. Unfortunately,
these two gifts have always spawned a great deal of controversy and contention
that continues to roil public sentiment.
If the west is to solidify and continue its future as the new global energy leader,
contentions must be cooperatively resolved and the industry and communities in
which it operates must move forward together cohesively into a dynamically
changing future. The advantages that can guarantee the Wests place as the cor-
nerstone of the energy marketplace are firmly established, but in order to regain the
ground that is being lost to other oil and gas producers around the globe, the regions
resources must be stewarded with calculated consideration for the countrys future.
Finding solutions for the environmental risks associated with horizontal dril-
ling and hydraulic fracturingincluding groundwater contamination, fugitive
methane emissions, and potential seismic effectswill be essential. The full ex-
tent of these risks is debated, and the long-term cost of damage in a worst-case
scenario, should it occur, could be quite high. It is in the interest of energy pro-
ducers themselves to create transparency on these risks, build public confidence,
and adopt rigorous operational standards (with special focus on the soundness of
well casings and best practices for the disposal of wastewater). If they fail to do so,
local and state governments may prohibit hydraulic fracturing, as some states have
done, or a single disaster could turn public opinion sharply negative. While policy
makers will have to set clear standards on drilling, well maintenance, and emis-
sions, the industry would be well served by proactively addressing these issues.14
There are additional challenges as well, including land-use impacts on local
communities and the intensity of water use for drilling in drought-prone regions.
But if local communities, counties, and state governments can successfully manage
these issues, the shale boom could generate economic growth, high-wage jobs, and
a secure supply of affordable energy that enhances U.S. competitiveness for decades
to come. After all, geography is permanent while boom and busts come and go.
All of these benefits are flowing from a U.S. oil boom that government did not
predict and had almost nothing to do with. The political class has proffered sub-
sidies to renewable energy with very little economic benefit. The new oil order is a
reminder that markets and American ingenuity are better economic pillars than
projects and policies of government planners. Investment follows value and op-
portunity and money goes where it is treated best.
Even at prices well below $100 a barrel, U.S. shale oil producers will find ways
to drive down costs and output will start rising again. Even as companies have cut
back on capital spending, they are squeezing more out of what is spent by contin-
uously eking out new efficiencies. They are drilling multiple wells from a single pad
and more efficiently targeting well bores at the most productive layers of formations.
Cheaper prices merely postpones the date in which a well or field will even-
tually be drilled. Oils current slide will slow the growth in U.S. oil output.
Stopping it altogether, however, will take a protracted period of low prices. Even

then, the techniques and discoveries already made will simply pass to another set
of larger and better capitalized players. Just as electronic commerce and broad-
band internet survived the collapse of the tech-stock bubble, so will shale oils
innovations survive the current slip in prices. For many members of OPEC and
other major oil producers, the world could possibly never look the same.
The United States will face many challenges in reaffirming itself as the global
energy leader. Accommodating unprecedented growth in the worlds most vital
economic sector will require acute awareness of issues not dealt with in the past.
To truly understand and forecast what may be on the horizon for the energy in-
dustry, we must explore its past and anticipated growth, mounting environmental
concerns, the role western shale will play in the global oil and gas portfolio, and
key distinctions of the American West that will allow it to become the cornerstone
in global supply.
So, just as the famous East Texas oil discovery that put Texas and the United
States on the global oil map in the 1930s, the worlds new swing producer sud-
denly finds itself back in the proverbial saddle and leading the herd. But, as Will
Rogers once said, If youre riding ahead of the herd, take a look back every now
and then to make sure its still there.

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